Question 1

Consolidated financial statements:
A) Show the results of operations,cash flows,and the financial position of all companies under a parent company's control.
B) Show the results of operations,cash flows,and the financial position of the parent company only.
C) Show the results of operations,cash flows,and the financial position of the subsidiary only.
D) Include the investment account on the balance sheet.
E) Show the results of operations,cash flows,and the financial position of all companies under a parent company's control and include the investment account on the balance sheet.

Accepted Answer

Consolidated financial statements show the results of operations, cash flows, and the financial position of all companies under a parent company's control, including subsidiaries. It does not only show the results of the parent company and includes the investment account in the balance sheet. Therefore, option A is the best choice.

Question 2

The method used to account for non-strategic investments is the:
A) Fair value method.
B) Cost method.
C) Effective interest method.
D) Equity method.
E) All of these answers are correct.

Accepted Answer

The fair value method is typically used for non-strategic investments where the investor does not have significant influence over the investee.

Question 3

On December 31,as a short term investment,Music City purchased 300 Radio Land Corporation common shares at $50 per share plus a $50 commission.The amount recorded as a debit to Short-term Investments- Radio Land would be:
A) $15,050.
B) $15,000.
C) $50.
D) No transaction need be recorded.
E) $5,000.

Accepted Answer

To calculate the amount recorded as a debit to Short-term Investments- Radio Land, we need to consider the cost of the shares and the commission paid. 
The cost of 300 shares at $50 per share is: 300 x $50 = $15,000 
The commission paid is an additional $50. 
So, the total amount Music City paid is: $15,000 + $50 = $15,050 
Therefore, the amount recorded as a debit to Short-term Investments- Radio Land would be $15,050.

Question 4

Music City owns Airport Corp bonds as a short-term equity investment with a carrying value of $65,000.The current market value is $68,500.Music City should record a:
A) Debit to Unrealized Holding Loss for $3,500.
B) Credit to Unrealized Holding Gain for $3,500.
C) Credit to Held-for-Trading Investment Gain for $3,500.
D) Credit to Held-for-Trading Investment for $3,500.
E) Debit to Unrealized Holding Gain for $3,500.

Accepted Answer

Music City should record a credit to Unrealized Holding Gain for $3,500 because the market value of the investment has increased from its carrying value, resulting in an unrealized gain.

Question 5

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The proceeds Music City receives at maturity will be:
A) $37,800.
B) $38,325.
C) $40,000.
D) $40,525.
E) $43,200.

Accepted Answer

Music City paid $37,800 plus a broker's fee of $525 to acquire the bonds with a $40,000 maturity value. Since they intend to hold the bonds to maturity, they will receive the full $40,000 value of the bonds at that time, regardless of how much they paid for them initially. Therefore, the proceeds Music City receives at maturity will be $40,000.

Question 6

The controlling investor is called the:
A) Owning company.
B) Subsidiary company.
C) Parent company.
D) Investee company.
E) Senior company.

Accepted Answer

The controlling investor is called the parent company. This is because the parent company has a controlling interest in the subsidiary company, which means that it has the ability to make important decisions and influence the direction of the subsidiary company's operations. The other options are not correct because they don't accurately describe the role of the controlling investor in a subsidiary company.

Question 7

Significant influence investments:
A) Are held-for-trading investments.
B) May earn dividends that are reported in the income statement.
C) May be classified as either current or long-term investments.
D) Are accounted for using the fair value method.
E) Recognize a proportionate share of an investee's net income as earnings.

Accepted Answer

Recognize a proportionate share of an investee's net income as earnings.

Question 8

If one company owns more than 20% of the shares of another company and the shares are being held as a long-term investment,which method would normally be used to account for this investment?
A) Equity.
B) Fair value.
C) Historical cost.
D) Straight-line.
E) EffectivE.

Accepted Answer

When a company owns between 20% and 50% of the shares of another company, it is generally considered to have significant influence over the second company. In such cases, the equity method is used to account for the investment. The equity method recognizes the investment as an asset on the balance sheet and allocates a proportionate share of the investee's net income to the investor's income statement. This method more accurately reflects the economic reality of the investment over time, as the investor's fortunes are tied to those of the investee.

Question 9

Micron owns 35% of Martok Corp common shares,and is considered to have significant influence.Martok paid a total of $47,000 in common dividends.Micron would record the dividend transaction with a:
A) Credit to Investment in Martok Common Shares for $16,450.
B) Debit to Investment in Martok Common Shares for $16,450.
C) Debit to Cash for $16,450.
D) Credit to Dividends Earned for $16,450.
E) Credit to Investment in Martok Common Shares for $16,450 and Debit to Cash for $16,450.

Accepted Answer

The answer of Micron owns 35% of Martok Corp common...

Question 10

As an investment in associates,Music City purchased 2,000 Asta Corp common shares for $143,000.Music City also paid $375 in commissions on the transaction.The entry to record the transaction would include a:
A) Credit to Common Shares for $2,000.
B) Credit to Common Shares for $143,000.
C) Credit to Common Shares for $143,375.
D) Debit to Investment in Asta Common Shares for $143,375.
E) Debit to Investment in Associates for $143,000.

Accepted Answer

The total cost of the investment includes both the purchase price and the commission, so the debit entry should be for the total amount of $143,375.

Question 11

Micron purchased 40,000 Martok Corp common shares.This represents 40% of the outstanding shares.The purchase price was $232,000.The entry to record the transaction includes a:
A) Debit to Investment in Martok Common Shares for $92,800.
B) Debit to Investment in Martok Common Shares for $232,000.
C) Credit to Investment in Martok Common Shares for $92,800.
D) Credit to Investment in Martok Common Shares for $232,000.
E) Debit to Investment in Martok Common Shares for $40,000.

Accepted Answer

The purchase of 40,000 Martok Corp common shares at a price of $232,000 represents 40% of the outstanding shares. Therefore, the entry to record the transaction would be a debit of $232,000 to Investment in Martok Common Shares. The other choices, A, C, D, and E, are incorrect since they do not reflect the total cost of the shares purchased.

Question 12

A controlling influence over the investee is based on the investor owning voting shares exceeding:
A) 10%.
B) 20%.
C) 30%.
D) 40%.
E) 50%.

Accepted Answer

According to accounting standards, a controlling influence over the investee is based on the investor owning voting shares exceeding 50%. Therefore, the answer is E.

Question 13

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The journal entry to record acquisition of the bonds includes a debit to Long-Term Investment in Airport Bonds for:
A) $37,800.
B) $38,325.
C) $40,000.
D) $40,525.
E) $41,525.

Accepted Answer

The Long-Term Investment in Airport Bonds account should be debited for the cost of the bonds, which is equal to the purchase price plus the broker's fee. Therefore, the debit entry should be for $37,800 + $525 = $38,325. This represents the initial investment in the bonds. The maturity value of $40,000 is not relevant to the journal entry as it represents the amount the bonds will be worth when they mature.

Question 14

Micron owns 16% of JVT as an investment in an associate.JVT paid $78,000 in total dividends to its shareholders.Micron should record a:
A) Debit to Dividend Revenue for $78,000.
B) Debit to Dividend Revenue for $12,480.
C) Credit to Cash for $12,480.
D) Debit to Investment in JVT Common Shares for $12,480.
E) Credit to Investment in JVT Common Shares for $12,480.

Accepted Answer

The answer of Micron owns 16% of JVT as an...

Question 15

Micron owns 40% of the outstanding Martok Corp common shares.Martok paid $97,000 in total cash dividends to its shareholders.Micron's entry to record the transaction should include a:
A) Debit to Dividends for $97,000.
B) Debit to Dividends for $38,800.
C) Debit to investment in Martok Common Shares for $97,000.
D) Credit to Investment in Martok Common Shares for $38,800.
E) Debit to Cash for $97,000.

Accepted Answer

The answer of Micron owns 40% of the outstanding Martok...

Question 16

Investments in associates are:
A) Recorded at historical cost when purchased and accounted for using the equity method.
B) Reported at historical cost,adjusted for the amortized amount of any difference between cost and maturity value.
C) Reported at fair value.
D) Recorded at historical cost when purchased and reported at historical cost,adjusted for the amortized amount of any difference between cost and maturity value.
E) Recorded at historical cost when purchased and reported at fair valuE.

Accepted Answer

Investments in associates are typically accounted for using the equity method, which involves recording the investment at historical cost when purchased and adjusting the balance each period to reflect the investor's share of the investee's profits or losses. The other options are not accurate - investments in associates are not reported at fair value and are not adjusted for the amortization of any difference between cost and maturity value.

Question 17

Accounting for long-term investments in equity securities with controlling influence uses the:
A) Controlling method.
B) Equity method.
C) Investor method.
D) Investment method.
E) Consolidation method.

Accepted Answer

The answer of Accounting for long-term investments in equity securities...

Question 18

World Co.paid $25,000 to buy 10% Core Power bonds payable.The bonds pay semi-annual interest on June 30^th and December 31^st.World Co.paid $100 commission.World Co.intends to hold these bonds for 9 months and then trade them.The entry to record this purchase is: A) B) C) D) E) No entry

Accepted Answer

The answer of World Co.paid $25,000 to buy 10% Core...

Question 19

On January 4,Year 1,Larsen Corp purchased 10,000 shares of Warner Corp for $119,000 plus a broker's fee of $2,000.Warner Corp has 50,000 common shares outstanding and it is presumed the Larsen Corp will have a significant influence over Warner Corp.During Year 1 and Year 2,Warner Corp declared and paid cash dividends of $0.85 per share.Warner Corp's net income was $72,000 and $67,000 for Year 1 and year 2,respectively.The January 12,Year 3 entry to record the sale of 5,000 shares of Warner Corp for $65,000 should be:
A)

B)

C)

D)

E)

Accepted Answer

Larsen Corp purchased 10,000 shares of Warner Corp for $119,000 plus a broker's fee of $2,000. 
Cost per share = (119,000 + 2,000)/10,000 = $12.10

As Larsen Corp has significant influence over Warner Corp, the equity method should be applied to account for the investment.

Year 1:
Dividend received = 10,000 shares x $0.85 per share = $8,500
Investment in Warner Corp = 10,000 shares x $12.10 per share = $121,000
Larsen Corp's share of Warner Corp's net income = 10,000 shares/50,000 shares x $72,000 = $14,400
Investment in Warner Corp (Year end) = $121,000 + $14,400 - $8,500 = $126,900

Year 2: 
Dividend received = 10,000 shares x $0.85 per share = $8,500 
Investment in Warner Corp (Year end) = $126,900 + (10,000 shares/50,000 shares x $67,000) - $8,500 = $135,400

On January 12, Year 3, Larsen Corp sold 5,000 shares of Warner Corp for $65,000.

The journal entry to record the sale would be:
Cash $65,000
Investment in Warner Corp $60,500 ($12.10 x 5,000 shares)
Gain on sale of investment $4,500 ($65,000 - $60,500)

Therefore, choice B is the best option.

Question 20

On December 31,as a short-term investment,Arlington and Fry purchased 500 shares for $50,000.The shares pay a $0.40 cash dividend on February 28.The entry to record the dividend would be:
A)

B)

C)

D)

E) No entry

Accepted Answer

The entry to record the dividend would be to debit Cash Dividends Receivable for $200 (500 shares x $0.40 per share) and credit Dividend Income for $200. This reflects the fact that the company has not yet received the cash, but has a right to receive it based on their ownership of the shares.

Quiz 16: Accounting for Debt and Share Investments

Consolidated financial statements:

The method used to account for non-strategic investments is the:

On December 31,as a short term investment,Music City purchased 300 Radio Land Corporation common shares at $50 per share plus a $50 commission.The amount recorded as a debit to Short-term Investments- Radio Land would be:

Music City owns Airport Corp bonds as a short-term equity investment with a carrying value of $65,000.The current market value is $68,500.Music City should record a:

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The proceeds Music City receives at maturity will be:

The controlling investor is called the:

Significant influence investments:

If one company owns more than 20% of the shares of another company and the shares are being held as a long-term investment,which method would normally be used to account for this investment?

Micron owns 35% of Martok Corp common shares,and is considered to have significant influence.Martok paid a total of $47,000 in common dividends.Micron would record the dividend transaction with a:

As an investment in associates,Music City purchased 2,000 Asta Corp common shares for $143,000.Music City also paid $375 in commissions on the transaction.The entry to record the transaction would include a:

Micron purchased 40,000 Martok Corp common shares.This represents 40% of the outstanding shares.The purchase price was $232,000.The entry to record the transaction includes a:

A controlling influence over the investee is based on the investor owning voting shares exceeding:

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The journal entry to record acquisition of the bonds includes a debit to Long-Term Investment in Airport Bonds for:

Micron owns 16% of JVT as an investment in an associate.JVT paid $78,000 in total dividends to its shareholders.Micron should record a:

Micron owns 40% of the outstanding Martok Corp common shares.Martok paid $97,000 in total cash dividends to its shareholders.Micron's entry to record the transaction should include a:

Investments in associates are:

Accounting for long-term investments in equity securities with controlling influence uses the:

World Co.paid $25,000 to buy 10% Core Power bonds payable.The bonds pay semi-annual interest on June 30th and December 31st.World Co.paid $100 commission.World Co.intends to hold these bonds for 9 months and then trade them.The entry to record this purchase is:

On December 31,as a short-term investment,Arlington and Fry purchased 500 shares for $50,000.The shares pay a $0.40 cash dividend on February 28.The entry to record the dividend would be:

World Co.paid $25,000 to buy 10% Core Power bonds payable.The bonds pay semi-annual interest on June 30^th and December 31^st.World Co.paid $100 commission.World Co.intends to hold these bonds for 9 months and then trade them.The entry to record this purchase is: