49) Phillips Corporation purchased 1,000,000 shares of Martin Corporation’s common stock,
which constitutes 10% of Martin’s voting stock on June 30, 2019 for $42 per share. Phillips’
intent is to keep these shares beyond the current year. On December 20, 2019, Martin paid a
$4,000,000 cash dividend. On December 31, Martin’s stock was trading at $45 per share and
Martin reported 2019 net income of $52 million.
What effect will the dividend have on Phillips’ 2019 financial statements?
A) It would increase cash and increase investment income.
B) It would increase cash and decrease investment in associated companies.
C) It would increase cash and increase net unrealized gains/losses.
D) It would increase cash and increase the investment account.
50) Phillips Corporation purchased 1,000,000 shares of Martin Corporation’s common stock,
which constitutes 10% of Martin’s voting stock on June 30, 2019 for $42 per share. Phillips’
intent is to keep these shares beyond the current year. On December 20, 2019, Martin paid a
$4,000,000 cash dividend. On December 31, Martin’s stock was trading at $45 per share and
Martin reported 2019 net income of $52 million.
What investment value will be reflected on Phillips’ balance sheet at December 31, 2019?
A) $42,000,000.
B) $45,000,000.
C) $46,800,000.
D) $47,200,000.
51) McGinn Company purchased 10% of RJ Company’s common stock during 2019 for
$100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2019 and a $105,000
fair value at the end of 2020.
Which of the following statements is correct?
A) The 2019 unrealized loss is $10,000, but is not included in McGinn’s 2019 net income.
B) The 2020 unrealized gain is $5,000, and is included in McGinn’s 2020 net income.
C) The 2020 unrealized gain is $15,000 and is included in McGinn’s 2020 net income.
D) The 2019 unrealized loss is $10,000 and is reported on McGinn’s balance sheet as a
component of stockholders’ equity.
52) Lumber Company purchased 16% of Jack Company’s common stock during 2019 for
$160,000. The 16% investment in Jack had a $144,000 fair value at the end of 2019 and a
$168,000 fair value at the end of 2020.
Which of the following statements is correct?
A) The 2019 unrealized loss is $16,000, but is not included in Lumber’s 2019 net income.
B) The 2020 unrealized gain is $8,000, and is included in Lumber’s 2020 net income.
C) The 2020 unrealized gain is $24,000 and is included in Lumber’s 2020 net income.
D) The 2019 unrealized loss is $16,000 and is reported on Lumber’s balance sheet as a
component of stockholders’ equity and is not reported on the income statement.
53) On January 2, 2018, Surfside Co. purchased 12,000 shares of Sand, Inc. for $240,000. The
investment represented 12% of Sand’s outstanding shares. On December 31, 2018 each share of
Sand was selling for $19 per share and on December 31, 2019 each share of Sand was selling for
$23 per share. Which of the following correctly presents the entries made by Surfside to its
investment account for this investment?
A) January 2, 2018, debit $240,000; December 31, 2018, credit $12,000; December 31, 2019,
debit $48,000.
B) January 2, 2018, debit $240,000; December 31, 2018, credit $12,000; December 31, 2019,
debit $36,000.
C) January 2, 2018, debit $240,000; December 31, 2018, debit $12,000; December 31, 2019,
credit $36,000.
D) January 2, 2018, credit $240,000; December 31, 2018, debit $12,000; December 31, 2019,
credit $48,000.
54) On January 2, 2018, Surfside Co. purchased 12,000 shares of Sand, Inc. for $240,000. The
investment represented 12% of Sand’s outstanding shares. On December 31, 2018 each share of
Sand was selling for $19 per share and on December 31, 2019 each share of Sand was selling for
$23 per share. Sand declared and paid dividends totaling $20,000 in 2018 and 2019. What was
the total amount reported on the income statement in 2019 by Surfside for its investment in
Sand?
A) $38,400.
B) $50,400.
C) $2,400.
D) $45,600.
55) Yoga Co. purchased 15% of Glow Company’s outstanding bonds during 2019 for $255,000.
The bonds had a $272,000 fair value at the end of 2019 and a $238,000 fair value at the end of
2020. If the bonds are accounted for as trading securities, which of the following statements is
correct?
A) The 2019 unrealized gain is $17,000, but is not included in Yoga’s 2019 net income.
B) The 2020 unrealized loss is $34,000, and is reported on Yoga’s balance sheet as a component
of stockholders’ equity.
C) The 2020 unrealized loss is $34,000 is included in Yoga’s 2020 net income.
D) The 2019 unrealized gain is $17,000 and is reported on Yoga’s balance sheet as a component
of stockholders’ equity.
56) Rye Company purchased 15% of Lena Company’s common stock during 2019 for $150,000.
The Investment in Lena had a $160,000 fair value at the end of 2019 and a $140,000 fair value at
the end of 2020.
Which of the following statements is incorrect?
A) The net $10,000 unrealized loss on the investment is reported on Rye’s balance sheet as a
component of other comprehensive income.
B) The 2020 unrealized loss is $20,000, and is included in Rye’s 2020 net income.
C) The investment is reported at $140,000 on the December 31, 2020 balance sheet.
D) The 2019 unrealized gain is $10,000 and is included in Rye’s 2019 net income.
57) Rye Company purchased 15% of Lena Company’s common stock during 2019 for $150,000.
The Investment in Lena had a $160,000 fair value at the end of 2019 and a $140,000 fair value at
the end of 2020. Lena Company declared and paid dividends of $36,000 in 2019 and $38,000 in
2020. What is the total amount reported on Rye’s income statement for the year ended December
31, 2020 related to the Lena investment?
A) $15,700.
B) ($14,300).
C) ($15,700).
D) $5,700.
58) Rye Company purchased 25% of Lena Company’s common stock during 2019 for $150,000.
The Investment in Lena had a $160,000 fair value at the end of 2019 and a $140,000 fair value at
the end of 2020. Lena Company reported net income of $60,000 in 2019 and $72,000 in 2020
and declared and paid dividends of $30,000 each year. On Rye Company’s balance sheet at
December 31, 2020, what amount was reported for the investment in Lena Company?
A) $168,000.
B) $175,000.
C) $160,500.
D) $150,500.
59) When is the equity method used to account for long-term investments in common stock?
A) When the investment is between 20% and 50% of the voting stock, regardless of whether or
not significant influence can be achieved.
B) When the investment is greater than 50% of the voting stock, regardless of whether or not
significant influence can be achieved.
C) When the investment is greater than 50% of the voting stock and significant influence can be
achieved.
D) When the investment is between 20% and 50% of the voting stock and significant influence
can be achieved.
60) Which of the following statements regarding the accounting for a common stock investment
using the equity method is incorrect?
A) The equity method is used for investments of ownership between 20% and 50% of the
outstanding voting stock when the investor has the ability to exert significant influence.
B) The investment account is increased by the proportionate share of affiliate net income.
C) The investment account is decreased by the proportionate share of affiliate dividends.
D) Investment income equals the proportionate share of affiliate dividends.
61) In which of the following circumstances is the investor most likely to exert significant
influence over the operating and financial policies of the investee company?
A) The investor owns 48% of the investee’s outstanding nonvoting preferred stock.
B) The investor owns 22% of the investee’s outstanding common stock and one other investor
owns the other 78%.
C) The investor owns 36% of the investee company’s outstanding convertible bonds.
D) The investor owns 19% of the investee’s outstanding common stock and has a seat on the
investee’s board of directors.
62) Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke
Corporation on January 1, 2019, at $40 per share as a long-term investment. The records of
Burke Corporation showed the following on December 31, 2019:
2019 net income
$
575,000
Dividends declared and paid during December, 2019
$
30,000
Market price per share
$
42
At what amount should Gilman Company report the Burke investment on the December 31,
2019 balance sheet?
A) $4,218,000.
B) $4,000,000.
C) $4,124,000.
D) $3,800,000.
Initial cost
$575,000 × 100,000/250,000
230,000
$30,000 × 100,000/250,000
)
Balance, December 31, 2019
63) Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke
Corporation on January 1, 2019, at $40 per share as a long-term investment. The records of
Burke Corporation showed the following on December 31, 2019:
2019 net income
$
575,000
Dividends declared and paid during December, 2019
$
30,000
Market price per share
$
42
How much should Gilman Company report as investment income from the Burke investment
during 2019?
A) $230,000.
B) $218,000.
C) $12,000.
D) $30,000.
64) JDR Company purchased 40% of the common stock of YRK Corporation on January 1,
2019, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the
following on December 31, 2019:
2019 net income
$
290,000
Dividends declared and paid during December, 2019
$
20,000
At what amount should JDR report the YRK investment on the December 31, 2019 balance
sheet?
A) $2,116,000.
B) $2,000,000.
C) $2,096,000.
D) $2,108,000.
Initial cost
$290,000 × 40%
$20,000 × 40%
)
Balance, December 31, 2019
65) Copper Company purchased 40% of the common stock of York Corporation on January 1,
2019, for $2,000,000 as a long-term investment. The records of York Corporation showed the
following on December 31, 2019:
2019 net income
$
290,000
Dividends declared and paid during December, 2019
$
20,000
How much investment income should Copper report from the York investment during 2019?
A) $290,000.
B) $108,000.
C) $116,000.
D) $8,000.
66) Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,
and Heartfelt accounts for the investment using the equity method. During 2019, Candle
Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.
The carrying value of the Candle investment was $500,000 on January 1, 2019.
How much investment income should Heartfelt report during 2019 from the Candle investment?
A) $36,000.
B) $40,000.
C) $4,000.
D) $10,000.
67) Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,
and Heartfelt accounts for the investment using the equity method. During 2019, Candle
Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.
The carrying value of the Candle investment was $500,000 on January 1, 2019.
At what amount is the Candle investment reported on the December 31, 2019 balance sheet of
Heartfelt Company?
A) $496,000.
B) $500,000.
C) $536,000.
D) $540,000.
68) On January 1, 2019, Palmer, Inc. bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this
investment. During 2019, Arnold Corporation reported $30,000 of net income and paid a total of
$10,000 in cash dividends. At the end of 2019, the shares had a fair value of $150,000.
At what amount should the Arnold investment be reported at on the December 31, 2019 balance
sheet of Palmer, Inc.?
A) $150,000.
B) $157,000.
C) $145,000.
D) $163,000.
69) On January 1, 2019, Palmer, Inc. bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this
investment. During 2019, Arnold Corporation reported $30,000 of net income and paid a total of
$10,000 in cash dividends. At the end of 2019, the shares had a fair value of $150,000.
At the end of 2019, the shares had a fair value of $150,000. What is the amount of Equity in
investee earnings for 2019?
A) $4,000.
B) $12,000.
C) $13,000.
D) $21,000.
70) On January 1, 2019, Calas Company acquired 40% of the outstanding voting common stock
of Nick Company as a long-term investment. During 2019, Nick reported net income of $10,000
and declared and paid dividends of $4,000. During 2019, Calas Company should report equity in
investee earnings of:
A) $5,600.
B) $4,000.
C) $2,400.
D) $10,000.
71) On January 1, 2019, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation
common stock at a cost of $150,000. Turtle uses the equity method of accounting for this
investment. During 2019, Shell Corporation reported $40,000 of net income and paid a total of
$5,000 in cash dividends. At the end of 2019, the shares had a fair value of $160,000.
How much investment income will Turtle report for equity in investee earnings during 2019?
A) $12,000.
B) $22,000.
C) $10,500.
D) $1,500.
72) On January 1, 2019, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation
common stock at a cost of $150,000. Turtle uses the equity method of accounting for this
investment. During 2019, Shell Corporation reported $40,000 of net income and paid a total of
$5,000 in cash dividends. At the end of 2019, the shares had a fair value of $160,000.
What investment balance will be reported on Turtle’s December 31, 2019 balance sheet?
A) $150,000.
B) $162,000.
C) $160,500.
D) $170,500.
73) When is the equity method not used to account for a long-term investment in common stock?
A) When the investment is 30% of the voting stock and significant influence can be achieved.
B) When the investment is 18% and significant influence can be achieved.
C) When the investment is greater than 50% of the voting stock and control is achieved.
D) When the investment is 40% of the voting stock and significant influence can be achieved.
74) Which of the following statements is false with regard to investments and the cash flow
statement?
A) Dividends received from stock investments increase cash flows from investing activities.
B) Income from investments accounted for using the equity method does not create cash flows.
C) Sale of stock investments is a cash inflow from investing activities.
D) Dividends received from stock investments accounted for using the equity method are not
reported as income but are reported as cash flows.
75) Which of the following statements is correct with regard to investments and the statement of
cash flows?
A) When the equity method is used to account for an investment in an investee company’s
common stock, the reported share of affiliate net income must be added to net income in the
operating activities section of the statement of cash flows.
B) When the equity method is used to account for an investment in an investee company’s
common stock, the cash dividends received are a cash inflow from investing activities.
C) Any unrealized gains or losses that were reported on the income statement under the fair
value method of accounting for investments must be removed from net income in the operating
activities section of the statement of cash flows.
D) When the equity method is used to account for an investment in an investee company’s
common stock, the reported share of affiliate dividends must be deducted from net income in the
operating activities section of the statement of cash flows.
76) Photo Finish Corporation bought a 40% interest in Click-It Corporation’s $1 par value voting
common stock on March 31, 2019. On December 31, 2019, Click-It paid a $1 million cash
dividend declared earlier in 2019, and reported net income for the year ended 2019 of $10
million. On December 31, 2019, Click-It’s stock was trading at $11.50 per share.
What effect will the dividend have on the Photo Finish financial statements?
A) It would increase cash and increase equity in investee earnings.
B) It would increase cash and decrease the investment account.
C) It would increase cash and increase net unrealized gains/losses.
D) It would increase cash and increase the investment account.
77) Photo Finish Corporation bought a 40% interest in Click-It Corporation’s $1 par value voting
common stock on March 31, 2019. On that date, Photo Finish paid $20 million for the 2 million
shares at a $10 market price per share. On December 31, 2019, Click-It paid a $1 million cash
dividend declared earlier in 2019, and reported net income for the year ended 2019 of $10
million. On December 31, 2019, Click-It’s stock was trading at $11.50 per share.
At what amount will the Click-It investment be reported on Photo Finish’s December 31, 2019
balance sheet?
A) $20,000,000.
B) $23,000,000.
C) $23,600,000.
D) $24,000,000.
78) Fun with Florals Corporation acquired all the voting common stock shares of Crafts-to-Go
Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which
of the following statements about the financial statements is true?
A) The assets and liabilities of Crafts-to-Go Corporation would be not revalued and disclosed at
fair value on the date of acquisition.
B) Fun with Florals will use the equity method of accounting for this investment.
C) Fun with Florals will prepare consolidated financial statements.
D) Fun with Florals will use the fair value method of accounting for this investment.
79) The use of consolidation accounting for a long-term investment in common stock of another
company is required when the ownership of its voting stock is:
A) 20% or more.
B) less than 20%.
C) between 20% and 50%.
D) more than 50%.