Question 1

When the cost-adjusted-to-market method is used to account for a long-term investment in stock of another company,the carrying value of the investment is directly affected by

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Question 2

Isber Corporation purchases 80 percent of the voting stock of Bossart Corporation for $175,000.At the date of acquisition,the fair market value of Bossart's identifiable net assets was equal to their book value.Bossart has common stock of $80,000 and retained earnings of $120,000.The elimination entry necessary to prepare a consolidated balance sheet for this date is:

Accepted Answer

The elimination entry necessary to prepare a consolidated balance sheet for the date of acquisition is to eliminate the investment account and recognize the acquired assets and liabilities at their fair values. The fair market value of Bossart's identifiable net assets was equal to their book value, so there are no adjustments needed for the identifiable assets and liabilities. Thus, the elimination entry will only eliminate the investment account and recognize non-controlling interest in the equity of the subsidiary:

Debit Investment in Bossart Corporation $175,000
Credit Non-controlling interest in Bossart Corporation $35,000
Credit Retained Earnings - Bossart Corporation $140,000

The consolidation process will combine the remaining 20% of Bossart Corporation with Isber Corporation, which represents the non-controlling interest.

Question 3

Which of the following is a true statement regarding elimination entries necessary for the preparation of consolidated financial statements?

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The answer of Which of the following is a true...

Question 4

Porter Corporation purchases 60 percent of the voting stock of Ritz Corporation for $48,000.Ritz has common stock of $25,000 and retained earnings of $35,000.Based solely on the above facts,the consolidated balance sheet would include

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The answer of Porter Corporation purchases 60 percent of the...

Question 5

When a parent company owns 100 percent of the outstanding stock of a subsidiary,Goodwill from Consolidation will appear on the consolidated balance sheet when the

Accepted Answer

Goodwill from Consolidation will appear on the consolidated balance sheet when the cost of the parent's investment exceeds the book value and the fair value of the investee's net identifiable assets. This occurs because the excess cost paid by the parent over the fair value of the subsidiary's net assets represents the amount of economic benefit expected to be gained from the subsidiary's intangible assets, such as its brand name, customer relationships, or intellectual property. This excess amount is recognized as goodwill on the consolidated balance sheet.

Question 6

When a subsidiary has borrowed cash from the parent company,the related receivable and payable are eliminated in preparing a consolidated balance sheet so that

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The answer of When a subsidiary has borrowed cash from...

Question 7

Eliminations appear on the books of

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The answer of Eliminations appear on the books of
...

Question 8

Which of the following entries would not require an eliminating entry when one is preparing consolidated financial statements?

Accepted Answer

The sale to a customer is a transaction external to the group and does not involve intercompany balances or transactions. Therefore, it would not require an eliminating entry when preparing consolidated financial statements. However, options A, B, and C would require eliminating entries as they are intercompany transactions or balances that must be eliminated to avoid double-counting in the consolidated financial statements.

Question 9

West Corporation purchased 15,000 shares of Luffy Corporation common stock for $60 per share on January 2,2009.Luffy Corporation reported net income of $1,500,000 for 2009 and paid dividends of $300,000 during 2009.Luffy has a total of 50,000 shares of common stock outstanding.The entry that would be recorded to recognize the receipt of cash dividend is:

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The answer of West Corporation purchased 15,000 shares of Luffy...

Question 10

When the equity method is used to account for a long-term investment in stock of another company,the carrying value of the investment is affected by

Accepted Answer

Under the equity method, the carrying value of the investment is increased by the investor's share of the investee's earnings and decreased by the investor's share of any dividends declared by the investee. Changes in the market value of the stock do not affect the carrying value of the investment unless there is an impairment in the value of the investment. Excess of market price over cost is not relevant to the carrying value.

Question 11

When a corporation owns more than 50 percent of the voting stock in another corporation,it usually should report its investment by using (the)

Accepted Answer

When a corporation owns more than 50 percent of the voting stock in another corporation, it is considered a parent company and the subsidiary's financial statements should be included in the parent company's consolidated financial statements. Therefore, the best choice is D, consolidated financial statements.

Question 12

Consolidated financial statements are useful because

Accepted Answer

Consolidated financial statements provide a clear financial picture of the total economic entity, which is useful for investors of the parent company who want to understand the performance of the entire group. This is particularly important for publicly-traded companies, where investors are interested in the financial performance and prospects of the entire enterprise, including all of its subsidiaries. The other choices are not accurate: minority shareholders may not need consolidated information to make good investment decisions, as they may only be interested in the performance of the subsidiary they have invested in; consolidated statements are not necessarily more detailed than the statements for individual companies; and while the parent and subsidiaries may be legally considered a single entity, this fact alone is not sufficient reason to prepare consolidated financial statements.

Question 13

Rapp Corporation purchases 75 percent of the stock of Sikora Corporation for $363,000.Sikora has contributed capital of $200,000 and retained earnings of $284,000.The consolidated financial statements will contain

Accepted Answer

Since Rapp Corporation has purchased 75% of the stock of Sikora Corporation, it has a controlling interest and therefore will prepare consolidated financial statements. Minority interest will be recorded in consolidated financial statements to reflect the portion of the investee company that is not owned by the controlling company. Therefore, choice (A) is incorrect. As there is no indication of negative goodwill in the question, choice (A) is incorrect and choice (B) is also incorrect. Since Rapp Corporation has purchased Sikora Corporation, a portion of the acquisition price will be allocated to goodwill, which represents the excess of the purchase price over Sikora's book value. Therefore, choice (C) is incorrect and choice (D) is the correct answer.

Question 14

Orlov Corporation purchased 8,500 shares of Matsey Corporation common stock for $40 per share on January 1,2009.Matsey reported net income of $120,000 for 2009 and paid dividends of $45,000 during 2009.As of December 31,2009,the market value of Matsey Corporation common stock was $40 per share.Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey,Orlov Corporation should report the long-term investment on December 31,2009,at a carrying value of

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The answer of Orlov Corporation purchased 8,500 shares of Matsey...

Question 15

The equity method generally should be used to account for an investment in stock when the level of ownership is

Accepted Answer

According to GAAP, the equity method should be used for investments in stock when the level of ownership is significant, usually between 20 and 50 percent. This is because in this range of ownership, the investor typically has significant influence over the investee, but not enough to control it fully. The equity method is used to reflect the investor's share of the investee's earnings and dividends on the investor's income statement.

Question 16

Orlov Corporation purchased 8,000 shares of Matsey Corporation common stock for $40 per share on January 1,2009.Matsey reported net income of $110,000 for 2009 and paid dividends of $45,000 during 2009.As of December 31,2009,the market value of Matsey Corporation common stock was $40 per share.Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey,the entry to record the recognition of income by Orlov Corporation is:

Accepted Answer

Orlov Corporation owns 30% of Matsey, so it uses the equity method. It recognizes 30% of Matsey's net income as income from the investment, which is $33,000 (30% of $110,000).

Question 17

Blau Corporation invests $302,500 in Hills Corporation,buying 80 percent of the voting stock.Hills pays Blau $20,000 in cash dividends and earns a net income of $130,000 during 2009.On the consolidated balance sheet,the balance in the investments account representing Blau's interest in Hills will be

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The answer of Blau Corporation invests $302,500 in Hills Corporation,buying...

Question 18

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)

Accepted Answer

The Unrealized Loss on Long-Term Investments account for available-for-sale equity securities should be reported as a separate item in the stockholders' equity section of the balance sheet as a component of accumulated other comprehensive income. It is not reported on the income statement as it represents an unrealized loss and not an actual realized loss. It is also not classified as an extraordinary item or prior period adjustment.

Question 19

Minority interest is reported as a(n)

Accepted Answer

Minority interest represents the portion of a subsidiary's net assets that are not owned by the parent company. It is reported as a separate item between liabilities and stockholders' equity on the consolidated balance sheet.

Question 20

West Corporation purchased 15,000 shares of Luffy Corporation common stock for $60 per share on January 2,2009.Luffy Corporation reported net income of $1,500,000 for 2009 and paid dividends of $300,000 during 2009.Luffy has a total of 50,000 shares of common stock outstanding.The entry that would be recorded to recognize the income is:

Accepted Answer

The entry to recognize the income and dividends received from the investment in Luffy Corporation common stock would be recorded using the equity method. 
The entry would be:
Investment in Luffy Corporation Common Stock                                               $1,500,000 
   Equity in Net Income of Luffy Corporation
       (15,000 shares/50,000 outstanding) 
Dividends Receivable                                                                                   $45,000 
   Investment in Luffy Corporation Common Stock Dividends
       (15,000 shares/50,000 outstanding)

Therefore, the correct choice is B.

Quiz 12: Investments