7) Gardens, Inc. invests its excess cash in Innovative Technologies, Inc. and acquires 4300 shares for
$28.00 per share. Garden, Inc. owns less than 3% of Innovative’s voting stock and plans to hold the stock
for two years. Which of the following is the correct journal entry for the transaction?
A)
Common Stock – Gardens
120,400
Cash
120,400
B)
Cash
120,400
Equity Investments
120,400
C)
Cash
120,400
Common Stock – Gardens
120,400
D)
Equity Investments
120,400
Cash
120,400
8) Franklin Corporation invested $100,000 to acquire 20,000 shares of Hope Technologies, Inc. on March 1,
2018. Hope pays a cash dividend of $0.25 per share on July 2, 2019. The investment is classified as equity
securities with no significant influence. Based on these two transactions, which of the following is true of
the accounting equation as of July 2, 2019?
A) Total assets in the balance sheet will remain unchanged.
B) Current assets in the balance sheet will remain unchanged.
C) Equity in the balance sheet will increase.
D) Total liabilities in the balance sheet will increase.
9) Gaines Corporation invested $114,000 to acquire 24,000 shares of Owens Technologies, Inc. on March 1,
2018. On July 2, 2019, Owens pays a cash dividend of $3.25 per share. The investment is classified as
equity securities with no significant influence. Which of the following is the correct journal entry to
record the transaction on July 2, 2019?
A)
Cash
78,000
Equity Investments
78,000
B)
Cash
78,000
Retained Earnings
78,000
C)
Equity Investments
78,000
Cash
78,000
D)
Cash
78,000
Dividend Revenue
78,000
10) All State Services, Inc. acquired 100,000 shares of Omega Metals, Inc. on January 1, 2018. Omega pays
a cash dividend of $0.25 per share on March 2, 2019. With the current investment, All State Services, Inc.
holds 8% of Omega. In the journal entry on March 2, 2019, ________.
A) Equity Investments is credited
B) Dividend Revenue is credited
C) Equity Investments is debited
D) Cash Dividends is credited
11) Autumn Services, Inc. acquired 140,000 shares of Spring Metals, Inc. on January 1, 2018. Spring
declares a cash dividend of $3.00 per share on February 15, 2019 and pays the cash dividend on March 2,
2019. With the current investment, Autumn Services, Inc. holds 8% of Spring‘s voting stock. Which of the
following will be the correct journal entry for the day when the dividend payment is made (March 2,
2019)?
A)
Cash
420,000
Equity Investments
420,000
B)
Cash
420,000
Retained Earnings
420,000
C) No Entry
D)
Cash
420,000
Dividend Receivable
420,000
12) When a company receives a dividend payment on investments in equity securities with no significant
influence, the ________.
A) total assets will remain unaffected
B) long-term assets will decrease
C) total equity will increase
D) total liabilities will decrease
13) National Financial Services, Inc. invested $21,000 to acquire 6250 shares of Stonebridge Investments,
Inc. on March 15, 2015. This investment represents less than 20% of the investee‘s voting stock. On May 7,
2018, National Financial Services, Inc. sells 3000 shares for $19,250. When the journal entry to record the
sale is made, ________.
A) Gain on Disposal will be credited
B) Equity Investments will be debited
C) Cash will be credited
D) Loss on Disposal will be debited
14) World-wide Financial Services, Inc. invested $27,000 to acquire 4000 shares of Dawn Investments, Inc.
on March 15, 2016. This investment represents less than 20% of the investee‘s voting stock. On May 7,
2019, World-wide Financial Services, Inc. sells 2500 shares for $14,250. In the accounting equation on May
7, 2019, ________.
A) total assets will remain unchanged
B) total assets will increase
C) total liabilities will decrease
D) total equity will decrease
15) Westbrook Financial Services, Inc. invested $15,000 to acquire 7250 shares of Cloud Investments, Inc.
on March 15, 2015. This investment represents less than 20% of the investee’s voting stock. On May 7,
2018, Westbrook Financial Services, Inc. sells 2250 shares for $12,250. Which of the following will be the
correct journal entry for the May 7, 2018 transaction? (Round any intermediate calculations to two
decimal places, and your final answer to the nearest dollar.)
A)
Loss on Disposal
12,250
Equity Investments
12,250
B)
Cash
12,250
Gain on Disposal
12,250
C)
Cash
12,250
Equity Investments
4657.5
Gain on Disposal
7592.5
D)
Cash
12,250
Equity Investments
12,250
16) The Loss on Disposal of Equity Investments is reported in the ________.
A) other income and (expenses) section of the income statement
B) stockholders’ equity section of the income statement
C) stockholders’ equity section of the balance sheet
D) losses section of the statement of retained earnings
17) On March 1, 2018, Rawlins Company invests $25,000 in Ashton Company stock. Ashton pays
Rawlins a $800 dividend on September 30, 2018. Rawlins sells the Ashton stock on November 30, 2018 for
$23,500. Assume the investment is categorized as a short-term equity investment and that Rawlins does
not have significant influence over Ashton.
Requirements:
1. Journalize the transactions for Rawlins’ investment in Ashton’s stock.
2. What was the net effect of the investment on Rawlins’ net income for the year ended December 31,
2018.
18) On April 1, 2018, Morton Company invests $50,000 in Johnson Company stock. Johnson pays Morton
a $2,000 dividend on November 30, 2018. Morton sells the Johnson stock on December 31, 2018 for
$54,500. Assume the investment is categorized as a short-term equity investment and that Morton does
not have significant influence over Johnson.
Requirements:
1. Journalize the transactions for Morton’s investment in Johnson’s stock.
2. What was the net effect of the investment on Morton’s net income for the year ended December 31,
2018.
19) When a company invests in equity securities with 20% to 50% ownership in the investee’s voting
stock, the investor can significantly influence the investee’s decisions.
20) Investments accounted for by the equity method are recorded at cost at the time of purchase.
21) Significant influence equity investments must be accounted for using the equity method.
22) Under the equity method, the Equity Investments account is debited for the receipt of a dividend
because the dividend increases the investee’s equity.
23) Under the equity method, the Equity Investments account is credited for the receipt of a dividend
because the dividend decreases the investor’s investment.
24) Under the equity method, the investee must annually record its share of the investor’s net income.
25) A ________ ownership in the investee’s voting stock can significantly influence the investee’s
decisions.
A) 10 percent
B) 5 percent to 10 percent
C) 15 percent to 20 percent
D) 20 percent to 50 percent
26) Significant influence equity investments must be accounted for using the ________ method.
A) equity
B) consolidation
C) discounted cash flow
D) acquisition
27) Purple Corporation pays $536,000 to acquire 40% of the equity securities of Blue, Inc. on May 5, 2019.
In the journal entry to record this transaction ________.
A) Equity Investments—Blue Inc. will be credited for $536,000
B) Equity Investments—Blue Inc. will be debited for $536,000
C) Common Stock Holdings—Blue Inc. will be debited for $536,000
D) Revenue from Investments will be credited for $536,000
28) Sparklers Services, Inc. pays $1,350,000 to acquire 35% of voting stock of Global Investments, Inc. on
March 5, 2018. When this transaction is recorded, the ________.
A) total equity will increase
B) total assets will increase
C) total assets will decrease
D) total cash will decrease
29) Premier Services, Inc. pays $1,350,000 to acquire 38% of voting stock of Blue Investments, Inc. on
March 5, 2019. Which of the following is the correct journal entry for the transaction?
A)
Equity Investments—Blue Investments, Inc.
1,350,000
Cash
1,350,000
B)
Common Stock Holdings—Blue Investments, Inc.
1,350,000
Cash
1,350,000
C)
Cash
1,350,000
Equity Investments—Blue Investments, Inc.
1,350,000
D)
Cash
1,350,000
Revenue from Investments
1,350,000