30) Orbit Services, Inc. pays $700,000 to acquire 30% (200,000 shares) of the voting stock of State
Investments, Inc. on January 5, 2019. State Investments, Inc. declares and pays a cash dividend of $1.40
per share on June 14, 2019. Which of the following is the correct journal entry for the transaction on June
14, 2019?
A)
Equity Investments—State Investments, Inc.
182,000
Cash
182,000
B)
Cash
182,000
Dividend Revenue
182,000
C)
Cash
182,000
Equity Investments—State Investments, Inc.
182,000
D)
Cash
182,000
Retained Earnings
182,000
31) Land Services, Inc. owns 32% of voting stock of World Investments, Inc. During the year 2018, World
Investments, Inc. earned profits of $320,000. Under the equity method, which of the following journal
entries will Land Services record?
A)
Equity Investments—World Investments, Inc.
320,000
Cash
320,000
B)
Cash
102,400
Dividend Revenue
102,400
C)
Cash
102,400
Equity Investments—World Investments, Inc.
102,400
D)
Equity Investments—World Investments, Inc.
102,400
Revenue from Investments
102,400
32) When applying the rules of the equity method, the Equity Investments account is credited for the
receipt of a cash dividend because ________.
A) the dividend decreases the investor‘s investment
B) the dividend is treated as earnings rather than a return of capital
C) there is a decrease in the dividend liability
D) the dividend increases the total assets
33) Under the equity method, dividend revenue is treated as ________.
A) a debit to revenue from investments
B) dividend revenue
C) a return of capital
D) a credit to current assets
34) Under the equity method, the investor ________.
A) must debit the Equity Investments account when a dividend is received
B) must record its share of the investee’s net income
C) must use the LIFO method for tax purposes
D) debits the Revenue from Investments when the investee reports income
35) The Gain on Disposal of Equity Investment is a(n) ________.
A) unrealized gain
B) contra revenue
C) element of other comprehensive income
D) temporary equity account
36) Marley Investments, Inc. purchased 45% of the common stock of Beige Corporation on January 1,
2019. Beige Corporation reports a net income of $720,000 for the 2019 year. Which of the following is the
correct journal entry?
A)
Equity Investments—Beige Corporation
324,000
Revenue from Investments
324,000
B)
Cash
324,000
Revenue from Investments
324,000
C)
Revenue from Investments
324,000
Cash
324,000
D)
Revenue from Investments
324,000
Equity Investments—Beige Corporation
324,000
37) Emerald Investments, Inc. purchased 40% of the common stock of Diamond Corporation on March 1,
2018. Diamond Corporation reports a net income of $675,000 for the year 2019. Which of the following is
true of the balance sheet on December 31, 2019?
A) Total assets will remain unchanged.
B) Total liabilities will decrease.
C) Total equity will increase.
D) Cash will increase.
38) Wheat Corporation pays $532,000 for 100,000 shares to acquire 45% common stock of Grain
Investments, Inc. on January 5, 2018. Wheat Corporation sells 20,000 shares for $40,000 on January 6, 2018.
Which of the following is the correct journal entry for the transaction on January 6, 2018? (Round any
intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A)
Cash
106,400
Equity Investments—Grain Investments, Inc.
106,400
B)
Equity Investments—Grain Investments, Inc.
106,400
Cash
40,000
Loss on Disposal
66,400
C)
Equity Investments—Grain Investments, Inc.
106,400
Cash
106,400
D)
Cash
40,000
Loss on Disposal
66,400
Equity Investments—Grain Investments, Inc.
106,400
39) When a loss is recorded on the sale of a significant influence equity investment, ________.
A) total assets will increase
B) equity will increase
C) total assets will decrease
D) equity will remain unchanged
40) Complete the following statement:
When a company invests in equity securities with 20% to 50% ownership in the investee’s _______ stock,
the investor can ________ ________ the investee’s decisions. These types of investments must be
accounted for using the ________ method.
41) On January 1, 2018, West Coast Boats paid $ 1,850,000 for its 30% investment in East Coast Autos.
After the purchase, West Coast Boats has significant influence over East Coast Autos. East Coast Autos
earned net income of $30,000,000 and paid cash dividends of $15,000,000 to all outstanding stockholders
during 2018. Assume all outstanding stock is voting stock.
Requirement:
1. Journalize all required 2018 transactions related to West Coast Boats’ investment in East Coast Autos.
Omit explanations.
2. What is the December 31, 2018 balance of the investment account? Label your work.
42) A company that is controlled by another corporation is called a subsidiary company.
43) Consolidated statements combine the balance sheets, income statements, and statement of cash flows
of the parent company with those of its controlling interest affiliates.
44) Consolidation accounting is the way to combine the financial statements of two or more companies
that have the same owners.
45) An investor owns a controlling interest when the investor has legal control over the investee company
and generally owns more than 50% of the investee’s voting stock.
46) A parent company is a company that is controlled by another corporation.
47) A parent company is a company that ________.
A) is controlled by another corporation
B) owns a controlling interest in another company
C) is the first to begin operations in an industry
D) has any level of investment in another company
48) A subsidiary company is a company that ________.
A) is controlled by another corporation
B) owns a controlling interest in another company
C) is the first to begin operations in an industry
D) has any level of investment in another company
49) Which of the following is true of consolidated statements?
A) They combine the balance sheets, income statements, and statements of cash flows of the parent
company with those of its peer group firms.
B) They combine the balance sheets, income statements, but not the statements of cash flows of the
subsidiary company using the consolidation method.
C) They combine the balance sheets, income statements, and statements of cash flows of the subsidiary
company with those of its investee firms.
D) They combine the balance sheets, income statements, and statements of cash flows of the parent
company with those of its controlling interest affiliates.
50) Which of the following accounting methods is used to account for controlling interest investments?
A) cost method
B) acquisition method
C) consolidation method
D) discounted cash flow method
51) List and briefly describe the method used to account for investments in equity securities with more
than 50% ownership.
52) Provide the following information for controlling interest equity investments:
1. Which accounting method is used?
2. What is the balance sheet effect when using this accounting method?
3. What is the income statement effect when using this accounting method?
1) At the end of each accounting period, trading debt securities must be adjusted and reported at fair
value.