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Financial Accounting, 5e (Spiceland)
Appendix D: Investments
1) Companies with large expansion plans, called growth companies, prefer to reinvest earnings in
the growth of the company rather than distribute earnings back to investors in the form of cash
dividends.
2) Seasonal refers to the revenue activities of a company varying based on the time (or season) of
the year.
3) When insignificant influence exists, an investment in equity securities should be accounted for
by the equity method.
4) When significant influence exists, an investment in equity securities should be accounted for by
the equity method.
5) When the investor has insignificant influence, the receipt of cash dividends from an equity
investment is recorded as dividend revenue.
6) Investments in equity securities are reported at fair value when a company has an insignificant
influence over another company in which it invests.
7) Unrealized holding gains and losses from changes in the fair value of investments in equity
securities are reported as a separate component of stockholders' equity when an investor has
insignificant influence.
8) Unrealized holding gains and losses from changes in the fair value of investments in equity
securities are reported as part of current net income when an investor has insignificant influence.
9) Gains and losses on the sale of equity investments are reported as nonoperating revenues and
expenses in the income statement.
10) Equity investments are reported at fair value when a company has a significant influence over
another company in which it invests.
11) Under the equity method, the investor includes in net income its portion of the investee's net
income.
12) When the investor has significant influence, the receipt of cash dividends is recorded as
dividend revenue.
13) Consolidated financial statements combine the separate financial statements of the purchasing
company and the acquired company into a single set of financial statements.
14) Bond investments are long-term assets that earn interest revenue, while bonds payable are
long-term liabilities that incur interest expense.
15) The cash received from interest equals the face value of the investment in bonds times the
stated interest rate.
16) Interest revenue is calculated as the amortized cost of the investment in bonds times the stated
interest rate.
17) Because the amortized cost of bonds purchased at a premium increases over time, interest
revenue will also increase each semi-annual interest period.
18) Because the amortized cost of bonds purchased at a discount increases over time, interest
revenue will also increase each semiannual interest period.
19) The statement of comprehensive income is a statement in which we report all changes in
stockholders' equity other than investments by stockholders and payment of dividends.
20) The statement of comprehensive income is a statement that includes net income plus
investments by stockholders less payment of dividends.
21) One of the primary reasons for investing in equity securities includes:
A) Acquiring debt of competing companies.
B) Appreciation in the value of the stock.
C) Earning interest revenue.
D) Deducting dividend payments for tax purposes.
22) One of the primary reasons for investing in debt securities includes:
A) Receiving dividend payments.
B) Acquiring significant influence.
C) Earning interest revenue.
D) Deducting interest payments for tax purposes.
23) Which of the following is true with regard to how to account for company A's investment in
company B's common stock?
A) The fair value method is used when A owns more than 50% of B.
B) The equity method is used when A owns from 20% to 50% of B.
C) Consolidated financial statements are prepared when A owns less than 20% of B.
D) All of the other answer choices are correct.
24) Which of the following is true with regard to how to account for company A's investment in
company B's common stock?
A) The fair value method is used when A's ownership is presumed to have insignificant influence.
B) The fair value method is used when A's ownership is presumed to be temporary.
C) The fair value method is used when A's ownership is presumed to have significant influence.
D) The fair value method is used when A's ownership is presumed to be long-term.
25) Libby Company purchased 10% of the equity securities in another company for $100,000. At
the end of the year, the fair value of the securities was $105,000. How should the investment be
reported in the year-end financial statements?
A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in equity securities would be reported in the balance sheet at its $105,000 fair
value.
C) An unrealized holding gain of $5,000 would be reported as a separate component of
stockholders' equity.
D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair
value; an unrealized holding gain of $5,000 would be reported as a separate component of
stockholders' equity.
9
26) Ronald Company purchased 5% of the equity securities of another company for $100,000. At
the end of the year, the fair value of the securities was $105,000. How should the investment be
reported in the year-end financial statements?
A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in equity securities would be reported in the balance sheet at its $100,000
purchase cost; an unrealized holding gain of $5,000 would be reported in net income.
C) An unrealized holding gain of $5,000 would be reported as a separate component of
stockholders' equity.
D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair
value; an unrealized holding gain of $5,000 would be reported in net income.
27) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30
per share. By the end of the year, the stock price has increased to $32 per share. How would the
change in stock price affect Sports Spectacular's net income?
A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.
10
28) Sports Science purchased 1,000 shares (4%) of stock in Silver's Gym for $30 per share. By the
end of the year, the stock price has decreased to $28 per share. How would the change in stock
price affect Sports Science's net income?
A) Decrease net income by $28,000.
B) Decrease net income by $30,000.
C) Decrease net income by $2,000.
D) No effect.
29) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30
per share. By the end of the year, the Athletic Warehouse has paid dividends of $2 per share. How
would Sports Spectacular account for the dividend?
A) Decrease in the investment account
B) Unrealized holding gain.
C) Dividend revenue.
D) Sports Spectacular would not recognize the dividend.
30) At the beginning of the year, Gilman Company purchased 10,000 of the 200,000 shares of
common stock of Burke Corporation at $40 per share as a long-term investment. The records of
Burke Corporation showed the following by the end of the year:
Net Income
$
500,000
Dividends Paid
$
200,000
Market Price per Share
$
38
What amount should Gilman Company report in its year-end balance sheet for its investment in
Burke?
A) $380,000.
B) $400,000.
C) $415,000.
D) $425,000.
31) On January 1, 2021, Nana Company paid $100,000 for 8,000 shares of Papa Company's
common stock. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for
the year ended December 31, 2021. The fair value of the Papa stock on that date was $45 per share.
What amount will be reported in the balance sheet of Nana Company for the investment in Papa at
December 31, 2021?
A) $284,400.
B) $300,000.
C) $315,600.
D) $360,000.
32) On January 2, 2021, Howdy Doody Corporation purchased 12% of Ranger Corporation's
common stock for $50,000. During 2021, Ranger had net income of $100,000 and declared and
paid a dividend of $60,000. On December 31, 2021, the fair value of the Ranger stock owned by
Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2021
income statement as income from this investment?
A) $26,000.
B) $7,200.
C) $20,000.
D) $27,200.
33) If Pop Company exercises significant influence over Son Company and owns 40% of its
common stock, then Pop Company:
A) Would record dividends received from Son Company as investment revenue.
B) Would increase Investments account when Son Company declares dividends.
C) Would record 40% of the net income of Son Company as investment income each year.
D) All of these answer choices are correct.
34) When the equity method of accounting for investments is used by the investor, the Investments
account increases when:
A) A cash dividend is received from the investee.
B) The investee reports a net income for the year.
C) The investor records additional depreciation related to the investment.
D) The investee reports a net loss for the year.
35) Which of the following increases the Investments account under the equity method of
accounting?
A) Decreases in the market price of the investee's stock.
B) Dividends paid by the investee that were declared in the previous year.
C) Net loss of the investee company.
D) None of these answer choices are correct.
36) When using the equity method to account for an investment, cash dividends received by the
investor from the investee should be recorded:
A) As a reduction in the Investments account.
B) As an increase in the Investments account.
C) As dividend income.
D) As a contra item to stockholders' equity.
37) The equity method of accounting for investments in voting common stock is appropriate when:
A) The investor can significantly influence the investee.
B) The investor has voting control over the investee.
C) The investor intends to hold the common stock indefinitely.
D) The investor is assured of a continued supply of a valuable raw material.
38) Sports International purchased 100,000 shares of stock in The Gaming Warehouse for $30 per
share. The investment is properly recorded using the equity method. By the end of the year, the
stock price has increased to $32 per share. How would the change in stock price affect Sports
International's net income under the equity method?
A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.
39) At the beginning of the year, Goldman Company purchased 10,000 of the 40,000 shares of
common stock of Buchanan Corporation at $40 per share as a long-term investment. Goldman can
exercise significant influence over Buchanan and properly records the investment using the equity
method. The records of Buchanan Corporation showed the following by the end of the year:
Net Income
$
500,000
Dividends Paid
$
200,000
Market Price per Share
$
38
What amount should Goldman Company report in its year-end balance sheet for its investment in
Buchanan?
A) $380,000.
B) $400,000.
C) $475,000.
D) $425,000.
40) On January 1, 2021, Tremen Corporation acquired 40% of the shares of Delany Company.
Tremen paid $3,000,000 for the investment. For 2021, Delany recognized net income of $500,000
and paid $300,000 of dividends. At December 31, 2021, Tremen's investment in Delany Company
would be reported for:
A) $3,200,000.
B) $3,120,000.
C) $3,000,000.
D) $3,080,000.
41) On January 1, 2021, Clement Corporation purchased 30% of Meyer Corporation's common
stock for $200,000. During 2021, Meyer had net income of $400,000 and declared and paid a
dividend of $100,000. On December 31, 2021, the fair value of the Meyer stock owned by Clement
had decreased to $180,000. How much should Clement report in its 2021 income statement as
income from this investment?
A) $10,000.
B) $30,000.
C) $120,000.
D) $(20,000).
42) Consolidated financial statements are prepared when one company has:
A) Accounted for the investment using the equity method.
B) Accounted for the investment as available-for-sale securities.
C) Control over another company.
D) None of the other answer choices are correct.
43) Which of the following investment securities held by Zoogle Inc. may be classified as
held-to-maturity securities in its balance sheet?
A) Debt securities.
B) Equity securities.
C) Common stock.
D) All of the other answer choices are correct.
44) A company purchased bonds on January 1, 2021, for $207,913. This price represents a market
rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 10%, pay
semiannual interest, and mature in 5 years. For what amount would these bonds be recorded when
purchased?
A) $7,913.
B) $207,913.
C) $200,000.
D) $220,000.
45) A company purchased bonds on July 1, 2021, for $281,859. This price represents a market rate
of 7% on bonds that have a face amount of $300,000, have a stated rate of 6%, pay semiannual
interest, and mature in 8 years. Calculate the amount of interest revenue as of December 31, 2021.
A) $19,730.
B) $9,000.
C) $9,865.
D) $18,000.
46) A company purchased bonds on July 1, 2021, for $107,106. This price represents a market rate
of 7% on bonds that have a face amount of $100,000, have a stated rate of 8%, pay semiannual
interest, and mature in 10 years. Calculate the amount of interest revenue as of December 31, 2021.
A) $7,497.
B) $4,000.
C) $3,749.
D) $8,000.
47) A company purchased bonds on July 1, 2021, for $274,885. This price represents a market rate
of 6% on bonds that have a face amount of $250,000, have a stated rate of 8%, pay semiannual
interest, and mature in 6 years. Calculate the amortized cost of the bonds as of December 31, 2021.
A) $273,132.
B) $264,885.
C) $276,638.
D) $266,638.
48) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate
of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual
interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased
to $195,000. Assuming the investment is classified as held-to-maturity securities, what amount
would the company report for its investment in bonds on December 31, 2021?
A) $193,404.
B) $195,703.
C) $194,107.
D) $195,000.
49) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate
of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual
interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased
to $195,000. Assuming the investment is classified as trading securities, what amount would the
company report for its investment in bonds on December 31, 2021?
A) $193,404.
B) $195,703.
C) $194,107.
D) $195,000.
50) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate
of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual
interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased
to $195,000. Assuming the investment is classified as available-for-sale securities, what amount
would the company report for its investment in bonds on December 31, 2021?
A) $193,404.
B) $195,703.
C) $194,107.
D) $195,000.
