Cash 450,000
d.
Investment in Luffy Corporation 450,000
Cash 450,000
40. West Corporation purchased 15,000 shares of Luffy Corporation common stock for $60 per share on
January 2, 2009. Luffy Corporation reported net income of $1,500,000 for 2009 and paid dividends of
$300,000 during 2009. Luffy has a total of 50,000 shares of common stock outstanding. The entry that
would be recorded to recognize the receipt of cash dividend is:
a.
Cash 90,000
Dividend Income 90,000
b.
Income,Luffy Corporation Investment 90,000
Cash 90,000
c.
Cash 90,000
Income,Luffy Corporation Investment 90,000
d.
Cash 90,000
Investment in Luffy Corporation 90,000
41. The equity method generally should be used to account for an investment in stock when the level of
ownership is
a.
between 20 and 50 percent.
b.
10 percent or more.
c.
less than 10 percent.
d.
between 10 and 20 percent.
42. When the cost-adjusted-to-market method is used to account for a long-term investment in stock of
another company, the carrying value of the investment is directly affected by
a.
the dividend distributions of the investee.
b.
the earnings and dividend distributions of the investee.
c.
the earnings of the investee.
d.
neither the earnings nor the dividends of the investee.
43. When the equity method is used to account for a long-term investment in stock of another company,
the carrying value of the investment is affected by
a.
declines in the market value of the stock.
b.
the earnings and dividends of the investee.
c.
an excess of market price over cost.
d.
neither the earnings nor the dividends of the investee.
44. For available-for-sale equity securities, the Unrealized Loss on Long-Term Investments account
should be reported as a(n)
a.
“other loss” item on the income statement.
b.
prior period adjustment.
c.
separate item in the stockholders’ equity section of the balance sheet.
d.
extraordinary item on the income statement.
45. When a corporation owns more than 50 percent of the voting stock in another corporation, it usually
should report its investment by using (the)
a.
equity method.
b.
cost adjusted to market method.
c.
book value method.
d.
consolidated financial statements.
46. Consolidated financial statements are useful because
a.
investors of the parent company want a clear financial picture of the total economic entity.
b.
minority shareholders need the consolidated information to make good investment
decisions.
c.
they are much more detailed than the statements for the individual companies.
d.
the parent and subsidiaries constitute a single legal entity, and the financial statements
should reflect that fact.
47. Which of the following entries would not require an eliminating entry when one is preparing
consolidated financial statements?
a.
Amount owed by subsidiary to parent
b.
Investment in subsidiary
c.
Amount owed by parent to subsidiary
d.
Sale to customer
48. Eliminations appear on the books of
a.
the subsidiary company only.
b.
neither the parent company nor the subsidiary company.
c.
both the parent company and the subsidiary company.
d.
the parent company only.
49. Which of the following is a true statement regarding elimination entries necessary for the preparation
of consolidated financial statements?
a.
The entries appear only on the consolidated work sheet.
b.
The entries contain either debits or credits, but not both.
c.
The entries are made only for intercompany receivables, payables, and sales.
d.
The entries are recorded in the consolidated general journal and posted to the consolidated
general ledger.
50. Minority interest is reported as a(n)
a.
current liability on the consolidated balance sheet.
b.
asset on the consolidated balance sheet.
c.
revenue item on the consolidated income statement.
d.
separate item between liabilities and stockholders’ equity on the consolidated balance
sheet.
51. When a subsidiary has borrowed cash from the parent company, the related receivable and payable are
eliminated in preparing a consolidated balance sheet so that
a.
stockholders’ equity will not be understated.
b.
stockholders’ equity will not be overstated.
c.
assets and liabilities will not be understated.
d.
assets and liabilities will not be overstated.
52. When a parent company owns 100 percent of the outstanding stock of a subsidiary, Goodwill from
Consolidation will appear on the consolidated balance sheet when the
a.
cost of the parent’s investment exceeds the book value and the fair value of the investee’s
net identifiable assets.
b.
cost of the parent’s investment exceeds the book value of the parent’s net assets.
c.
book value of the parent’s net assets exceeds the fair value of the parent’s net assets.
d.
fair value of the investee’s net identifiable assets exceeds the cost of the parent’s
investment.
53. Porter Corporation purchases 60 percent of the voting stock of Ritz Corporation for $48,000. Ritz has
common stock of $25,000 and retained earnings of $35,000. Based solely on the above facts, the
consolidated balance sheet would include
a.
goodwill of $4,200.
b.
investment in Ritz of $48,000.
c.
minority interest of $36,000.
d.
minority interest of $24,000.
54. Blau Corporation invests $302,500 in Hills Corporation, buying 80 percent of the voting stock. Hills
pays Blau $20,000 in cash dividends and earns a net income of $130,000 during 2009. On the
consolidated balance sheet, the balance in the investments account representing Blau’s interest in Hills
will be
a.
$432,500.
b.
$412,500.
c.
$0 .
d.
$302,500.
55. Isber Corporation purchases 80 percent of the voting stock of Bossart Corporation for $175,000. At the
date of acquisition, the fair market value of Bossart’s identifiable net assets was equal to their book
value. Bossart has common stock of $80,000 and retained earnings of $120,000. The elimination entry
necessary to prepare a consolidated balance sheet for this date is:
a.
Common Stock(Bossart) 80,000
Retained Earnings(Bossart) 120,000
Investment in Bossart Corporation(Isber) 200,000
b.
Common Stock(Bossart) 80,000
Retained Earnings(Bossart) 120,000
Goodwill 15,000
Investment in Bossart Corporation(Isber) 175,000
Minority Interest 40,000
c.
Common Stock(Bossart) 80,000
Retained Earnings(Bossart) 120,000
Investment in Bossart Corporation(Isber) 160,000
Minority Interest 40,000
d.
Common Stock(Bossart) 80,000
Retained Earnings(Bossart) 120,000
Investment in Bossart Corporation(Isber) 160,000
Gain on consolidation 40,000
56. Rapp Corporation purchases 75 percent of the stock of Sikora Corporation for $363,000. Sikora has
contributed capital of $200,000 and retained earnings of $284,000. The consolidated financial
statements will contain
a.
minority interest and negative goodwill.
b.
neither minority interest nor goodwill.
c.
goodwill but not minority interest.
d.
minority interest but not goodwill.
57. Platek Company buys 100 percent of the stock of Brendel Company for $180,000. Brendel Company
has contributed capital of $105,000 and retained earnings of $75,000. The consolidated financial
statements would contain
a.
minority interest and goodwill.
b.
minority interest but not goodwill.
c.
goodwill but not minority interest.
d.
neither minority interest nor goodwill.
58. Highland Company buys 70 percent of the stock of Danner Company of $91,000. Danner Company
has contributed capital of $70,000 and retained earnings of $60,000. The consolidated financial
statements would contain
a.
goodwill but not minority interest.
b.
neither minority interest nor goodwill.
c.
minority interest and goodwill.
d.
minority interest but not goodwill.
59. On January 1, 2010, Walker Corporation has the following stockholders’ equity accounts:
Common Stock, $10 par $300,000
Retained Earnings 900,000
The fair market value of Walker’s net identifiable assets on this date was equal to their book value. On
January 1, 2010, Rau Corporation acquired 100 percent of the common stock of Walker Corporation
for $1,320,000 cash. The elimination entry necessary to prepare a consolidated balance sheet for this
date is:
a.
Common Stock(Walker) 300,000
Retained Earnings(Walker) 900,000
Goodwill 120,000
Investment in Walker Corporation(Rau) 1,320,000
b.
Common Stock(Walker) 300,000
Retained Earnings(Walker) 900,000
Loss from Consolidation 120,000
Investment in Walker Corporation (Rau) 1,320,000
c.
Common Stock(Walker) 300,000
Retained Earnings(Walker) 900,000
Investment in Walker Corporation (Rau) 1,200,000
d.
Common Stock(Walker) 300,000
Retained Earnings(Walker) 900,000
Gain from Consolidation 120,000
Investment in Walker Corporation (Rau) 1,320,000
60. James Company buys 100 percent of the outstanding stock of Maier Company for $650,000. Maier
Company has contributed capital of $420,000 and retained earnings of $180,000. The fair market value
of Maier’s identifiable net assets was equal to their book value on the date of acquisition. The
consolidated financial statements would contain
a.
neither minority interest nor goodwill.
b.
goodwill but not minority interest.
c.
minority interest but not goodwill.
d.
minority interest and goodwill.
61. Perri Company buys 80 percent of the stock of McGrath Company for $150,000. McGrath Company
has contributed capital of $100,000 and retained earnings of $60,000. The eliminating entry that would
appear on the work sheet for consolidating the balance sheets of two companies is:
a.
Common Stock(McGrath) 100,000
Retained Earnings(McGrath) 60,000
Goodwill 22,000
Investment in McGrath Company(Perri) 150,000
Minority Interest 32,000
b.
Common Stock(McGrath) 100,000
Retained Earnings(McGrath) 60,000
Investment in McGrath Company(Perri) 160,000
c.
Common Stock(McGrath) 100,000
Retained Earnings(McGrath) 60,000
Investment in McGrath Company(Perri) 150,000
Minority Interest 10,000
d.
Common Stock(McGrath) 100,000
Retained Earnings(McGrath) 60,000
Goodwill 22,000
Investment in McGrath Company(Perri) 182,000
62. In preparing consolidated financial statements, all of the following commonly require elimination
entries except a(n)
a.
intercompany loan.
b.
purchase from a nonaffiliated.
c.
intercompany sale.
d.
intercompany investment.
63. Wyfker Company and Mularkey Company have separate incomes of $38,500 and $42,500,
respectively. They had intercompany purchases and sales of $15,000 and intercompany interest of
$1,500. Consolidated net income would be
a.
$64,500.
b.
$81,000.
c.
$37,000.
d.
$23,500.
64. Which of the following would not be an elimination on a work sheet for a consolidated income
statement?
a.
Debit Cost of Goods Sold and credit Sales.
b.
Debit Interest Income and credit Interest Expense.
c.
Debit Common Stock and Retained Earnings and credit Investment in Subsidiary.
d.
Debit Sales and credit Cost of Goods Sold.
65. Coll Company (the parent company) manufactured a product at a cost of $150 and sold it to Obman
Company, a subsidiary of Coll, for $200. Obman Company sold the product to its customer for $284.
As a result of these transactions, how much gross profit will appear on a consolidated income
statement?
a.
$134
b.
$84
c.
$234
d.
$0
66. Ensley Company and Bac Company have separate incomes of $140,000 and $240,000, respectively.
They had intercompany purchases and sales of $40,000 and intercompany interest of $2,000.
Consolidated net income is
a.
$422,000.
b.
$380,000.
c.
$338,000.
d.
$142,000.
67. A short-term investment in a U.S. Treasury bill costs $24,400 and will mature six months later at
$25,000. Management intends to hold the investment until it matures. The entry to record the initial
investment is:
a.
Short – Term Investments 25,000
Cash 25,000
b.
Cash 24,400
Short – Term Investments 24,400
c.
Short – Term Investments 24,400
Cash 24,400
d.
Cash 25,000
Short – Term Investments 24,400
Interest Income 600
68. A short-term investment in a U.S. Treasury bill costs $24,200 and will mature in six months at
$25,000. Management intends to hold the investment until it matures. The entry to record receipt of
cash at maturity is: (No prior entries were made to recognize revenue.)
a.
Cash 25,000
Short – Term Investments 24,200
Interest Income 800
b.
Cash 25,000
Short – Term Investments 25,000
c.
Cash 24,200
Short – Term Investments 24,200
d.
Cash 25,000
Short – Term Investments 24,200
Gain on Sale of Investments 800
69. Held-to-maturity securities are valued on the balance sheet at
a.
original cost.
b.
fair value.
c.
maturity value.
d.
cost, adjusted for the effects of interest.
70. When the accounting period ends before U.S. Treasury bills are scheduled to mature, the investor’s
adjusting entry would include a
a.
debit to Short-Term Investments.
b.
debit to Cash.
c.
debit to Interest Income.
d.
credit to Interest Payable.
71. Available-for-sale debt securities are valued on the balance sheet at
a.
cost, adjusted for the effects of interest.
b.
maturity value.
c.
fair value.
d.
original cost.
SHORT ANSWER
1. Match each of the following terms with their descriptions below by inserting the correct letter.
A. Marketable securities
E. Available-for-sale securities
B. Held-to-maturity securities
F. Control
C. Significant influence
G. Trading securities
D. Insider trading
H. Noninfluential and noncontrolling
___ 1. Ownership of more than 50 percent of another company’s voting stock
___ 2. Debt and equity investments that may or may not be held short- or long-term
___ 3. Debt investments that will be kept for the long run
___ 4. Ownership of less than 20 percent of another company’s voting stock
___ 5. Illegally using unreleased company knowledge for personal gain
___ 6. Ownership of 20 to 50 percent of another company’s voting stock
___ 7. Debt and equity investments that will be sold shortly after purchase
___ 8. Another term for short-term investments
ANS:
1. F
2. E
3. B
4. H
5. D
6. C
7. G
8. A
2. On November 28, 2009, Barrett Company purchased 20,000 shares of HAL Corporation stock for
$360,000. Barrett’s management intends to hold the shares for a short period of time. On December 31,
2009, the price of HAL stock was $15 per share. Finally, on January 19, 2010, Barrett sells all 20,000
shares for $375,000. In the journal provided below, prepare Barrett’s entries for November 28,
December 31, and January 19. (Omit explanations).
General Journal
Date
Description
Post.
Ref.
Debit
Credit
3. Distinguish between the financial statement presentation of unrealized gains and losses related to
trading securities and the financial statement presentation of unrealized gains and losses related to
available-for-sale securities.
Nov.
Short-Term Investments
Short-Term Investments
Realized Gain on Investments
4. Discuss the financial statement presentation of the account Allowance to Adjust Short-Term
Investments to Market, distinguishing between the effect of a debit balance and the effect of a credit
balance in the account.
5. The following transactions and information pertain to Langston Corporation for 20xx. Prepare entries
in journal form, without explanations, to record these transactions.
May
1
Purchased 1,000 shares of Granger Corporation’s common stock at $180 per
share (representing 5 percent of Granger’s total outstanding stock) as a
long-term investment.
Sept.
1
Received a cash dividend of $6.00 per share from Granger.
Dec.
31
End of Langston’s accounting year. Granger’s market price per share is $168.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Date
May
Long-Term Investments
Dividend Income
6. On January 1, 2010, Remco Corporation purchased 5,000 shares of Lowell Corporation common stock
for $60 per share. Remco’s investment represents 30 percent of the total outstanding shares of Lowell.
During 2010, Lowell paid total dividends of $100,000. Remco appropriately used the equity method to
account for this investment and accordingly reported the investment at a carrying value of $390,000 on
December 31, 2010. Compute the amount of earnings reported by Lowell Corporation for 2010.
ANS:
7. Knabe Corporation purchased 3,000 shares of Duncan Corporation common stock for $80 per share on
January 1, 2009, as a long-term investment. Duncan reported net income of $70,000 and $90,000 for
2009 and 2010, respectively, and paid dividends of $25,000 and $30,000 during 2009 and 2010,
respectively. Duncan has a total of 10,000 shares outstanding. Compute the following amounts.
a. Amount of investment income recognized by Knabe Corporation during 2009
b. Balance of Investment in Duncan Corporation account at end of 2009
c. Amount of investment income recognized by Knabe Corporation during 2010
d. Balance of Investment in Duncan Corporation account at end of 2010
8. On January 1, Chapin Corporation purchased, as long-term investments, 10 percent of the voting stock
of Paxton Corporation for $75,000 and 25 percent of the voting stock of Colb Corporation for
$150,000. During the year, Paxton Corporation had earnings of $40,000 and paid dividends of $15,000
on October 15, and Colb Corporation had earnings of $20,000 and paid dividends of $12,000 on
November 10. The market value of neither investment declined nor rose during the year. Prepare
journal entries without explanations to record this information as appropriate in Chapin Corporation’s
general journal.
General Journal
Page 1
Post.
Date
Description
Ref.
Debit
Credit
9. When a company receives a dividend from its investee, what will be the effect on the financial
statements of the investing company if it uses the equity method?
10. When are eliminating entries made, where are they entered, and why are they needed?
ANS:
Jan.
Long-Term Investments
Cash
225,000
Oct.
Cash
Dividend Income
Nov.
Cash
Investment in Colb Corporation
Investment
11. At the beginning of the current year, Morris Corporation acquired 100 percent of the common stock of
Nash Corporation for $200,000. Nash’s stockholders’ equity included common stock for $125,000 and
retained earnings of $75,000. Prepare the eliminating entry in journal form that would appear on the
work sheet for consolidating the balance sheets of the two entities as of the acquisition date. (Omit
explanations.)
General Journal
Date
Description
Post.
Ref.
Debit
Credit
Common Stock (Nash)
Retained Earnings (Nash)
12. On January 1, 2009, Grant Corporation acquired 90 percent of the common stock of Chen Corporation
for $256,500. Chen’s stockholders’ equity on this date consisted of common stock of $150,000 and
retained earnings of $135,000. Prepare the eliminating entry in journal form that would appear on the
work sheet for consolidating the balance sheets of the two entities as of the acquisition date. (Omit
explanations.)
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
13. On January 1, 20xx, Hilary Corporation acquired 100 percent of the common stock of Gooden
Corporation for $3,250,000. At the date of acquisition, Gooden Corporation reported total assets of
$4,200,000, liabilities of $1,200,000, common stock of $2,200,000, and retained earnings of $800,000
on its balance sheet. An appraisal on the acquisition date showed that the fair value of Gooden’s net
identifiable assets was equal to their book value. Prepare the eliminating entry in journal form that
would appear on the work sheet for consolidating the balance sheets of the two companies as of the
acquisition date. (Omit explanations.)
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Common Stock (Gooden)
Goodwill
14. The stockholders’ equity section of Ernesto Corporation’s balance sheet appeared as follows on
December 31, 2010:
Common Stock
$150,000
Retained Earnings
75,000
Total Stockholders’ Equity
$225,000
Prepare entries in journal form to eliminate Brody‘s investment in Ernesto and Ernesto’s stockholders’
equity used in preparing the consolidated balance sheet under each of the following assumptions.
(Omit explanations.)
a. Brody purchased 100 percent of Ernesto for $225,000.
b. Brody purchased 100 percent of Ernesto for $250,000. The excess did not apply to any particular
asset.
c. Brody purchased 80 percent of Ernesto for $180,000.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit