Chapter 13
1. The accounting for investments in common stock depends on (1) the expected holding period, and (2) the
purpose of the investment, as determined by both the percentage held and management intent.
2. Securities that firms expect to sell within the next year appear as investment securities in current assets on the
balance sheet.
3. Securities that firms expect to hold for more than one year from the date of the balance sheet appear in
investments in securities, classified as a current asset on the balance sheet.
4. U.S. GAAP and IFRS view investments of between 20% and 50% of the voting stock of another company as
minority, active investments unless evidence indicates that the investor cannot exert significant influence.
5. U.S. GAAP and IFRS view investments of less than 20% of the voting shares of another company as
minority, passive investments in most cases.
6. U.S. GAAP and IFRS view ownership of more than 50% of an investee as implying an ability to control the
investee, unless evidence indicates to the contrary.
7. The rationale for the equity method is that it better measures an investor’s income from investing activities
when, because of its ownership interest, it can exert significant influence over the operations and dividend
policy of the investee.
8. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
subsidiaries, often referred to as an affiliated group.
9. A major mining company owns a mining subsidiary in South America, where the government enforces
stringent control over cash payments outside the country. The parent cannot control all the assets of the
subsidiary, despite owning a majority of the voting shares, but should prepare consolidated statements with the
subsidiary.
10. In the acquisition method for a business combination, the excess of the fair value of the consideration over
the fair value of the acquired firm’s identifiable assets net of identifiable liabilities is goodwill.
11. The summary of significant accounting principles, a required part of the financial statement notes, must
include a statement about the parent’s consolidation policy. If an investor does not consolidate a significant
majority-owned subsidiary, the notes will disclose that fact.
12. If an entity qualifies as a variable interest entity (VIE), U.S. GAAP requires the primary beneficiary of the
VIE to consolidate the VIE.
13. The accounting for investments in common stock depends on the
14. Which of the following is true regarding minority, passive investments?
15. Which of the following is true regarding minority, active investments?
16. Which of the following is true regarding majority, active investments?
17. When an investor owns less than a majority of the voting stock of another corporation, the accountant must
judge when the investor can exert significant influence. For the sake of uniformity, U.S. GAAP and IFRS
presume that significant influence exists at ownership of _____ or more of the voting stock of the
investee. (Assume that management does not have a contractual or other basis to demonstrate that influence.)
18. U.S. GAAP and IFRS require firms to account for minority, active investments, generally those where the
investor owns between _____ using the equity method. Under the equity method, the investor recognizes as
revenue (expense) each period its share of the net income (loss) of the investee. The investor recognizes
dividends received from the investee as a return (reduction) of investment, not as income.
19. Under the equity method, the investor recognizes as revenue (expense) each period _____ The investor
recognizes dividends received from the investee as a(n) _____.
20. U.S. GAAP and IFRS require firms to account for minority, active investments, using the _____ method.
21. The rationale for the equity method is that it better measures an investor’s income from investing activities
when, because of its ownership interest, it
22. Paula Company measures its investments in available-for-sale marketable securities
23. Paula Company recognizes unrealized changes in the fair value of available-for-sale securities in
24. The equity method records the initial purchase of an investment in voting common stock at _____ Each
period, the investor treats as revenue its share of the _____, of the investee. The investor treats dividends
declared by the investee as _____.
25. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
The entry to record the acquisition is:
26. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee
Corporation reports earnings of $80,000. Purchaser Corporation records the following journal entry:
27. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
If Investee Corporation declares and pays a dividend of $30,000 to holders of its common stock, Purchaser
Corporation records the following journal entry:
28. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Purchaser Corporation records income earned by Investee Corporation as a(n) _____, while the dividend _____,
and _____ account.
29. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Suppose that Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the next
accounting period. Purchaser Corporation’s entries are:
30. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock,
Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
Purchaser Corporation’s Investment in Stock of Investee Corporation account now has a balance of :
31. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock,
Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
Assume now that Purchaser Corporation sells one-fourth of its investment in Investee Corporation for $165,000.
The entry is as follows:
32. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock,
Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
During the next accounting period, Purchaser Corporation sells one-fourth of its investment in Investee
Corporation for $165,000.
After the sale, the balance in the Investment in Stock of Investee Corporation account is:
33. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
When Purchaser Corporation acquired 30% of Investee Corporation’s common shares for $600,000, Investee
Corporation’s total shareholders’ equity was $1.5 million. Purchaser Corporation’s cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 – (0.30 x $1,500,000)]. Purchaser Corporation may pay
this premium because
34. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
When Purchaser Corporation acquired 30% of Investee Corporation’s common shares for $600,000, Investee
Corporation’s total shareholders’ equity was $1.5 million. Purchaser Corporation’s cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 – (0.30 x $1,500,000)]. What is/are the accounting
procedure(s) for this premium?
35. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
When Purchaser Corporation acquired 30% of Investee Corporation’s common shares for $600,000, Investee
Corporation’s total shareholders’ equity was $1.5 million. Purchaser Corporation’s cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 – (0.30 x $1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchase price as follows: $100,000 to remeasure
buildings and equipment to fair value and $50,000 to goodwill. Which of the following is/are true?
36. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Investee Corporation’s other comprehensive income during the first period is as follows:
Unrealized Holding Gains from Marketable Securities. . .$ 3,000
Unrealized Losses from Cash Flow Hedges . . . . . . . . . . (2,000)
Other Comprehensive Income. . . . . . . . . . . . . . . . . . . . $ 1,000
Purchaser Corporation would make the following entry to recognize its share of the items of other
comprehensive income of Investee Corporation:
37. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Which of the following is/are true?
38. Which of the following is/are true?
39. Business firms have several reasons for preferring to operate as a group of legally separate corporations,
rather than as a single entity. From the standpoint of the parent company, the more important reasons for
maintaining legally separate subsidiary companies include which of the following?
40. Business firms have several reasons for preferring to operate as a group of legally separate corporations,
rather than as a single entity. From the standpoint of the parent company, the more important reasons for
maintaining legally separate subsidiary companies include which of the following?
41. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
subsidiaries, often referred to as an affiliated group. Which of the following is/are true?
42. Consolidated financial statements provide more helpful information than does the equity method, because
43. U.S. GAAP and IFRS require firms to account for business combinations using the _____ method.
44. Which of the following is true regarding the acquisition method for a business combination?
45. Accountants sometimes refer to the equity method as a one-line consolidation because
46. Accountants sometimes refer to the equity method as a(n)
47. Often, the parent does not own 100% of the voting stock of a consolidated subsidiary. The parent refers to
the owners of the remaining shares of voting stock as a
48. The consolidated income statement shows
49. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
equity. U. S. GAAP refers to such entities as a _____ entity.
50. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
equity. Which of the following is/are true?
51. U.S. GAAP view investments of less than 20 percent of the voting stock of another company as
52. In Year 2, ABC Corp. acquired a 15% interest in XYZ, Inc., for $50,000. During the year, XYZ paid
dividends of $10,000 and had net income of $30,000. ABC sold the shares of XYZ for $65,000 cash. What
entry will ABC make to record the sale?
53. A minority, active investment is generally
54. If BG Company purchases a minority active interest in LG Company for $150,000, BG will make which of
the following entries to record the purchase using the equity method?
55. Pareto Corporation owns 40% of Spring Corporation. During Year 3, Spring has net income of $60,000.
What entry should Pareto record related to its investment in Spring during Year 3?
56. If Woodbury Company pays $55,000 in dividends to its corporate investor LMT Corporation (LMT owns
35% of The Woodbury Company), what entry should LMT Corporation record when it receives the dividends?
57. InvestCo purchases 30% of NewCo’s stock on January 1, Year 1, for $100,000. In Year 1, NewCo paid total
dividends of $30,000 and had a net income of $70,000. In Year 2, NewCo suffered a loss of $20,000 and paid
no dividends. On January 1, Year 3, InvestCo sells its investment in NewCo for $105,000. How is the sale
recorded?
58. Purl Co. purchased 40% of the stock of Stitch Co. in Year 1 for $100,000. Stitch had net income in Year 1
of $50,000 and net income in Year 2 of $30,000. Stitch also paid total dividends of $20,000 in Year 2. On
January 1, Year 3, Purl Co. sold its investment in Stitch Co. to Shoemaker Capital Corporation (SCC) for
$130,000. What entry would Purl Co. make to record the sale of Stitch Co.?
59. Management and shareholders may desire to have legally separate corporations because
60. (CMA adapted, Dec 92 #9) In a business combination that is accounted for as a purchase and does not
create negative goodwill, the assets of the acquired company are to be recorded on the books of the acquiring
company at
61. U.S. GAAP view investments of between 20 and 50 percent of the voting stock of another company (unless
evidence indicates that significant influence cannot be exercised) as
62. An intercompany transaction is a transaction between
63. Dividends and interest from Minority, Passive Investments become income when the
64. To avoid double counting P’s investment in S, P must eliminate
65. Intercompany sales
66. Minority, passive investments are initially recorded at the
67. When preparing consolidated financial statements, the result of the elimination process generally is the
68. Which of the following investments in securities would require the preparation of consolidated financial
statements by the investor corporation?
69. U.S. GAAP view investments of over 50 percent of the voting stock of another company (for the purpose of
controlling the other company at the broad policy-making level and at the day-to-day operational level) as
70. Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each
of the following independent cases:
CASE A
CASE B
CASE C
P’s ownership of S
A
30%
40%
Investment in beginning of year
$100
B
$130
Investment in end of year
105
$128
C
S’s income (loss)
100
90
40
S’s dividends paid
80
30
20