82-16 Under the equity method of accounting for shares investments, cash dividends received from the investee
are recorded by the investor as:
A) a debit to the Investment account of the investor company.
B) a credit to Dividend Revenue of the investor company.
C) a credit to the Investment account of the investor company.
D) no entry. There is no entry made to record dividends in this accounting situation.
8.2-17 Under the equity method of accounting for shares investments, the Investment account is decreased
for the receipt of a dividend because:
A) no cash is received.
B) the dividend decreases the investee’s owners’ equity, and thus the investor’s investment.
C) the dividend decreases the investee’s owners’ equity, and thus increases the investor’s
investment.
D) none of the above occur.
8.2-18 Abler Company owns 40% of Saparo Company. Saparo Company paid $40,000 cash dividends for
the year. Abler Company’s journal entry to record the dividends includes a:
A) credit to Dividend Revenue for $16,000.
B) credit to Dividend Revenue for $40,000.
C) credit to Long-Term Investments for $16,000.
D) credit to Long-Term Investments for $40,000.
8.2-19 A company using the equity method to account for long-term investments should report an unrealized
gain on the investment:
A) if the investee shares has fallen below or risen above its cost to the investor.
B) only if market exceeds cost.
C) only if market is below cost.
D) in no instance. No adjusting entry is made.
8.2-20 A gain or loss on the sale of a long-term investment using the equity method is determined by
comparing the cash received with the:
A) lower-of-cost-or-market value of the long-term investment.
B) cost of the long-term investment.
C) market value of the long-term investment.
D) cost of the long-term investment, adjusted for the investor’s share of the investee’s net income and
cash dividends, while the investment was held by the investor company.
8.2-21 Under the equity method, the revenue from the investment appears on:
A) the balance sheet as a long-term asset.
B) the income statement as Other Revenue.
C) the balance sheet as Other comprehensive income.
D) none of the above.
8.2-22 Under the equity method, if the investee company has a net loss, then the investor company will:
A) debit the Investment account for their share of the net loss.
B) credit the Investment account for their share of the net loss.
C) make no entry to the Investment account.
D) do none of the above.
8.2-23 The English Tea Company owns 19,000 of the 40,000 shares of outstanding ordinary shares of the
Express Beverage Company. The English Tea Company should account for this investment using
the:
A) equity method.
B) market method.
C) consolidation method.
D) lower-of-cost-or-market method.
8.2-24 The Hammer Company paid $1,300,000 to purchase 35% of the outstanding shares of the Anvil
Corporation. Anvil Corporation reports $425,000 of net income and pays a cash dividend of
$115,000. These three events will increase Hammer Company’s Investment account from $0 to:
A) $ 40,250.
B) $1,610,000.
C) $1,408,500.
D) $1,725,000.
8.2-25 On January 1, 20X7, the Hammer Company paid $1,300,000 to purchase 35% of the outstanding
shares of the Anvil Corporation. Anvil Corporation reports $425,000 of net income for the year
ending December 31, 20X7 and pays a cash dividend of $115,000 during 20X7. On January 1, 20X8,
the Hammer Company sells its entire investment in the Anvil Corporation for $1,500,000. The
Hammer Company will report a(n):
A) realized gain on the sale of $200,000
B) unrealized gain on the sale of $200,000.
C) realized gain on the sale of $91,500.
D) unrealized gain on the sale of $91,500.
8.2-26 Douglas Company purchased 40% of the outstanding shares of Outrigger Corporation on January 1 at
a cost of $675,000. Outrigger Corporation reported net income of $87,000 and paid total dividends of
$33,000 for the year. At the end of the year, the Outrigger shares had a current market value of
$680,000. After all necessary adjusting entries are made for the year, the balance in Douglas
Company’s Long-Term Investment account will be:
A) $675,000.
B) $680,000.
C) $696,600.
D) $729,000.
8.2-27 On January 1, 20X7, Centurian Corporation purchased 40% of the outstanding shares of Street Kings
Corporation for $750,000. Net income reported by Street Kings Corporation for 20X7 was $110,000.
Dividends paid by Street Kings Corporation during 20X7 were $65,000. The long-term investment
will appear on Centurian Corporation’s December 31, 20X7 balance sheet in the amount of:
A) $750,000.
B) $768,000.
C) $795,000.
D) $860,000.
10.2-28 On January 1, 20X7, Rider Corporation purchased 30% of the outstanding shares of Arapahoe
Corporation for $770,000. Net income reported by Arapahaoe Corporation for 20X7 was $120,000.
Dividends paid by Arapahoe Corporation during 20X7 were $70,000. The amount of investment
revenue that Rider should recognize for 20X7 is:
A) $15,000.
B) $21,000.
C) $36,000.
D) $50,000.
8.2-29 Tupelo Corporation used the equity method to account for a 25% ownership interest in Jordan
Corporation. If Jordan Corporation reports $300,000 of income and pays $60,000 of dividends, the
net effect of the entries made by Tupelo Corporation will be to:
A) increase the Investment account by $240,000.
B) reduce the Investment account by $240,000.
C) increase the Investment account by $60,000.
D) reduce the Investment account by $60,000.
8.2-30 An investor company with a 40% interest in an investee debited the Investment account for $70,000
and credited the account for $55,000. Based on this information, the investee must have paid
dividends of:
A) $6,000.
B) $22,000.
C) $28,000.
D) $137,500.
8.3-1A company that owns less than 20% of another company’s shares must use the consolidation method of
accounting.
8.3-2The parent company controls the subsidiary company.
8.3-3The consolidated financial statements carry the name of the parent company.
8.3-4 Consolidation accounting is an exception to the IFRS entity concept.
8.3-5 A year-end elimination entry is required to remove the parent company’s equity from the books of the
subsidiary company.
8.3-6 Goodwill arises when a parent company must pay more to acquire a subsidiary company than the
market value of the subsidiary’s net assets.
8.3-7 A noncontrolling (minority) interest arises when a parent company owns less than 100% of the shares
of a subsidiary.
8.3-8 The elimination entries zero out the balance in the Investment in Subsidiary account.
8.3-9 Goodwill arises when a parent company:
A) pays more to acquire a subsidiary company than the market value of the subsidiary’s net assets.
B) pays less to acquire a subsidiary company than the market value of the subsidiary’s net assets.
C) pays more to acquire a subsidiary company than the book value of the subsidiary’s net assets.
D) pays less to acquire a subsidiary company than the book value of the subsidiary’s net assets.
8.3-10 A controlling interest exists when the investor:
A) uses the equity method to account for the investment.
B) uses the market value method of accounting for the investment.
C) owns more than 20% of the investee’s voting shares.
D) owns more than 50% of the investee’s voting shares.
8.3-11 An investor company that owns more than 50% of the voting shares of a subsidiary company is the:
A) parent company.
B) subsidiary company.
C) consolidated company.
D) non-controlling interest.
8.3-12 An investee company in which a parent company owns more than 50% of the voting shares is the:
A) parent company.
B) subsidiary company.
C) consolidated company.
D) non-controlling interest.
8.3-13 A non-controlling (minority) interest is defined as:
A) a subsidiary company that represents less than 20% of the value of the consolidated company.
B) all of the shares of a subsidiary company relative to the parent company.
C) a subsidiary company’s equity held by shareholders other than the parent company.
D) a parent company that owns less than 50% of the shares in the subsidiary company.
8.3-14 Which of the following terms represents more than 50% interest in a subsidiary company?
A) Directing interest
B) Equity interest
C) Non-controlling interest
D) Controlling interest
8.3-15 Which of the following terms represents a subsidiary company’s equity that is held by shareholders
other than the parent company?
A) Directing interest
B) Equity interest
C) Non-controlling interest
D) Controlling interest
8.3-16 When a parent-subsidiary relationship exists between two companies:
A) the subsidiary company will keep one set of accounting records covering both companies.
B) the parent company will keep one set of accounting records covering both companies.
C) both the parent and the subsidiary will continue to keep their own separate accounting records as
if the parent-subsidiary relationship does not exist.
D) the parent company must use the cost method to account for the subsidiary.
8.3-17 Financial statements of the parent company plus those of the majority-owned subsidiaries—as if the
combination were a single legal entity—are:
A) foreign-currency statements.
B) consolidated statements.
C) minority interest statements.
D) supplemental statements.
8.3-18 When a parent-subsidiary relationship exists, the consolidated statements include:
A) the balance sheet.
B) the income statement.
C) the statement of cash flows.
D) all of the above.
8.3-19 The three methods of accounting for shares investments are the market value method, the consolidation
method and the equity method. The appropriate method to use depends on the percentage of
ownership. Which of the following statements is true?
A) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
consolidation method, equity method, and market value method should be used, respectively.
B) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
market value method, consolidation method, and equity method should be used, respectively.
C) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
equity method, market value method, and consolidation method should be used, respectively.
D) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
market value method, equity method, and consolidation method should be used, respectively.
8.3-20 A consolidated balance sheet shows:
A) combined assets and liabilities for the parent and the subsidiary, but shareholders’ equity for
solely the parent.
B) combined assets and liabilities for the parent and the subsidiary, but shareholders’ equity for
solely the subsidiary.
C) combined liabilities and shareholders’ equity for the parent and subsidiary, but assets for solely
the parent.
D) combined assets and shareholders’ equity for the parent and the subsidiary, but liabilities for
solely the subsidiary.
83-21 On a worksheet for a consolidated entity balance sheet, the elimination entry requires:
A) a credit to Investment in Subsidiary.
B) debits to the shareholders’ equity accounts of the parent.
C) a debit to Investment in Subsidiary.
D) credits to the shareholders’ equity accounts of the subsidiary.
8.3-22 How do consolidation entries on a worksheet affect the shareholders’ equity of parent and subsidiary
corporations?
A) Neither investment in subsidiary nor the subsidiary’s shareholders’ equity will be presented.
B) Both investment in subsidiary and the shareholders’ equity of the parent will be eliminated.
C) Investment in subsidiary will be presented, but the shareholders’ equity of the subsidiary will be
eliminated.
D) The shareholders’ equity of the parent will be eliminated, but investment in subsidiary will be
presented.
8.3-23 The parent company uses _____________ to prepare the consolidated financial statements.
A) a trial balance
B) a worksheet
C) a general ledger
D) none of the above
8.3-24 NewLook Company owns all of the shares of Harlow Corporation and 80% of the shares of Tamblyn
Corporation. NewLook earned net income of $500,000; Harlow earned $130,000; and Tamblyn
earned $115,000. NewLook’s consolidated income statement would report net income of:
A) $630,000.
B) $745,000.
C) $722,000.
D) $805,000.
8.3-25 If a parent company and its subsidiary have accounts receivable from mutually exclusive external
sources in the amounts of $155,000 and $145,000, respectively, the consolidated balance sheet for the
parent and its subsidiary will show:
A) only the parent’s accounts receivable balance.
B) one accounts receivable balance of $300,000.
C) net accounts receivable of $10,000.
D) both amounts, but it will list them in two separate accounts.
8.3-26 Subsidiary Company borrowed $75,000 from Parent Company on a note payable during the year.
Before the consolidation entries were made on the worksheet, the balances in Parent Company’s
Notes Receivable and Notes Payable accounts were $175,000 and $255,000, respectively. A
consolidated balance sheet shows:
A) Notes Receivable of $175,000 and Notes Payable of $330,000.
B) Notes Receivable of $250,000 and Notes Payable of $255,000.
C) Notes Receivable of $100,000 and Notes Payable of $255,000.
D) Notes Receivable of $175,000 and Notes Payable of $180,000.
8.3-27 Which of the following would NOT be presented on a consolidated balance sheet after the accounts
of the parent and subsidiary have been combined?
A) Liabilities of the subsidiary
B) Shareholders’ equity accounts for the parent
C) Assets of the subsidiary
D) Shareholders’ equity accounts for the subsidiary
8.3-28 Which of the following is NOT eliminated on a consolidated balance sheet?
A) Investment in Subsidiary account
B) Shareholders’ equity accounts of the subsidiary
C) Assets of the subsidiary
D) Loans made by a subsidiary to a parent company
8.3-29 Parent Company has a $50,000 note receivable from Subsidiary Company, and Subsidiary Company
has a note payable to the Parent Company for $50,000. As part of the elimination entries:
A) the note payable will be eliminated.
B) the note receivable will be eliminated.
C) both the note receivable and the note payable will be eliminated.
D) neither the note payable or the note receivable will be eliminated.
8.3-30 Which of the following would NOT be included in the elimination entries shown on a worksheet used
in preparing consolidated financial statements?
A) A credit to Notes Receivable from Subsidiary
B) A debit to Share Capital-Subsidiary
C) A debit to Retained Earnings-Subsidiary
D) A debit to Investment in Subsidiary
8.3-31 The entry to eliminate the Investment in Subsidiary account affects the:
A) total assets and total shareholders’ equity reported by the consolidated company.
B) total equity reported by the parent company and total equity reported by the subsidiary company.
C) total assets reported by the parent company and total liabilities reported by the subsidiary
company.
D) total assets and total liabilities reported by the consolidated company.
8.3-32 The entry to eliminate the Investment in Subsidiary account includes a:
A) debit to the investment account, credit to the share capital account and credit to the retained
earnings account.
B) debit to the share capital account, debit to the retained earnings account and a credit to the
investment account.
C) debit to the investment account, debit to the share capital account and credit to retained earnings.
D) debit to the investment account and credit to notes payable.
8.3-33 Consolidated net income for a parent and its partially owned subsidiary would always be equal to the
total of the parent company’s net income:
A) plus the parent’s share of the subsidiary’s net income.
B) plus the subsidiary’s net income and the net income of the non-controlling interest.
C) plus the non-controlling percentage of the subsidiary’s net income.
D) plus the subsidiary’s net income.
8.4-1A decrease in foreign currency value relative to the functional currency between the date of purchase and
date of payment will create an exchange gain.
8.4-2If a U.S.company sells merchandise to a French company, the French company must settle the transaction
in U.S. dollars.
8.4-3If a U.S.company sells merchandise to a French company and the transaction is settled in euros, the U.S.
Company will collect the euros and then sell the euros for dollars.
8.4-4When rates of return are high in a stable economy, international investors buy shares and bonds of that
country. This activity decreases the country’s exchange rate.
8.4-5When the exchange rate of nation A’s currency rises relative to another nation’s currency, the currency of
nation A is said to have weakened.
8.4-6If a Japanese Company sells to a Mexican company and the transaction is in yen, the Japanese company
will have a foreign-currency transaction gain or loss.