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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 8: Investments in Equity Securities

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 29

Short Problems 35

Short Essay Questions 46

IFRS Questions 52

Data Analytic Questions 54

Video Questions 56

Multiple Choice Questions

1) Equity investments are:

A) investments in bonds of a corporation.

B) investments that often pay dividends, not interest.

C) classified as long-term liabilities.

D) marketed by the SEC to any investor who wishes to buy bonds of a public company.

Diff: Easy

Learning Objective: 8.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) Investments in equity securities are current assets if:

A) they are readily marketable and management plans to convert to sell them within the time period defined in the definition of current assets.

B) the fair market value can't be determined.

C) management intends to convert them into common stock within one year.

D) management owns less than 50% of the outstanding stock.

Diff: Easy

Learning Objective: 8.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) Income from passive investments in equity securities is recognized when:

A) interest is received from the investee.

B) dividends are declared by the investee.

C) adjusting entries are made to reflect the cost of the securities.

D) the investee reports profits for the accounting period.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) When a company accounts for an investment under the purchase method of accounting:

A) the book value of the subsidiary's assets is added to the parent company's assets.

B) the book value of the subsidiary's liabilities is added to the parent company's liabilities.

C) the company owns more than 50% of the stock of the investee.

D) a year-end adjustment is made to increase or decrease the carrying value of the investment to fair market value.

Diff: Easy

Learning Objective: 8.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) Passive investments in equity securities are:

A) readily marketable investments that management intends to hold for extended periods.

B) always long-term investments.

C) current assets that require the equity method of accounting.

D) investments with little or no influence on the investee.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) Passive investments in equity securities are:

A) actively 'traded' on the open market but can't be sold until they mature.

B) nonmarketable investments that management intends to sell for short-term profits.

C) always long-term investments in common stock.

D) adjusted to fair value at year end.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) Passive investments in equity securities:

A) are reported on the balance sheet at market value.

B) may have unrealized gains or losses in other comprehensive income.

C) are always listed as long-term assets.

D) Both A and B are correct.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) Benson Incorporated owns 32% of Denver Company's outstanding voting stock. Benson Incorporated should account for its investment in Denver using the:

A) fair value method.

B) cost method.

C) consolidation procedure.

D) equity method.

Diff: Easy

Learning Objective: 8.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) Dewey Inc. owns 64% of Felicity Corporation's outstanding voting stock. Dewey should account for its investment in Felicity using:

A) the fair value method.

B) the cost method.

C) consolidated financial statements.

D) the market value (mark-to-market) method.

Diff: Easy

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) During 2020, the market price of a short-term passive investment in equity securities declined. Which one of the following correctly reflects the effects on the financial statements as a result?

A) Current ratio and earnings per share decrease.

B) Current ratio and earnings per share increase.

C) Current ratio is unchanged and earnings per share increases.

D) Current ratio increases and earnings per share are unchanged.

Diff: Easy

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) Passive investments in equity securities:

A) are reported on the balance sheet at original cost.

B) may have unrealized price increases or decreases, which affect shareholders' equity but not the income statement.

C) are reported in the shareholders' equity section of the balance sheet at fair value.

D) may have unrealized gains or losses on the income statement associated with price increases or decreases.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) When a company recognizes unrealized losses on short-term passive investments in equity securities, its return on assets ratio:

A) normally decreases.

B) normally increases.

C) is not affected.

D) may increase or decrease depending on the company.

Diff: Easy

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) Torborg Corp. purchased short-term passive investments in equity securities on December 23 for $3,000. On December 31, the market value of those securities is $3,600. Which one of the following journal entries is appropriate on December 31?

A)

Short-term Equity Investments 3,600

Unrealized Gain 3,600

B)

Short-term Equity Investments 600

Unrealized Gain 600

C)

Short-term Equity Investments 600

Unrealized Price Increase 600

D)

No entry is required.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) Equity securities of Sanchez Inc. were purchased as a short-term passive investment by Hayden Company on December 14 for $1,000. On December 31, the market value of those securities is $1,300. Which one of the following adjusting journal entries is appropriate at December 31?

A)

Short-term Equity Investments 1,300

Unrealized Gain 300

Cash 1,000

B)

Short-term Equity Investments 300

Unrealized Gain 300

C)

Short-term Equity Investments 300

Securities Revenue 300

D)

No entry is required.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) On November 10, 2020, Clark Inc. purchased, as a short-term passive investment, shares of Landon Corp. for $100,000 and shares of Norris Incorporated for $50,000. At the end of 2020, the fair market value of the stock of Landon was $80,000 and for Norris Incorporated was $65,000. How should Clark Inc. recognize these changes in market price?

A) As a net unrealized loss of $20,000.

B) As a net unrealized gain of $15,000.

C) As a net unrealized loss of $5,000.

D) No adjustment required since the total fair value is higher than the total original cost.

Explanation: ($80,000 + $65,000) - ($100,000 + $50,000) = $5,000 loss

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) Which one of the following is true of the equity method?

A) The income recognized by the investor is based on the percentage of stock ownership and the amount of earnings reported by the investee.

B) Market value adjustments are made at year end.

C) The receipt of dividends increases net income on the investor's financial statements.

D) The percent of ownership must be greater than 50% to apply this method.

Diff: Easy

Learning Objective: 8.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) The recognition of unrealized gains on passive equity investments:

A) decreases return on equity.

B) decreases the current ratio.

C) does not affect the current ratio.

D) increases the current ratio if the investment is classified as current, otherwise it has no effect.

Diff: Easy

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) An investor owns passive equity investments in Noah Company. Noah Company declares and pays dividends of $300 during July. What entry is required in August when the dividends are booked?

A)

Cash 300

Dividend Revenue 300

B)

Cash 300

Short-term Equity Investments 300

C)

Cash 300

Dividend Payable 300

D)

Cash 300

Trading Securities 300

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) Which one of the following journal entries is appropriate for an investor who owns, as a passive investment, equity securities when dividends of $500 have been declared and paid on those equity securities?

A)

Cash 500

Dividends Securities 500

B)

Dividends Receivable 500

Short-term Equity Investments 500

C)

Cash 500

Short-term Equity Investments 500

D)

Cash 500

Dividend Revenue 500

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Which one of the following correctly reflects the effects on the financial statements caused by the increase in the market price of long-term passive equity investments?

A) Current ratio is unchanged and earnings per share increases.

B) Current ratio and earnings per share increase.

C) Current ratio and earnings per share are unchanged.

D) Current ratio is unchanged and earnings per share decreases.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Analysis

AACSB/AICPA: None / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) A passive investment in equity securities was purchased on April 1 for $900. On December 31, the market value of those securities is $700. Which of the following is part of the adjusting entry necessary on December 31?

A) Debit Unrealized Loss for $700

B) Debit Realized Loss on for $200

C) Credit Short-term Equity Investments for $200

D) Credit Unrealized Loss for $200

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) A small long-term investment in equity securities was purchased on May 2 for $1,000. On December 31, the market value of those securities is $1,100. Which of the following is part of the adjusting entry necessary on December 31?

A) Debit Unrealized Gain for $1,100

B) Debit Realized Gain for $100

C) Credit Short-term Equity Investments for $100

D) Credit Unrealized Gain for $100

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) The recognition of unrealized losses on a current investment:

A) decreases the return on asset ratio.

B) increases the quick and current ratios.

C) does not affect the quick ratio but decreases the current ratio.

D) does not affect the current ratio but decreases the quick ratio.

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) Which of the following correctly reflects the effects on the financial statements caused by the increase in market price of a current investment in equity securities?

A) Current ratio and earnings per share decrease.

B) Current ratio and earnings per share increase.

C) Current ratio is unchanged but earnings per share decrease.

D) Current ratio decreases and earnings per share are unchanged.

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) The recognition of realized losses on short-term equity securities:

A) increases the current ratio.

B) decreases working capital.

C) increases return on assets.

D) decreases the debt/equity ratio.

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) Which one of the following is an area of subjectivity which opens the incentive of window dressing to management as it relates to investments?

A) The timing of when an equity investment is sold.

B) The proclamation of the intention to sell an investment within the next year.

C) The determination of the percentage of stock acquired.

D) Whether management has available cash to acquire investments.

Diff: Medium

Learning Objective: 8.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) The market value (mark-to-market) method of accounting for long-term equity investments is typically used when:

A) between 20% and 50% of the investee company is owned.

B) over 50% of the investee company is owned.

C) at least 20% of the investee company is owned.

D) less than 20% of the investee company is owned.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) Which one of the following correctly reflects the effects on the financial statements caused by dividends declared and paid on passive equity investments owned by a firm?

A) Current ratio decreases.

B) Return on equity increases.

C) Current ratio is unchanged.

D) Earnings per share is unchanged.

Diff: Easy

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) The equity method of accounting for long-term equity investments is typically used when:

A) less than 20% of the investee company is owned.

B) between 20% and 50% of the investee company is owned.

C) over 50% of the investee company is owned.

D) any amount over 20% is acquired.

Diff: Easy

Learning Objective: 8.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) The consolidation procedure of accounting for long-term equity investments is typically used:

A) when less than 20% of the investee company is owned.

B) in situations when over 50% of the investee company is owned.

C) only when 100% of the investee company is owned.

D) when between 20% and 50% of the investee company is owned.

Diff: Easy

Learning Objective: 8.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) Walsh Company purchased, as a passive investment, 1,000 shares of Pierce Company for $20 per share. At the end of the year, the fair market value of the investment was $23 per share. How should Walsh recognize this change?

A) Debit the investment account by $23,000.

B) Credit the investment account by $3,000.

C) Report an unrealized gain on the income statement.

D) Show an unrealized loss on the balance sheet.

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) Which one of the following correctly reflects the effects on the financial statements caused by a decrease in the market price of an investment where the investor owns 30% of the outstanding stock?

A) Current ratio decreases.

B) Earnings per share increases.

C) Current ratio increases.

D) Earnings per share remains unaffected.

Diff: Medium

Learning Objective: 8.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) The treatment of unrealized gains on equity securities:

A) depends on the ownership percentage in the investee.

B) causes net income to increase regardless of the situation.

C) causes net income to decrease regardless of the situation.

D) is a primary concern under the equity method.

Diff: Easy

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) Which one of the following must be met prior to classifying an investment as current?

A) It must be an equity security accounted for under the equity method.

B) The percentage of ownership must be greater than 50%.

C) The investment must be readily marketable.

D) Management must intend to hold the investment for an undetermined time period.

Diff: Easy

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 34 / None

35) Equity securities intended to be held for a short time period are held primarily for the purpose of:

A) anticipated increases in value over extended time periods.

B) increasing the current ratio.

C) window dressing the balance sheet.

D) generating profits on short-term price increases.

Diff: Easy

Learning Objective: 8.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) Which one of the following correctly reflects the effects on the financial statements of the investor caused by dividends declared and paid on securities held as a passive investment?

A) Current ratio increases

B) Working capital decreases

C) Revenue and assets decrease

D) Assets increase and shareholders' equity decreases

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) Camber Corp. owns 10% of Nova Corp's outstanding voting stock. Camber should account for its long-term equity investment in Nova Corp. using:

A) the equity method.

B) consolidated financial statements.

C) mark-to-market method.

D) amortization method.

Diff: Medium

Learning Objective: 8.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) Which one of the following is evidence of a ready market?

A) The stock was purchased at a negotiated price from an outside party.

B) The security is actively traded on a public stock exchange.

C) A privately held corporation issued the stock.

D) The stock was purchased from an outside investor.

Diff: Easy

Learning Objective: 8.1

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) An unrealized gain or loss that relates to a passive investment represents:

A) an undervalued investment.

B) the profit or loss made when the trading securities were sold.

C) the total dividends received from the investee company during the year.

D) the extent to which an investor's wealth increased or decreased due to holding the investment.

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) A controlling interest in another company:

A) exists whenever the relationship between the investor and investee gives the investor significant influence.

B) requires the parent to prepare consolidated financial statements.

C) is evidence that a merger will soon occur.

D) can be as low as 20 percent.

Diff: Easy

Learning Objective: 8.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) Why might chief executives react very positively to current goodwill accounting?

A) Goodwill increases in value.

B) Goodwill is amortized creating expenses that reduce net income, enabling a company to pay less income tax.

C) Its amortization increases earnings per share.

D) Goodwill is no longer amortized so income is greater than prior accounting requirements.

Diff: Easy

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) James Corporation purchased 100% of the common stock of Rashaad Corporation for $50 million. James must account for this investment as:

A) a passive investment.

B) an acquisition that requires consolidation accounting.

C) a "mark-to-market" investment.

D) an equity method investment with no consolidation.

Diff: Medium

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) Decuzzi, Inc. paid $10,000 for a passive stock investment. On December 31, 2020, the company appropriately recognized an unrealized gain of $3,000. The stock is reported on Decuzzi's balance sheet at December 31, 2020 at:

A) $10,000.

B) $13,000.

C) $7,000.

D) Not enough information to determine.

Explanation: $10,000 + $3,000 =$13,000.

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Multinational US companies usually have a number of foreign subsidiaries with financial statements expressed in foreign currency. When the consolidated financial statements are prepared, to combine the financial statements of the US parent and all of its subsidiaries, the consolidation process involves multiple steps. Which of the following statements about the combining process and the resultant consolidated financial statements is always true for multinational US companies?

A) The foreign subsidiaries are separated into three categories, each of which receives different treatment.

B) The foreign entity's financial statements are converted into dollars.

C) Foreign currency translation adjustments have no effect on cash flows.

D) The foreign currency translation adjustments are included in consolidated income.

Diff: Medium

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: Diversity / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) Which of the following statements about Special Purpose Entities (SPEs) is not true?

A) SPEs cannot take on various legal forms.

B) It can be difficult to determine who actually controls an SPE.

C) Management can structure a transaction using an SPE in such a manner that the accounting treatment fails to reflect the economic substance of the transaction.

D) SPEs have been used to mislead investors.

Diff: Medium

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) Carmen Corporation purchased a 40% interest in Sahara Inc. on January 1, 2020, paying $200,000 for 40% of the outstanding voting stock of Sahara Inc. For its year ended December 31, 2020, Sahara Inc. reported net income of $40,000. On December 31, 2020, Carmen received a dividend payment from Sahara in the amount of $1,000. As a result of its ownership interest in Sahara, the financial statements for Carmen Corporation for the year ended December 31, 2020 will reflect which of the following?

A) An asset in the amount of $200,000.

B) Revenue of $1,000.

C) Cash flows from operations of $1,000.

D) Investment income of $16,000.

Explanation: $40,000 × 40% = $16,000

Diff: Medium

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of year-end adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at year-end. If Caldwell properly accounts for equity securities, what is Caldwell's current ratio before and after the investment adjustment?

A) 3.0 and 2.1

B) 3.0 and 3.3

C) 3.0 and 3.6

D) 3.0 and 2.4

Explanation: Current ratio before = $45,000/$15,000 = 3.0

Current ratio after = ($45,000 - {$13,000 - $4,000})/$15,000 = 2.4

Diff: Hard

Learning Objective: 8.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of year-end adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at year end. If Caldwell properly accounts for equity securities, what is Caldwell's earnings per share amount before and after the investment adjustment, respectively?

A) $3.25 and $3.00

B) $3.25 and $3.13

C) $3.25 and $3.37

D) $3.25 and $2.77

Explanation: Earnings per share = $243,750/75,000 = $3.25

Earnings per share = ($243,750 - {$13,000 - $4,000})/75,000 = $3.13

Diff: Hard

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) On January 2, 2020, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2020, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is Pfizer's income from the Wiley investment?

A) $27,000

B) $28,380

C) $22,440

D) $33,000

Explanation: 2020 investment income = $102,000 × 22% = $22,440

Diff: Medium

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) On January 2, 2020, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2020, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is the December 31, 2020, balance sheet value of its long-term equity investment in Wiley?

A) $178,380

B) $225,000

C) $150,000

D) $166,500

Explanation: 2020 investment income = $102,000 × 22% = $22,440

December 31, 2020, investment in Wiley Company

= $150,000 + $22,440 - (2020 Dividends, $27,000 × 22%) = $166,500

Diff: Medium

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) If Howard Company's balance sheet amount of goodwill is $20,000 and the fair market value of the goodwill is estimated to be $25,000, which of the following entries would be recorded in Howard's books?

A)

Goodwill 5,000

Goodwill Gain 5,000

B)

Goodwill Gain 5,000

Goodwill 5,000

C)

Impairment Loss 5,000

Goodwill 5,000

D)

No entry will be made.

Diff: Medium

Learning Objective: 8.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) On December 31, 2020, short-term equity securities with an original cost of $15,000 have a carrying value on the balance sheet equal to their market value of $20,000. On January 5, 2021, those securities are sold for $18,000. Which of the following would be part of the appropriate entry to record the sale of the securities?

A) A debit to Loss on Sale of Investments for $2,000.

B) A debit to Unrealized Gain for $3,000.

C) A debit to Unrealized Gain for $5,000.

D) A credit to Short-term Equity Investments for $15,000.

Explanation:

Cash 18,000

Realized Loss on Sale of Investments ($20,000 - $18,000) 2,000

Short-term Equity Investments 20,000

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) On January 2, 2020, Dellgate Corp. purchased 27% of Galaxy Corporation's voting stock for $125,000. During 2020, Galaxy recorded income of $214,000 and paid total dividends of $17,000. What is the December 31, 2020, balance sheet value of Dellgate's long-term equity investment in Galaxy?

A) $125,000

B) $178,190

C) $187,370

D) $86,940

Explanation: $125,000 + (27% × $214,000) - (27% × $17,000) = $178,190

Diff: Easy

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2020, are described in the table below.

Early in 2021, Solo sold all of its investment in AAA securities for $36 per share.

The journal entry to record the sale in 2021 will include:

A) a debit to Short-term Equity Investments for $3,400.

B) a credit to Unrealized Loss for $200.

C) a credit to Loss on Sale of Investments for $200.

D) a credit to Gain on Sale of Investments for $200.

Explanation: ($36 - $34) = $2 × 100 = $200 Gain on Sale of Investments.

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 54 / None

55) The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2020 are described in the table below.

Early in 2021, the company sold 50 shares of BBB for $26 per share.

The journal entry to record the sale in 2021 will include:

A) a credit to Short-term Equity Investments for $1,400.

B) a credit to Unrealized Loss for $100.

C) a credit to Loss on Sale of Investments for $100.

D) a debit to Gain on Sale of Investments for $100.

Explanation:

Cash 1,300

Loss on Sale of Investments 100

Short-term Equity Investments 1,400

($26 - $28) = ($2) × 50 = $100 Loss on Sale of Investments*

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 55 / None

56) The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2020 are described in the table below.

Early in 2021, the company sold 50 shares of BBB for $26 per share. During 2021, Solo received dividends of $3 per share on the remaining 200 shares of BBB, and dividends of $2.50 per share were received on the 150 shares of CCC stock. The per-share market values of BBB and CCC on December 31, 2021, were $24 and $18, respectively. During 2022, Solo sold the remaining 200 shares of BBB stock for $26 per share and the 150 shares of CCC for $22 per share.

The journal entries to record the dividends received on the BBB and CCC securities 2021 will include:

A) a credit to Dividend Revenue for $975.

B) a credit to Dividend Payable for $375.

C) a credit to Cash for $600.

D) a debit to Dividend Expense for $375.

Explanation: (200 × $3) + (150 × $2.50) = $975.

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 56 / None

57) The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2020 are described in the table below.

Early in 2021, the company sold 50 shares of BBB for $26 per share. During 2021, Solo received dividends of $3 per share on the remaining 200 shares of BBB. The per-share market value of BBB on December 31, 2021, was $24. During 2022, Solo sold the remaining 200 shares of BBB stock for $26 per share.

The journal entry to record the sale of 200 shares of BBB stock in 2022 is:

A)

Cash 5,200

Short-term Equity Investments 4,800

Unrealized Gain 400

B)

Cash 5,200

Unrealized Loss 400

Trading Securities 4,800

C)

Cash 5,200

Short-term Equity Investments 4,800

Gain on Sale of Investments 400

D)

Short-term Equity Investments 6,000

Gain on Sale of Investments 800

Cash 5,200

Explanation: 200 × $24 = $4,800 Short-term Equity Investments (Credit)

200 × $26 = $5,200 Cash (Debit)

($26 - $24) = $2 × 200 = $400;

or $5,200 - $4,800 = $400 Gain on Sale of Investments (Credit).

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 57 / None

58) The following information is related to the marketable security investments of Solo Company. Securities held on December 31, 2020 are described in the table below.

During 2021, Solo received dividends of $$2.50 per share on the 150 shares of CCC stock. The per-share market value of CCC on December 31, 2021, was $18. During 2022, Solo sold 150 shares of CCC for $22 per share.

The journal entry to record the sale of 150 shares of CCC stock in 2022 would include:

A) a debit to Cash for $3,000.

B) a debit to Unrealized Gain for $300.

C) a debit to Unrealized Gain for $900.

D) a credit to Gain on Sale of Investments for $600.

Explanation:

Cash 3,300 (150 × $22)

Short-term Equity Investments 2,700 (150 × $18)

Gain on Sale of Investments 600 [($22 - $18) = $4 × 150]

Diff: Medium

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 58 / None

59) Under GAAP, market values based on quoted prices in active markets for identical securities are called:

A) Level 1 measurements.

B) Level 2 measurements.

C) Level 3 measurements.

D) None of the above

Diff: Medium

Learning Objective: 8.3

Bloom's: Knowledge

AACSB/AICPA: Communication / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 59 / None

60) Under GAAP, market values based on less reliable, unobservable inputs for securities are called:

A) Level 1 measurements.

B) Level 2 measurements.

C) Level 3 measurements.

D) None of the above

Diff: Medium

Learning Objective: 8.3

Bloom's: Knowledge

AACSB/AICPA: Communication / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 60 / None

61) On January 2, 2020, NIU purchased 100% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Goodwill should be reported at:

A) $20,000.

B) $40,000.

C) $48,000.

D) $60,000.

Explanation: Purchase Price - FMV of net assets = Goodwill = $128,000 - $80,000 = $48,000.

Diff: Easy

Learning Objective: 8.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 61 / None

62) On January 2, 2020, NIU purchased 100% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Inventory is recorded in Huskie's financial statements at $20,000 but has a fair market value of $30,000. On its consolidated financial statements NIU should report the inventory it acquired from Huskie at:

A) $20,000.

B) $25,000.

C) $30,000.

D) cannot determine from information given.

Explanation: Inventory reported at Fair Market Value = $30,000

Diff: Easy

Learning Objective: 8.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 62 / None

63) On January 2, 2020, NIU purchased 80% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Inventory is recorded in Huskie's financial statements at $20,000 but has a fair market value of $30,000. On its consolidated financial statements NIU should report the inventory it acquired from Huskie at:

A) $20,000.

B) $25,000.

C) $30,000.

D) cannot determine from information given.

Explanation: Inventory reported at Fair Market Value = $30,000

Diff: Easy

Learning Objective: 8.8A

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 63 / None

Matching Questions

64) Each transaction numbered 1 through 5 below involves an equity security originally acquired at a cost of $1,000. Identify the effect each transaction has on the current ratio and earnings per share by selecting from the effects listed in a through f. You may use each letter more than once or not at all.

Effects

a. Increase in current ratio and earnings per share.

b. Does not change earnings per share or the current ratio.

c. Does not change earnings per share; may impact the current ratio under certain conditions.

d. Decrease in current ratio and earnings per share.

e. Increases earnings per share.

f. Can't determine the direction of changes in at least one ratio from the event given.

_______ 1. Passive investment with a current balance sheet value of $1,200 is sold for $1,100.

_______ 2. Passive investment with a current balance sheet value of $800 is sold for $800.

_______ 3. Passive investment with a current balance sheet value of $1,200 is sold for $1,300.

_______ 4. Passive investment has a market value of $800 at year end.

_______ 5. Passive investment has a market value of $1,200 at year end.

1. d

2. b

3. a

4. d

5. a

Diff: Medium

Learning Objective: 8.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Matching Question 1 / None

65) Each transaction listed in 1 through 4 relates to an investment in a long-term equity security. Place the letter that corresponds to the effect (a through h) the transaction has on the accounting equation in the space provided. You may use each letter more than once or not at all.

Accounting Effects

a. + A and + L

b. + A and + SE (Contributed Capital)

c. + A and + SE (Retained Earnings)

d. - A and - L

e. - A and - SE (Contributed Capital)

f. - A and - SE (Retained Earnings)

g. + A and - A

h. The event is not reported on financial statements.

_______ 1. Under the mark-to-market method, the investee company declares and pays a cash dividend.

_______ 2. Under the equity method, the investee company declares and pays a cash dividend.

_______ 3. Under the mark-to-market method, the investee company recognizes net income.

_______ 4. Under the equity method, the investee company recognizes net income.

1. c

2. g

3. h

4. c

Diff: Medium

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Matching Question 2 / None

66) For each transaction numbered 1 through 4 below, identify which effect (a through f) the transaction is most likely to cause. You may use each letter more than once or not at all.

Effects

a. Increase in current ratio and earnings per share

b. Decrease in current ratio and earnings per share

c. Does not change the current ratio; increases earnings per share

d. Increases the current ratio; does not change earnings per share

e. Does not change the current ratio or earnings per share

f. Can't determine the effect

_______ 1. The mark-to-market method is used for an investment in long-term equity securities, and the investee company declares and pays a cash dividend.

_______ 2. The equity method is used for an investment in long-term equity securities and the investee company declares and pays a cash dividend.

_______ 3. The mark-to-market method is used for an investment in long-term equity securities and the investee company recognizes net income.

_______ 4. The equity method is used for an investment in long-term equity securities and the investee company recognizes net income.

1. a

2. d

3. e

4. c

Diff: Medium

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Matching Question 3 / None

67) Each transaction listed in 1 through 4 below relates to a long-term investment in equity securities. Select the letters of the accounting effects (a through h) and place them in the space provided. Transactions may have more than one answer.

_______ 1. Using the equity method, the market price of the investment increases above its cost.

_______ 2. Using the market value method, the market price of the investment increases above its cost.

_______ 3. Using the equity method, the investee company recognizes a net loss for the year.

_______ 4. An investment in a 40%-owned subsidiary is sold for more than its carrying value.

1. h

2. a, c

3. e, f

4. a, c

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Matching Question 4 / None

68) For each transaction numbered 1 through 4 below, identify which effect (a through g) would most likely occur as a result of the transaction. All transactions refer to passive equity investments.

Effects

a. Increase in current ratio and earnings per share

b. Decreases current ratio; increases earnings per share

c. Increases current ratio; does not change earnings per share

d. Decrease in current ratio and earnings per share

e. Decreases current ratio; does not change earnings per share

f. Does not change the current ratio or earnings per share

g. Can't determine the direction of changes in the current ratio

_______ 1. A security is purchased for $1,000 cash.

_______ 2. Securities that cost $1,000 have a year-end market value of $800.

_______ 3. Securities that cost $1,000 have a year-end market value of $1,200.

_______ 4. Securities that cost $1,000 and have a current balance sheet value of $800 are sold for $900.

1. f

2. d

3. a

4. a

Diff: Medium

Learning Objective: 8.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Matching Question 5 / None

69) For each transaction listed in 1 through 9, place the letter (a through g) of the best effect in the space provided. You may use each letter more than once or not at all. All transactions involve a passive investment in equity securities unless otherwise specified.

Effects

a. + A and + L

b. + A and + SE (on income statement)

c. - A and - L

d. - A and - SE (on income statement)

e. No change in total A, L, or SE

_______ 1. Equity securities are purchased for $900 cash.

_______ 2. Equity securities with a cost of $600 have a year-end market value of $350.

_______ 3. Equity securities with a cost of $12,000 have a year-end market value of $14,000.

_______ 4. Equity securities with an original cost of $3,000 and a balance sheet value of $700 are sold for $800.

_______ 5. Equity securities with an original cost of $4,000 and a balance sheet value of $4,500 are sold for $4,300.

_______ 6. Equity securities with an original cost of $9,000 and a balance sheet value of $7,800 are sold for $7,800.

_______ 7. Equity securities with an original cost of $4,000 and a balance sheet value of $4,500 are sold for $4,500.

_______ 8. Securities for which the equity method is used, with a cost of $7,000, have a year-end market value of $5,200.

_______ 9. Securities for which the equity method is used, with a cost of $7,000, have a year-end market value of $7,200.

1. e

2. d

3. b

4. b

5. d

6. e

7. e

8. e

9. e

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 7 min.

Title/Media Ref.: Matching Question 6 / None

Short Problems

70) Equity securities were purchased as a short-term passive investment at a cost of $5,000. Their current market value is $4,000. Prepare the December 31 adjusting journal entry.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 1 / None

71) Prepare the December 31 journal entry that adjusts equity securities that were purchased as a long-term passive investment at a cost of $5,000 when current market value is $4,200.

Diff: Easy

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 2 / None

72) On December 31, the cost and market price of a short-term passive investment in equity securities are $5,000 and $9,000, respectively. Give the appropriate adjusting entry on December 31.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 3 / None

73) On December 31, the cost and market price of equity securities purchased as a long-term passive investment are $5,000 and $8,000, respectively. Give the appropriate adjusting entry on December 31.

Diff: Easy

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 4 / None

74) On December 31, 2020, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2021, those securities are sold for $11,000. Give the appropriate entry to record the sale of the securities.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 5 / None

75) On December 31, 2020, short-term equity securities with an original cost of $45,000 have a market value of $47,000. On January 11, 2021, those securities are sold for $51,000. Determine the gains or losses in 2020 and 2021 associated with these securities, which are held as a passive investment. Clearly label whether the gains or losses are realized or unrealized. Name the financial statement on which each is reported.

2020 2021

2020: ($47,000 - $45,000) = $2,000 Unrealized Gain

2021: ($51,000 - $47,000) = $4,000 Gain on Sale of Investments

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 6 / None

76) On December 31, 2020, short-term equity securities with an original cost of $14,000 have a carrying value on the balance sheet equal to their market value of $16,000. On January 11, 2021, those securities are sold for $18,000. Give the appropriate entry to record the sale of the securities.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 7 / None

77) On December 31, 2020, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 11, 2021, those securities are sold for $15,000. Prepare the appropriate entry to record the sale of the securities.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 8 / None

78) On December 31, 2020, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2021, those securities are sold for $10,000. Give the appropriate entry to record the sale of the securities.

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 9 / None

79) On December 31, 2020, short-term equity securities with an original cost of $45,000 have a market value of $47,000. On January 5, 2021, those securities are sold for $41,000. Determine the gains or losses in 2020 and 2021 associated with these securities, which are held as a passive investment. Clearly label whether the gains or losses are realized or unrealized. Name the financial statement on which each is reported.

2020 2021

2020: ($47,000 - $45,000) = $2,000 Unrealized Gain

2021: ($41,000 - $47,000) = $6,000 Loss on Sale of Investments

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 10 / None

80) On December 31, 2020, short-term equity securities held as a passive investment, with an original cost of $100,000, have a market value of $110,000. On January 11, 2021, the securities are sold for $130,000. Determine the gains or losses in 2020 and 2021 associated with these securities that must be reported on the income statements. Indicate whether the gains or losses are realized or unrealized.

Unrealized Gain $10,000

Gain on Sale of Investments $20,000

2020: ($110,000 - $100,000) = $10,000 Unrealized Gain

2021: ($130,000 - $110,000) = $20,000 Gain on Sale of Investments

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 11 / None

81) On October 10, 2020, Marcus Inc. buys short-term equity securities with an original cost of $100,000. On December 31, 2020, they have a market value of $80,000. On March 9, 2021, those securities are sold for $120,000. Determine the gains or losses in 2020 and 2021 associated with these securities that will be reported on the income statement. Indicate whether the gains or losses are realized or unrealized.

Unrealized Loss $20,000

Gain on Sale of Investments $40,000

2020: ($80,000 - $100,000) = $20,000 Unrealized Loss

2021: ($120,000 - $80,000) = $40,000 Gain on Sale of Investments

Diff: Easy

Learning Objective: 8.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 12 / None

82) On January 4, 2020, Harrison Corp. purchased 26% of C Corporation's voting stock for $100,000. During 2020, C recorded income of $200,000 and paid total dividends of $13,000. Harrison uses the equity method to account for this investment. Calculate Harrison's income from the C investment and the December 31, 2020, balance sheet value of its long-term equity investment in C.

December 31, 2020, investment in C Corporation = $100,000 + $52,000 - (26% × $13,000) = $148,620

Diff: Easy

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 13 / None

83) Before adjusting its current passive investments in equity securities, Apex Company has total current assets and current liabilities of $23,000 and $12,000, respectively. During the current year, Apex has net income of $200,000 with 50,000 shares of common stock outstanding. This amount excludes the effects of year-end adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $3,000. However, the current market value of those securities is $4,000 at year end. If Apex properly accounts for the securities, determine the effect on Apex's current ratio and earnings per share.

Current ratio after = $24,000/$12,000 = 2.0

Earnings per share = $200,000/50,000 = $4.00

Earnings per share = $201,000/50,000 = $4.02

[($24,000 - $23,000) = $1,000 Unrealized gain of equity securities]

Diff: Medium

Learning Objective: 8.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 14 / None

84) Falcon, Inc. acquired 30% of Dodson Corporation for $100,000 on December 31, 2019. During the calendar year 2020, Dodson had net earnings of $400,000 and paid total dividends of $50,000. The fair value of Dodson Corporation's stock at year end was $160,000. Falcon mistakenly recorded these transactions using the market value method rather than the equity method of accounting.

A. Determine the effect the error would have on the investment account at December 31, 2020.

B. Determine the effect the error would have on net income for the year ending December 31, 2020.

A. Market value method: $160,000

Equity method: $100,000 + ($400,000 × 30%) - ($50,000 × 30%) = $205,000

Net effect using market method: Understatement of investment account = $45,000

B. Market value method: ($50,000 × 30%) + ($160,000 - $100,000) = $75,000

Equity method: $400,000 × 30% = $120,000

Net effect using market value method: Understatement of investment income = $45,000

Diff: Medium

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 15 / None

85) On January 3, 2020, Blanton Co. purchased 24% of Martin Company's voting stock for $100,000. During 2020, Martin recorded income of $90,000 and paid total dividends of $15,000. Blanton uses the equity method to account for this investment. Calculate Blanton's income from the Martin investment and the December 31, 2020, balance sheet value of its long-term equity investment in Martin. Show your work.

December 31, 2020, investment in Martin Company

= $100,000 + $21,600 - ($15,000 × 24%) = $118,000

Diff: Medium

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 16 / None

86) On November 30, 2020, Arnold Company purchased 100% of the outstanding voting common stock of Compton Corporation for $100,000. At that date the fair market value of Compton assets less liabilities was $80,000. What amount, if any, of goodwill must Arnold recognize in connection with its purchase of Compton? Where should Arnold Company report this amount?

Diff: Easy

Learning Objective: 8.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 17 / None

87) On April 1, 2020, Parrish Company purchased 90% of the outstanding voting common stock of Hamilton Corporation for $400,000. At that date the fair market value of Hamilton's assets less liabilities was $200,000. What amount, if any, of goodwill must Parrish recognize in its consolidated balance sheet on December 31, 2020? Show your work.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 18 / None

88) On January 1, 2020, Simpson Company purchased all of the assets and assumed all of the liabilities of Dobson Company for $400,000. Dobson's balance sheet showed total assets of $450,000 and total liabilities of $210,000 of this date. An appraiser determined all assets except for land are valued at fair market value. The land is worth $20,000 more than its book value.

A. Calculate goodwill in connection with this business combination.

B. Prepare the journal entry to record the combination.

A.

Book value of the assets $ 450,000

Increase to fair value for land 20,000

Fair value of assets 470,000

Less fair value of liabilities (210,000)

Fair value of net assets 260,000

Purchase price 400,000

Goodwill $ 140,000

B.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 19 / None

89) On December 31, 2020, Celtic Inc. acquired a 24% interest in Romano Corp. for $100,000 and appropriately applied the equity method. During 2021, Romano reported net income of $400,000 and paid cash dividends of $50,000. How much will Celtic report for the year ending December 31, 2021 on its income statement? Show your work.

Diff: Easy

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Problem 20 / None

90) On January 1, 2020, Danner Company purchased all of the assets and assumed all of the liabilities of Clancy Company for cash of $80,000. Clancy's balance sheet showed total assets of $120,000 and total liabilities of $70,000. The equipment had a fair market value on the same date of $10,000 instead of the $6,000 reported on the balance sheet. Calculate goodwill in connection with this business combination. Prepare the journal entry to record the combination.

Book value of assets $120,000

Fair value for equipment difference ($10,000 - $6,000) 4,000

Fair value of assets 124,000

Less fair value of liabilities (70,000)

Fair value of net assets 54,000

Purchase price 80,000

Goodwill $ 26,000

Diff: Medium

Learning Objective: 8.5; 8.8A

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 21 / None

91) On December 31, 2020, Rory Corp. acquired an 18% interest in Batson Corp. for $100,000 and appropriately applied the market value method. During 2021, Batson had net income of $200,000 and paid cash dividends of $50,000. On the last day of 2021, Rory sold one-half of its investment in Batson Corp. for $180,000. The December 31, 2021 market value of the investment is $100,000. How much should Rory report on its income statement for the year ending December 31, 2021? Show your work.

Gain on sale of investment = $180,000 - ($100,000 × 50%) = $130,000

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 22 / None

92) York Corporation owns 25% of Carson, Inc. that it purchased on January 1, 2020, for $100,000. York uses the market value (mark-to-market) method for accounting for its investment in Carson, Inc. During 2020, Carson, Inc. paid a total of $45,000 of dividends and recorded income of $200,000. The fair market value of the investment at year end is $105,000. Determine how much York's 2020 net income would differ if it used the equity method instead of the market value method. Show your work.

Equity method: $200,000 × 25% = $50,000

Difference = $45,000 ($50,000 - $5,000) more income under the equity method

Diff: Medium

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 23 / None

93) On December 31, 2020, Tanner Corp. acquired a 20% interest in Gantry Corp. for $800,000 and appropriately applied the equity method. During 2021, Gantry had net income of $150,000 and paid cash dividends of $5,000. On the last day of 2021, Tanner sold one-half of its investment in Gantry Corp. for $620,000. How much should Tanner report on its income statement for the year ending December 31, 2021? Show your work.

Investment income = $150,000 × 20% $30,000

Gain on sale of investment:

Selling price $620,000

Book value:

Original cost $800,000

Net income (20% × $150,000) 30,000

Dividends (20% × $5,000) (1,000)

Carrying Value 829,000

Portion Sold × 50% 414,500

Gain on sale 205,500

Income statement effect of investment income and sale $235,500

Diff: Medium

Learning Objective: 8.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 24 / None

94) On January 2, 2021, Merton Co. acquired 30 percent of the outstanding voting common stock of Tilton, Inc., at a cost of $50,000. With this investment, Merton has the ability to exercise significant influence over Tilton, Inc. During 2021, Tilton, Inc. reported net income of $110,000 and paid total cash dividends of $35,000. What amount should be reported as investment and investment earnings by Merton for the year ending December 31, 2021? Show your work.

Investment earnings = (30% × $110,000) = $33,000

Diff: Medium

Learning Objective: 8.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 25 / None

Short Essay Questions

95) Why should users be cautious when examining financial statements in which the company has accounted for investments using the equity method?

Diff: Easy

Learning Objective: 8.3

Bloom's: Synthesis

AACSB/AICPA: Communication / PC: Communication; BB: None

TOT: 3 min.

Title/Media Ref.: Short Essay Question 1 / None

96) How is the acquisition (purchase) method used in accounting for business acquisitions?

Diff: Easy

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 2 / None

97) How does the concept of "consolidated financial statements" relate to a business acquisition?

Diff: Medium

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 3 / None

98) What are several features about the equity method that should cause financial report users to view it carefully?

• First, the equity method provides another reason why a company's net income (loss) differs from its cash flow from operations. The income recognized from the investee company rarely equals the cash dividends received by the investor.

• Second, the equity method ignores price (market value) changes in the affiliate's equity securities. For example, price decreases, even if substantial, are not recognized on the investor's books. In fact, they may even be accompanied by the recognition of income and the receipt of dividends if the affiliate reports positive income and declares dividends during the period of the price decline.

• Third, the percentage of ownership (20 - 50%) is not always a valid indication of "significant influence." Influence comes in many different forms.

• Finally, using the equity method can be considered a method of off-balance-sheet financing because it fails to reflect the liabilities of the affiliate on the balance sheet of the investor company.

Diff: Medium

Learning Objective: 8.3

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 4 / None

99) What is the concept of 'noncontrolling interest'?

Diff: Easy

Learning Objective: 8.8A

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 5 / None

100) What two criteria must be met for an investment in a security to be considered as current on an investor's balance sheet?

Diff: Easy

Learning Objective: 8.1

Bloom's: Knowledge

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 6 / None

101) How does the concept of 'merger' differ from an 'acquisition'?

Diff: Easy

Learning Objective: 8.4

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 7 / None

102) List the primary reasons a company might invest in equity securities. Explain how each of these reasons helps to achieve the primary goal of a business entity–to make a profit.

Equity securities include the right to the profits of the investee company in proportion to the percent of the stock acquired. Thus, as subsidiaries perform well and make profits, the wealth of the investor company increases either due to stock appreciation and/or dividends. Equity securities also include the right to influence the investee company in proportion to the percent of ownership. This feature gives the investor company an opportunity to influence the management of the subsidiary in ways that maximize the profits of the parent.

Diff: Medium

Learning Objective: 8.1; 8.2; 8.3

Bloom's: Synthesis

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 8 / None

103) Explain how passive investments in equity securities are accounted for, and describe the four events for which these rules must be applied.

There are four separate events associated with passive investments. (1) the purchase of the securities, (2) the declaration and receipt of related cash dividends, (3) the sale of the securities (at either a realized gain or a realized loss), and (4) changes in the prices of the securities on hand at the end of the accounting period (at either an unrealized gain or an unrealized loss).

Diff: Medium

Learning Objective: 8.2

Bloom's: Comprehension

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 9 / None

104) Explain how the transactions involving passive investments in equity securities affect the balance sheet and income statement.

The first event (purchase of securities) involves two asset accounts and has no overall effect even on total assets. The second event (dividends) increases the asset cash on the balance sheet, and increases revenue on the income statement (and therefore retained earnings in the stockholders' equity section of the balance sheet).

The third event (sale) either causes a net increase or net decrease in assets depending on whether the securities were sold at a gain or a loss. The gain or loss affects both net income on the income statement and retained earnings on the balance sheet. The fourth event (price changes) causes assets to increase if the fair market value of the securities has gone up and decrease if the fair market value of the securities has declined.

Similarly, there will be either an unrealized gain on the income statement (and an increase in retained earnings on the balance sheet), or either an unrealized loss on the income statement (and a decrease in retained earnings on the balance sheet).

Diff: Medium

Learning Objective: 8.2

Bloom's: Synthesis

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 8 min.

Title/Media Ref.: Short Essay Question 10 / None

105) Define goodwill and explain how it is accounted for.

Up until 2002, each year a portion of the goodwill balance was amortized, reducing reported income in that year. However, an accounting standard, effective January 1, 2002, ruled that goodwill should not be amortized. Rather, each year the balance in the goodwill account should be subjected to an impairment test to see if the balance sheet amount of the goodwill exceeds its estimated fair market value. If the balance sheet amount is judged to exceed the fair market value of the goodwill, the goodwill account should be written down to its fair market value.

Estimating the fair market value of goodwill is highly subjective. It essentially involves attempting at the end of each year to place a value on the subsidiaries previously acquired by the company, most of which are no longer publicly traded and many of which do not operate as independent entities.

Diff: Medium

Learning Objective: 8.4

Bloom's: Synthesis

AACSB/AICPA: Communication / PC: Communication; BB: None; FC: Reporting

TOT: 8 min.

Title/Media Ref.: Short Essay Question 11 / None

IFRS Questions

106) IFRS has an option for which assets to be reported at fair value?

A) Equity investments but not plant assets

B) Plant assets but not equity investments

C) Equity investments and plant assets

D) Neither equity investments nor plant assets.

Diff: Easy

Learning Objective: 8.3

Bloom's: Knowledge

AACSB/AICPA: Diversity / BB: Global; FC: Reporting

TOT: 1 min.

Title/Media Ref.: IFRS Question 1 / None

107) Under GAAP, investee companies that are 20 to 50 percent owned by investor companies are often referred to as affiliate companies. Under IFRS, affiliate companies are referred as:

A) sister companies.

B) associate companies.

C) brother companies.

D) subordinate companies.

Diff: Easy

Learning Objective: 8.3

Bloom's: Knowledge

AACSB/AICPA: Diversity / BB: Global; FC: Reporting

TOT: 1 min.

Title/Media Ref.: IFRS Question 2 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

Key ratios for Walmart, the giant discount retailer, for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.

Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income

108) The change in ROE from 2018 to 2019 was driven by:

A) the change in leverage.

B) the change in long-term asset turnover.

C) the change in Walmart's ability to control operating expenses.

D) the change in profit margin.

Diff: Hard

Learning Objective: 8.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 1 / None

109) Most important to the change in asset turnover was:

A) the change in accounts receivable turnover.

B) the change in inventory turnover.

C) the change in accounts payable turnover.

D) the change in long-term asset turnover.

Diff: Hard

Learning Objective: 8.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 2 / None

110) Choose the best answer in explaining the change in ROA.

A) Walmart's ability to turn over its inventory.

B) Walmart's ability to control its operating expenses.

C) Walmart's ability to control its total expenses.

D) Walmart's increased reliance on debt financing.

Diff: Hard

Learning Objective: 8.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 3 / None

111) Which of the following statements is false?

A) Walmart's suppliers are likely to be less pleased with Walmart in 2019 than in 2017.

B) The ability of Walmart's stores to produce sales has improved over the 3-year period.

C) Walmart was less able to cover its debt payments with operating funds in 2019 than in 2018.

D) Problems with controlling cost of goods sold hurt Walmart's ROA from 2017 to 2019.

Diff: Hard

Learning Objective: 8.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 4 / None

Video Questions

112) The proper accounting method for investments in securities depends on:

A) the dollar value of the investment.

B) level of influence of the investor company on the investee company.

C) whether the price of the securities have increased or decreased.

D) whether the investor and investee companies are in similar or different industries.

Diff: Easy

Learning Objective: 8.2; 8.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 1 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

113) The term affiliate company is used:

A) in cases where the market value method is used.

B) in cases where consolidated statements are prepared.

C) in cases where the investment is classified as available-for-sale

D) under U.S. G.A.A.P. when the equity method is used.

Diff: Easy

Learning Objective: 8.2; 8.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 2 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

114) A 50:50 joint venture, where each of the partnering companies has an equal influence, would normally be accounted for:

A) using the equity method.

B) using the purchase method.

C) using the fair market value of the investment.

D) using the cost of the investment and depreciating it over its useful life.

Diff: Easy

Learning Objective: 8.2; 8.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 3 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

115) Which of the following is not true of passive equity investments?

A) Realized gains and losses are reflected on the income statement.

B) These investments are carried on the balance sheet at their market values.

C) Unrealized gains and losses are reflected in the accumulated other comprehensive income account.

D) Unrealized losses are reflected on the income statement, while unrealized gains are reflected in the accumulated other comprehensive income account.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 4 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

116) Which of the following is true for equity investments where the investor company has a "significant influence" on the affiliate?

A) Trading security portfolios are commonly-held by most manufacturing companies.

B) Realized and unrealized gains and losses and both reflected on the income statement.

C) Whether a trading security is held or sold during a given period has no bearing on the value of net income for that period.

D) Investments in securities classified as trading are normally held in high-turnover portfolios.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 5 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

117) Under the market value method, dividends declared by and received from the investee company:

A) increase the investment account on the balance sheet.

B) reduce the investment account on the balance sheet.

C) are reflected in the accumulated other comprehensive income account.

D) increase reported net income.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 6 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

118) Under the equity method of accounting, dividends declared by and received from the investee company:

A) increase the investment account on the balance sheet.

B) reduce the investment account on the balance sheet.

C) are reflected in the accumulated other comprehensive income account.

D) increase reported net income.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 7 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

119) Which of the following is not a key difference between the market value method and the equity method when accounting for investments in securities?

A) Under the equity method earnings reported by the investee company affects the earnings reported by the investor company, but not under the market value method.

B) Under the equity method dividends received are handled much differently than under the market value method.

C) When the securities are originally purchased, the equity method places them on the balance sheet at a different value than under the market value method.

D) The market value method treats the investor entity as independent from the investee company, while the equity method treats the two entities as having overlapping interests.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 8 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

120) The phrase "associate company" refers to:

A) the investee company when the market value method is used under IFRS.

B) the investor company when the market value method is used under IFRS.

C) the investee company when the equity method is used under IFRS.

D) the investor company when the equity method is used under IFRS.

Diff: Easy

Learning Objective: 8.2; 8.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 9 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

121) One reason a company manager may prefer market value accounting over equity method accounting for a given equity investment is:

A) reported earnings tend to be higher.

B) higher values would tend to be attached to the balance sheet investment account.

C) the manager has more control over when to book earnings and losses because they are not booked until the securities are sold, a decision at management's discretion.

D) trading securities are less liquid.

Diff: Medium

Learning Objective: 8.2; 8.3

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Non-controlling investments in securities issued by other companies - Walt Disney & Co. Video: Question 10 / Video: Non-controlling investments in securities issued by other companies - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

122) The accounting method used to account for equity investments large enough to create a controlling interest by the investor (parent) company in the target company is called:

A) the fair market value method

B) the equity method

C) the acquisition method

D) the purchase method

Diff: Easy

Learning Objective: 8.4; 8.8A

Bloom's: Knowledge

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 1 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

123) In the context of an acquisition due diligence refers to:

A) the method used to account for the debt position of the target company.

B) the effort by the acquiring company to estimate both the fair market values of the individual assets and liabilities of the target company and the incremental value to the parent associated with acquiring the target company.

C) the effort by the target company to estimate its value to its industry.

D) the approach used by the target company's board of directors to determine the quality of its corporate governance.

Diff: Easy

Learning Objective: 8.4; 8.8A

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 2 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

124) The role of the balance sheet of the target company in an acquisition is:

A) to provide a reasonable estimate of the market value of the target company's equity.

B) to provide a basis for determining the target company's value as a going concern.

C) to provide a starting point for the assessment of the market values of the target's individual assets and liabilities.

D) to provide a list of all the assets and liabilities the acquiring company will be acquiring in the potential acquisition.

Diff: Easy

Learning Objective: 8.4; 8.8A

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 3 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

125) Which of the following statements is not true about the valuation bases used on the balance sheet of the target company?

A) Short-term investments traded on the public exchanges should be on the balance sheet at their fair market values.

B) Inventories on the balance sheet should be on the balance sheet at their fair market values.

C) The shareholders' equity section of the balance sheet represents a measure of the accumulated investments in the target company made by its owners.

D) The fixed assets on the balance sheet should be valued at either their costs — adjusted for depreciation — or their market values, whichever is lower.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 4 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

126) The liquidation value of the target company is:

A) an estimate of the minimum dollar amount the shareholders of the target company would ever accept for their equity in the company.

B) the addition of the individual market value estimates of all the target company's assets.

C) often the same value as the dollar amount of the shareholder's equity section of the target company's balance sheet.

D) an estimate of the highest dollar amount the acquiring company would ever be willing to pay the target company shareholders for the equity in the target company.

Diff: Easy

Learning Objective: 8.4; 8.8A

Bloom's: Knowledge

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 5 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

127) Why does the acquiring company go through the effort of estimating the incremental value associated with acquiring the target company?

A) To help identify the proper method of accounting for the acquisition.

B) To provide an estimate of the minimum dollar amount it would pay for the equity of the target company.

C) To better understand the target company's balance sheet.

D) To provide an estimate of the maximum dollar amount it would pay for the equity of the target company.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 6 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

128) When an acquisition is completed and a consolidated balance sheet is prepared:

A) the assets and liabilities of the target are added to those of the parent at the values they had on the target's balance sheet.

B) the assets and liabilities of the target are added to those of the parent at their fair market values, but only for those assets and liabilities that originally appeared on the target company's balance sheet.

C) the assets and liabilities acquired by the parent are added to the consolidated balance at their fair market values whether or not they appeared on the target's balance sheet.

D) inventories and some non-current assets owned by the target company are added to the consolidated balance sheet at the lower of their cost or market values.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 7 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

129) Which of the following statements is not true about goodwill?

A) Goodwill represents the dollar amount paid by the parent in the acquisition in excess of the liquidation value of the target company's assets and liabilities.

B) The dollar value of goodwill recognized in an acquisition is always larger than the liquidation value of the target company.

C) Goodwill represents the dollar amount paid by the parent company for the "going concern" value of the target company when combined with the resources of the parent.

D) Goodwill equals the fair market value of the liabilities acquired in the acquisition minus the fair market value of the assets acquired in the acquisition plus the consideration paid for the equity of the target company.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 8 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

130) Which of the following statements is true about goodwill after it has been acquired and is carried on the balance sheet?

A) The balance sheet carrying amount of the goodwill is amortized over its useful life.

B) Goodwill is carried on the balance sheet at its fair market value.

C) Goodwill remains unadjusted on the balance sheet until the related subsidiary is sold.

D) Goodwill is subject to an annual impairment test, which leads to an impairment write down in the event its value is estimated to have permanently dropped.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 9 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

131) If control is obtained in an acquisition by purchasing less than 100% — but more than 50% — of the equity in the target company:

A) the assets and liabilities of the target company are added to those of the parent in proportion to the percent of equity paid for.

B) the assets and liabilities acquired in the acquisition are added in total to the consolidated balance sheet, and an account called non-controlling interests is also added to the equity section of the consolidated balance sheet to represent the interest of the minority shareholders in the target company's assets and liabilities listed on the consolidated balance sheet.

C) the assets and liabilities of the target company are added to the consolidated balance sheet, but goodwill is not recognized.

D) the equity method is used and consolidated financial statements are not prepared.

Diff: Medium

Learning Objective: 8.4; 8.8A

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Acquisition accounting and goodwill - Walt Disney & Co. Video: Question 10 / Video: Acquisition accounting and goodwill - Walt Disney & Co. www.wiley.com/go/pratt/financialaccounting11e

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