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Chapter 10
Multiple Choice
1. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
2. Pence Corporation, which accounts for its investments in the common stock of Walsh Company
by the equity method, should ordinarily record a dividend received from Walsh as
3. On January 15, 2005, a corporation was granted a patent on a product. On January 2, 2013, to
protect its patent, the corporation purchased a patent on a competing product the originally was
issued on January 10, 2011. Because of its unique plant, the corporation does not feel the
competing patent can be used in producing a product. The cost of the competing patent should be
4. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s common
stock for $80,000 on January 2, 2012. During 2013, Queen Company declared dividends of
$8,000 and reported earnings for the year of $20,000.
If Pacer Company uses the equity method of accounting for its investment in Queen Company, its
Investment in Queen Company account at December 31, 2013 should be
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5. Refer to the facts in problem (4). If Pacer Company uses the lower of cost or market method of
accounting for its investment in Queen Company, and the value of its investment hasn’t changed,
its Investment in Queen Company account on December 31, 2013, should be
6. A large, publicly held company developed and registered a trademark during 2013. The cost of
developing and registering the trademark should be accounted for by
7. Goodwill should be written off
8. A net unrealized loss on a company’s long-term portfolio of available for sale securities should
be reflected in the current financial statements as
9. Changes in the fair value of a long-term available for sale equity securities portfolio should be
reported as a component of
10. Cash dividends declared out of current earnings are distributed to an investor. How will the
investor’s investment account be affected by those dividends under each of the following
accounting methods?
Fair Value Method Equity Method
11. An activity that would be expensed currently as research and development costs is the
12. Should the following fees associated with the registration of an internally developed patent be
capitalized?
Registration
Legal fees fees
13. Which of the following assets acquired in 2014 are amortizable?
Goodwill Trademarks
14. A purchased patent has a remaining life of 15 years. It should be
15. Which of the following amounts incurred in connection with a trademark should be capitalized?
Cost of a Registration
Successful defense fees
16. Zink Company owns 32% of Ace Company’s outstanding voting stock. Zink Company normally
should account for its investment in Ace Company using the
17. An investor purchased a bond as a long-term investment on January 1. Annual interest was
received on December 31. The investor’s interest income for the year would be lowest if the bond
was purchased at
18. The theoretical justification for expensing research and development (R&D) cost as it is incurred
is based on which of the following arguments?
19. When a patent is successfully defended in court, the cost of the lawsuit
20. Goodwill is an intangible asset
21. A trading security is measured at fair value on the balance sheet date and reported as
22. Current accounting for an available-for-sale (AFS) security is consistent with
23. The physical capital maintenance concept of income would require that an investment in the
common stock of another entity be
24. The economic concept of income would require that an investment in the common stock of
another entity be
25. Under the fair value option, an investment in the common stock of another entity will be
26. When a company reports goodwill in its balance sheet, we know that
Essay
1. How are income and balance sheet values determined under the equity method?
2. Discuss accounting for equity securities under the cost method.
3. Discuss accounting for equity securities under the SFAS No. 115 now contained at FASB ASC
320.
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4. Summarize the accounting requirements for investments in equity securities. That is, what
methods are available and when is each method appropriate?
5. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at
FASB ASC 825-10.
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6. Discuss accounting for investments in debt securities.
7. What is an intangible asset? How is the cost of an intangible asset amortized?
8. What is goodwill? How is the recorded value of goodwill determined? How is goodwill written
off under the provisions of SFAS No. 142 now FASB ASC 350?
9. Define research and development. How are research and development costs recorded
10. How does IAS No 39 define fair value?