Chapter 12 Investments
63. Unrealized holding gains and losses on securities available for sale would have the following
effects on retained earnings:
Gains
Losses
a.
Increase
No change
b.
No change
Decrease
c.
No change
No change
d.
Increase
Decrease
64. Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in
January 2016. In December, Handy announced $200,000 net income for 2016 and declared
and paid a cash dividend of $2 per share on the 200,000 shares of outstanding common stock.
Zwick Company’s dividend revenue from Handy Corporation in December 2016 would be:
a. $ 0.
b. $28,000.
c. $56,000.
d. None of these answer choices is correct.
65. On January 2, 2015, Howdy Doody Corporation purchased 12% of Ranger Corporation’s
common stock for $50,000 and classified the investment as available for sale. Ranger’s net
income for the years ended December 31, 2015 and 2016, were $10,000 and $50,000,
respectively. During 2016, Ranger declared and paid a dividend of $60,000. There were no
dividends in 2015. On December 31, 2015, the fair value of the Ranger stock owned by
Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2016
income statement as income from this investment?
a. $26,000.
b. $ 7,200.
c. $20,000.
d. $27,200.
66. Jeremiah Corporation purchased securities during 2016 and classified them as securities
available for sale:
Security
Cost
Fair Value,
12/31/2016
A
$40,000
$49,000
B
70,000
66,000
C
28,000
39,000
All declines are considered to be temporary. How much gain will be reported by Jeremiah
Corporation in the December 31, 2016, income statement relative to the portfolio?
a. $0.
b. $16,000.
c. $20,000.
d. None of these answer choices is correct.
67. Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2013 for $50
per share and classified the investment as securities available for sale. Diamond’s market value
was $60 per share on December 31, 2014, and $65 on December 31, 2015. During 2016,
Hawk sold all of its Diamond stock at $70 per share. In its 2016 income statement, Hawk
would report:
a. A gain of $ 50,000.
b. A gain of $150,000.
c. A gain of $200,000
d. A gain of $300,000.
Chapter 12 Investments
68. Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2013 for $800 per share
and classified the investment as securities available for sale. Witt’s market value was $400 per
share on December 31, 2014, and $300 on December 31, 2015. During 2016, Dim sold all of
its Witt stock at $350 per share. In its 2016 income statement, Dim would report:
a. A realized gain of $50,000.
b. A recognition of unrealized losses of $400,000.
c. A loss on the sale of investments of $450,000.
d. A trading gain of $50,000 and an unrealized loss of $500,000.
350,000
450,000
800,000
69. On January 1, 2016, Everglade Company purchased the following securities and properly
accounted for them as securities available for sale:
Security
Cost
Fair value on 12/31/2016
ABC
$40,000
$55,000
DEF
72,000
65,000
XYZ
16,000
20,000
All declines in value are considered temporary. What amount should the Everglade Company
report relative to these securities in its 2016 statement of other comprehensive income?
a. $0.
b. $19,000 unrealized gain.
c. $12,000 net unrealized gain.
d. $7,000 unrealized loss.
70. Boulter, Inc. began business on January 1, 2016. At the end of December 2016, Boulter had
the following investments in equity securities:
Trading
Available for Sale
Cost
$60,000
$110,000
Fair value
54,000
107,500
All declines in value are deemed to be temporary in nature. How should the corresponding
losses be reflected in the financial statements at December 31, 2016?
Income
Statement
Accumulated Other Comprehensive Income in
Shareholders’ Equity
a.
$8,500
$ 0
b.
$ 0
$8,500
c.
$6,000
$2,500
d.
$2,500
$6,000
71. A weakness of _______ is that firms can increase or decrease net income by choosing to sell
particular investments with net unrealized gains or unrealized losses.
a. the available-for-sale approach
b. the trading-securities approach
c. both the available-for-sale and trading-securities approaches
d. neither the available-for-sale and trading-securities approaches
Chapter 12 Investments
72. If an available-for-sale investment is sold for which there are unrealized gains in accumulated
other comprehensive income (AOCI), a reclassification adjustment affects other
comprehensive income (OCI) in the period of sale by:
a. Reducing OCI for the amount of unrealized gains in AOCI.
b. Increasing OCI for the amount of unrealized gains in AOCI.
c. No effect on OCI, as OCI only includes the effects of unrealized gains and losses.
d. No effect on OCI, as the realized gain is included in AOCI.
73. If an available-for-sale investment is sold for which there are unrealized losses in accumulated
other comprehensive income (AOCI), the total effect on total comprehensive income is:
a. An increase.
b. A decrease.
c. No effect.
d. Cannot be determined given this information.
74. Seybert Systems accounts for its investment in Wang Engineering as available for sale.
Seybert’s balance in accumulated other comprehensive income with respect to the Wang
investment is a credit balance of $20,000, and Seybert reports the investment at $100,000 on
its balance sheet. Seybert purchased the Wang investment for (ignore taxes):
a. $100,000.
b. $120,000.
c. $80,000.
d. Cannot be determined from this information.
Chapter 12 Investments
75. Sloan Company has owned an investment during 2016 that has increased in fair value. After
all closing entries for 2016 are completed, the effect of the increase in fair value on total
shareholders’ equity would be:
a. Higher under the available-for-sale approach than under the trading-securities approach.
b. Lower under the available-for-sale approach than under the trading-securities approach.
c. The same amount under the available-for-sale and trading-securities approaches.
d. Not possible to identify whether the available-for-sale or trading-securities approaches
yield higher shareholders’ equity given this information.
76. When investments are treated as available-for-sale, other comprehensive income (OCI) also
includes the tax effects associated with unrealized holding gains and losses. As a result:
a. Accumulated other comprehensive income would be increased by the tax benefits
typically associated with unrealized holding gains.
b. Other comprehensive income typically would be reduced by the tax expense associated
with unrealized holding gains.
c. Accumulated other comprehensive income would not be affected by taxes.
d. None of these answer choices is correct.
77. The Guitar World (TGW) holds an investment that increased in fair value over 2016, and
accounts for that investment as available for sale. When considering taxes, TGW would:
a. Recognize tax expense on the income statement, and probably increase taxes payable.
b. Recognize tax expense on the income statement, and probably increase its deferred tax
liability.
c. Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably
increase taxes payable.
Chapter 12 Investments
d. Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably
increase its deferred tax liability.
78. 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.
79. Consolidated financial statements are prepared when one company has:
a. Accounted for the investment using the equity method.
b. Accounted for the investment as securities available for sale.
c. Control over another company.
d. None of these answer choices is correct.
80. If Pop Company owns 15% of the common stock of Son Company, then Pop Company
typically:
a. Would record 15% of the net income of Son Company as investment income each year.
b. Would record dividends received from Son Company as investment revenue.
c. Would increase its investment account by 15% of Son Company income each year.
d. All of these answer choices are correct.
81. 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 its investment 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 the above are correct.
82. 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 investment account.
b. As an increase in the investment account.
c. As dividend income.
d. As a contra item to stockholders’ equity.
83. When the equity method of accounting for investments is used by the investor, the investment
account is increased when:
a. A cash dividend is received from the investee.
b. The investee reports 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.
Chapter 12 Investments
84. Which of the following increases the investment 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 is correct.
85. If the fair value of equity securities is not determinable and the equity method is not
appropriate, the securities should be reported at:
a. Amortized cost.
b. Cost.
c. Consolidated value.
d. Net present value.
86. When the investor’s level of influence changes, it may be necessary to change from the equity
method to another method. When the level of ownership falls from a range of 20% to 50% to
less than 20%, the equity method typically would be discontinued and the investment account
balance would be carried over at:
a. Amortized cost on the date of ownership change.
b. Fair value on the date of ownership change.
c. Discounted present value on the date of ownership change.
d. The current balance, and this balance would serve as the new “cost.”
Chapter 12 Investments
87. When the investor’s level of influence changes, it may be necessary to change to the equity
method from another method. When the level of ownership rises from less than 20% to a
range of 20% to 50%, the equity method typically would become appropriate and the
investment account balance should be:
a. Retrospectively adjusted to the balance that would have existed if the equity method had
been in effect for prior years.
b. Carried over as is with no adjustment necessary.
c. Carried over at fair value on date of transfer.
d. Adjusted to reflect amortized cost.
88. On July 1, 2016, Tremen Corporation acquired 40% of the shares of Delany Company.
Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the
book value of identifiable net assets on Delany’s balance sheet. Delany recognized net income
of $1,000,000 for 2016, and paid $150,000 of dividends each quarter to its shareholders. After
all closing entries are made, Tremen’s “Investment in Delany Company” account would have
a balance of:
a. $3,200,000.
b. $3,160,000.
c. $3,000,000.
d. $3,080,000.
89. Which of the following is not true about accounting for investments using the equity method
under IFRS?
a. IFRS requires the equity method when the investor exercises significant influence over
the investee.
b. IFRS is more restrictive than U.S. GAAP concerning when an investor can elect the fair
value option.
c. IFRS requires that the accounting policies of an investee be adjusted to correspond to
those of the investor when applying the equity method.
d. IFRS does not allow use of the equity method where two or more investors have joint
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control.
90. Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method.
Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31, 2015 and
2016, respectively. During 2016 Clor recognized $80,000 of net income and paid dividends of
$30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2016,
their percentage ownership must have been:
a. 15%.
b. 18.75%.
c. 30%.
d. 50%.
91. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1,
2016. Jack can significantly influence Jill. On December 10, 2016, Jill declared and paid $1
million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss
should Jack report in its income statement for 2016 relative to its investment in Jill?
a. $1,000,000.
b. $1,200,000.
c. $1,400,000.
d. $1,500,000.
92. Hope Company bought 30% of Faith Corporation in the beginning of 2016. Hope’s purchase
price equaled 30% of the book value of Faith’s net identifiable assets, which also equaled 30%
of the fair value of Faith. During 2016, Faith reported net income in the amount of $4,000,000
and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for
the investment as available for sale instead of using the equity method. What effect would this
error have on the investment account and net income, respectively, for 2016?
a. Overstated by $1,050,000; understated by $1,050,000.
b. Understated by $1,050,000; understated by $1,050,000.
c. Overstated by $1,200,000; overstated by $1,200,000.
d. Understated by $1,200,000; overstated by $1,050,000.
93. Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1,
2016. On November 1, 2016, Hack declared and paid $1 million in dividends. On December
31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report
on its income statement for 2016 relative to its investment in Hack?
a. $1,100,000.
b. $2,400,000.
c. $1,500,000.
d. $1,600,000.
Chapter 12 Investments
94. Assume that, on January 1, 2016, Matsui Co. paid $1,200,000 for its investment in 60,000
shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued.
The book value and fair value of Yankee’s identifiable net assets were both $4,000,000 at
January 1, 2016. The following information pertains to Yankee during 2016:
Net Income
$200,000
Dividends declared and paid
$60,000
Market price of common stock on 12/31/2016
$22/share
What amount would Matsui report in its year-end 2016 balance sheet for its investment in
Yankee?
a. $1,320,000.
b. $1,260,000.
c. $1,242,000.
d. None of these answer choices is correct.
95. Gerken Company concluded at the beginning of 2016 that the company’s ownership interest in
DillCo had increased to the point that it became appropriate to begin using the equity method
to account for the investment. The balance in the investment account is $50,000 at the time of
the change, and accountants working with company records determined that the balance would
have been $75,000 if the account had been adjusted for investee net income and dividends as
prescribed by the equity method. After implementing the change to the equity method, if
financial statements were prepared:
a. Net income and retained earnings will be higher by $25,000.
b. Net income will be unchanged, and retained earnings will be higher by $25,000.
Chapter 12 Investments
c. Net income and retained earnings will be higher by $75,000.
d. The accounts will be unchanged, because no adjustment is necessary.
96. On April 1, 2016, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen
paid $100,000 for the investment, which is $40,000 more than 30% of the book value of
LittleTick’s identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to
inventory that will be sold in the remainder of 2016, and the rest to goodwill. LittleTick
recognized a total of $20,000 of net income for 2016, and paid total dividends for the year
$10,000; these dividends were issued quarterly. BigBen’s investment in LittleTick will affect
BigBen’s 2016 net income by:
a. A loss of $10,500.
b. Earnings of $4,500.
c. Earnings of $1,125.
d. Earnings of $3,450.
97. Cucumber Company concluded at the beginning of 2016 that the company’s ownership
interest in PickelCo had decreased to the point that it became appropriate to begin accounting
for its investment as available for sale, rather than using the equity method as it had been
doing. The balance in the investment account is $75,000 at the time of the change, and
accountants working with company records determined that the balance would have been
$50,000 if the investment had been accounted for as an available-for-sale investment. At the
time of implementing the change to the available-for-sale method, if financial statements were
prepared:
a. Net income and retained earnings will be lower by $25,000.
b. Net income will be unchanged, and retained earnings will be lower by $25,000.
c. The accounts will be unchanged, because no adjustment is necessary.
d. Other comprehensive income and accumulated other comprehensive income will be lower
by $25,000.
98. When the equity method of accounting for investments is used by the investor, the
amortization of additional depreciation due to differences between book values and fair values
of investee assets on the date of acquisition:
a. Reduces the investment account and increases investment revenue.
b. Increases the investment account and increases investment revenue.
c. Reduces the investment account and reduces investment revenue.
d. Increases the investment account and reduces investment revenue.
99. On January 1, 2016, Green Corporation purchased 20% of the outstanding voting common
stock of Gold Company for $300,000. The book value of the acquired shares was $275,000.
The excess of cost over book value is attributable to an intangible asset on Gold’s books that
was undervalued and had a remaining useful life of five years. For the year ended December
31, 2016, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is
the carrying value of Green’s investment in Gold at December 31, 2016?
a. $295,000.
b. $300,000.
c. $315,000.
d. $320,000.
Chapter 12 Investments
Use the following to answer questions 100 and 101:
At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the
time of purchase, the carrying value of Sky Tech’s net assets was $75 million. The fair value of Sky
Tech’s depreciable assets was $15 million in excess of their book value. For this year, Sky Tech
reported a net income of $75 million and declared and paid $15 million in dividends.
100. The amount of purchased goodwill is:
a. $18 million.
b. $30 million.
c. $60 million.
d. None of the above is correct.
101. The total amount of additional depreciation to be recognized by SBC over the remaining life
of the assets is:
a. $4.5 million.
b. $15 million.
c. $27 million.
d. None of these answer choices is correct.
102. Assume that, on January 1, 2016, Sosa Enterprises paid $3,000,000 for its investment in
36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock
Chapter 12 Investments
issued and estimates an eight-year remaining useful life and straight-line depreciation with no
residual value for its depreciable assets.
At January 1, 2016, the book value of Orioles’ identifiable net assets was $7,000,000, and the
fair value of Orioles was $10,000,000. The difference between Orioles’ fair value and the
book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder
to depreciable assets. Goodwill was not part of this transaction.
The following information pertains to Orioles during 2016:
Net Income
$600,000
Dividends declared and paid
$360,000
Market price of common stock on 12/31/2016
$80/share
What amount would Sosa Enterprises report in its year-end 2016 balance sheet for its
investment in Orioles Co.?
a. $3,200,000.
b. $3,180,000.
c. $3,135,000.
d. $3,027,000.
103. Smith buys and sells securities, which it typically classifies as available for sale. On December
15, 2016, Smith purchased $500,000 of Jones shares and elected the fair value option to
account for the Jones investment. As of December 31, 2016, the Jones shares had a fair value
of $525,000. In the 2016 financial statements, Smith will report (ignore taxes):
a. Investment income of $25,000 in its income statement.
b. Other comprehensive income of $25,000.
c. Accumulated other comprehensive income of $525,000.
d. An investment in Jones of $500,000.
104. Which of the following is not true about the fair value option?
Chapter 12 Investments
a. The fair value option is irrevocable.
b. The fair value option must be elected for all shares of an investment in a particular
company.
c. Electing the fair value option for held–to-maturity investments simply reclassifies those
investments as trading securities.
d. All of these answer choices are true.
105. Which of the following is not true when the fair value option is elected for an investment that
would normally be accounted for under the equity method?
a. No journal entry need be made to recognize the investor’s portion of the investee’s net
income.
b. Unrealized gains and losses on that investment are recognized in net income.
c. No journal entry need be made to recognize the investor’s portion of dividends paid by
the investee.
d. All of these answer choices are true.
106. Under IAS No. 39, which is not a category for accounting for investments?
a. Fair value through profit and loss.
b. Fair value through other comprehensive income.
c. Held-to-maturity.
d. Available-for-sale.
107. Under IFRS No. 9, which is not a category for accounting for investments?
a. Fair value through profit and loss.
Chapter 12 Investments
b. Fair value through other comprehensive income.
c. Held-to-maturity.
d. Amortized cost.
108. Which of the following is not true about the “fair value through profit and loss” approach for
accounting for investments under IFRS?
a. Allowed under both IAS No. 39 and IFRS No. 9.
b. Includes unrealized gains in earnings.
c. Requires reclassification of realized gains from other comprehensive income.
d. Not vulnerable to other-than-temporary impairments.
xxx. Under IFRS No. 9, an investment can be accounted for at amortized cost if:
a. The debt consists of interest and principal, and the investor is holding the debt to
collect those cash flows.
b. The investor elects amortized cost.
c. The investor owns between 20% and 50% of outstanding shares.
d. The debt is not in technical default.
xxx. Which of the following is not true about accounting for an equity investment under IFRS No.
9?
a. The investor can elect to account for the investment as FVOCI.
b. Unrealized gains and losses on the investment will be recognized in income unless the
Chapter 12 Investments
investor elects to account for the investment as FVOCI.
c. If the investor elects to account for the investment as FVOCI, gains and losses will be
recognized in net income when the investment is sold.
d. Unrealized gains and losses are recognized in net income if the investor accounts for
the investments as FVPL.
109. Which of the following is not true about the “fair value through other comprehensive income”
approach for accounting for investments under IFRS No. 9?
a. Is allowed for equity method investments.
b. Includes unrealized gains in other comprehensive income.
c. Does not require reclassification of realized gains from other comprehensive income.
d. Is allowed for equity investments.
110. Wang Corporation purchased $100,000 of Hales Inc. 6% bonds at par with the intent and
ability to hold the bonds until they matured in 2020, so Wang classifies its investment as held
to maturity. Unfortunately, a combination of problems at Hales and in the debt market caused
the fair value of the Hales investment to decline to $70,000 during 2016. Wang views this
decline as an other-than-temporary (OTT) impairment. Wang calculates that, of the $30,000
drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses.
If Wang accounts for the Hales bonds under IAS No. 39, before-tax net income for 2016 will
be reduced by:
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.