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FOR INSTRUCTOR USE ONLY
CHAPTER 12
INVESTMENTS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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Brief Exercises
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
159.
2
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
26.
TF
36.
MC
38.
MC
133.
MC
2.
TF
35.
MC
37.
MC
39.
MC
Learning Objective 2
3.
TF
30.
TF
44.
MC
49.
MC
54.
MC
149.
BE
162.
Ex
4.
TF
40.
MC
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MC
50.
MC
55.
MC
150.
BE
182.
C
5.
TF
41.
MC
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159.
Ex
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C
6.
TF
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MC
160.
Ex
194.
Ma
7.
TF
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MC
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MC
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135.
MC
161.
Ex
Learning Objective 3
8.
TF
58.
MC
69.
MC
80.
MC
91.
MC
155.
Ex
174.
C
9.
TF
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MC
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C
10.
TF
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SA
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TF
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190.
SA
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TF
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MC
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TF
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Ex
28.
TF
64.
MC
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MC
86.
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143.
BE
161.
Ex
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MC
65.
MC
76.
MC
87.
MC
144.
BE
162.
Ex
55.
MC
66.
MC
77.
MC
88.
MC
145.
BE
163.
Ex
56.
MC
67.
MC
78.
MC
89.
MC
146.
BE
164.
Ex
57.
MC
68.
MC
79.
MC
90.
MC
154.
Ex
173.
C
Learning Objective 4
14.
TF
16.
TF
96.
MC
98.
MC
100.
MC
102.
MC
196.
SA
15.
TF
32.
TF
97.
MC
99.
MC
101.
MC
187.
C
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
Investments
FOR INSTRUCTOR USE ONLY
12 - 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 5
17.
TF
104.
MC
112.
MC
120.
MC
158.
BE
178.
Ex
199.
SA
18.
TF
105.
MC
113.
MC
121.
MC
165.
Ex
188.
C
200.
SA
19.
TF
106.
MC
114.
MC
122.
MC
166.
Ex
189.
C
20.
TF
107.
MC
115.
MC
140.
MC
173.
Ex
190.
C
21.
TF
108.
MC
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MC
141.
MC
174.
Ex
191.
C
22.
TF
109.
MC
117.
MC
155.
BE
175.
Ex
192.
C
33.
TF
110.
MC
118.
MC
156.
BE
176.
Ex
197.
SA
103.
MC
111.
MC
119.
MC
157.
BE
177.
Ex
198.
SA
Learning Objective 6
23.
TF
34.
TF
125.
MC
142.
MC
173.
Ex
195.
SA
24.
TF
123.
MC
126.
MC
143.
MC
178.
Ex
199.
SA
25.
TF
124.
MC
127.
MC
172.
Ex
193.
C
Learning Objective 7
26.
TF
28.
TF
129.
MC
131.
MC
179.
Ex
181.
Ex
27.
TF
128.
MC
130.
MC
132.
MC
180.
Ex
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of ten Matching questions and Seven Short-Answer Essay
questions. CHAPTER LEARNING OBJECTIVES
1. Discuss why corporations invest in debt and stock securities. Corporations invest for
three primary reasons: (a) They have excess cash; (b) They view investments as a
significant revenue source; or (c) They have strategic goals such as gaining control of a
competitor or moving into a new line of business.
2. Explain the accounting for debt investments. Companies record investments in debt
securities when they purchase bonds, receive or accrue interest, and sell the bonds. They
report gains or losses on the sale of bonds in the “Other revenues and gains” or “Other
expenses and losses” sections of the income statement.
3. Explain the accounting for stock investments. Companies record investments in
common stock when they purchase the stock, receive dividends, and sell the stock. When
ownership is less than 20%, the cost method is used. When ownership is between 20% and
50%, the equity method should be used. When ownership is more than 50%, companies
prepare consolidated financial statements.
4. Describe the use of consolidated financial statements. When a company owns more
than 50% of the common stock of another company, it usually prepares consolidated
financial statements. These statements indicate the magnitude and scope of operations of
the companies under common control.
5. Indicate how debt and stock investments are reported in financial statements.
Investments in debt and stock securities are classified as trading, available-for-sale, or held-
to-maturity securities for valuation and reporting purposes. Stock investments are classified
as either trading or available-for-sale securities. Stock investments have no maturity date
and therefore are never classified as held-to-maturity securities. Trading securities are
Test Bank for Financial Accounting, Ninth Edition
12 - 4
reported in current assets at fair value, with changes from cost reported in net income.
Available-for-sale securities are also reported at fair value, with the changes from cost
reported in stockholders’ equity. Available-for-sale securities are classified as short-term or
long-term depending on their expected future sale date.
6. Distinguish between short-term and long-term investments. Short-term investments are
securities that are (a) readily marketable and (b) intended to be converted to cash within the
next year or operating cycle, whichever is longer. Investments that do not meet both criteria
are classified as long-term investments.
7. Describe the form and content of consolidated financial statements as well as how to
prepare them. Consolidated financial statements are similar in form and content to the
financial statements of an individual corporation. A consolidated balance sheet shows the
assets and liabilities controlled by the parent company. A consolidated income statement
shows the result of operations of affiliated companies as though they are one economic
unit. The worksheet for a consolidated balance sheet contains column for (a) the balance
sheet data for the separate entities, (b) intercompany eliminations, and (c) consolidated
data.
TRUE-FALSE STATEMENTS
1. Corporations purchase investments in debt or stock securities generally for one of two
reasons.
2. A reason some companies purchase investments is because they generate a significant
portion of their earnings from investment income.
3. The accounting for short-term debt investments and for long-term debt investments is
similar.
4. When debt investments are sold, the gain or loss is the difference between the net
proceeds from the sale and the fair value of the bonds.
5. Debt investments are investments in government and corporation bonds.
6. In accordance with the historical cost principle, brokerage fees should be added to the
cost of an investment.
7. In accordance with the historical cost principle, the cost of debt investments includes
brokerage fees and accrued interest.
Investments
12 - 5
8. In accounting for stock investments of less than 20%, the equity method is used.
9. Dividends received on stock investments of less than 20% should be credited to the Stock
Investments account.
10. If an investor owns between 20% and 50% of an investee’s common stock, it is presumed
that the investor has significant influence on the investee.
11. The Stock Investments account is debited at acquisition under both the equity method and
cost method of accounting for investments in common stock.
12. Under the equity method, the investment in common stock is initially recorded at cost, and
the Stock Investments account is adjusted annually.
13. Under the equity method, the receipt of dividends from the investee company results in an
increase in the Stock Investments account.
14. Consolidated financial statements are appropriate when an investor controls an investee
by ownership of more than 50% of the investee’s common stock.
15. Consolidated financial statements are prepared in place of the financial statements for the
parent and subsidiary companies.
16. Consolidated financial statements should be prepared only when a subsidiary company
has a controlling interest in the parent company.
17. The valuation of available-for-sale securities is similar to the procedures followed for
trading securities, except that changes in fair value are not recognized in current income.
18. An unrealized gain or loss on trading securities is reported as a separate component of
stockholders’ equity.
Test Bank for Financial Accounting, Ninth Edition
12 - 6
19. For available-for-sale securities, the unrealized gain or loss account is carried forward to
future periods.
20. A decline in the fair value of a trading security is recorded by debiting an unrealized loss
account and crediting the Fair Value Adjustment account.
21. If the fair value of an available-for-sale security exceeds its cost, the security should be
written up to fair value and a realized gain should be recognized.
22. The Fair Value Adjustment account can only have a credit balance or a zero balance.
23. To be classified as a short-term investment, the investment must be readily marketable
and intended to be converted into cash within the next year or operating cycle.
24. An investment is readily marketable if it is management’s intent to sell the investment.
25. Stocks traded on the New York Stock Exchange are considered readily marketable.
26. When a parent company acquires a wholly owned subsidiary for an amount in excess of
the book value of the net assets acquired, the excess is always allocated to goodwill.
27. A consolidated income statement will reflect only revenue and expense transactions
between the consolidated entity and parties outside the affiliated group.
28. The process of excluding intercompany transactions in preparing consolidated statements
is referred to as intercompany eliminations.
29. One of the reasons a corporation may purchase investments is that it has excess cash.
30. When recording bond interest, Interest Receivable is reported as a fixed asset in the
balance sheet.
Investments
12 - 7
31. Under the cost method, the investment is recorded at cost and revenue is recognized only
when cash dividends are received.
32. Consolidated financial statements present a condensed version of the financial
statements so investors will not experience information overload.
33. Available-for-sale securities are securities bought and held primarily for sale in the near
term to generate income on short-term price differences.
34. “Intent to convert” does not include an investment used as a resource that will be used
whenever the need for cash arises.
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE QUESTIONS
35. Corporations invest excess cash for short periods of time in each of the following except
a. equity securities.
b. highly liquid securities.
c. low-risk securities.
d. government securities.
36. Corporations invest in other companies for all of the following reasons except to
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. increase trading of the other companies’ stock.
37. A typical investment to house excess cash until needed is
a. stocks of companies in a related industry.
b. debt securities.
c. low-risk, highly liquid securities.
d. stock securities.
Test Bank for Financial Accounting, Ninth Edition
12 - 8
38. A company may purchase a noncontrolling interest in another firm in a related industry
a. to house excess cash until needed.
b. to generate earnings.
c. for strategic reasons.
d. for speculative reasons.
39. Pension funds and mutual funds regularly invest in debt and stock securities to
a. generate earnings.
b. house excess cash until needed.
c. meet strategic goals.
d. control the company in which they invest.
40. At the time of acquisition of a debt investment,
a. no journal entry is required.
b. the historical cost principle applies.
c. the Stock Investments account is debited when bonds are purchased.
d. the Investment account is credited for its cost plus brokerage fees.
41. Which of the following is not a true statement regarding short-term debt investments?
a. The securities usually pay interest.
b. Investments are frequently government or corporate bonds.
c. This type of investment must be currently traded in the securities market.
d. Debt investments are recorded at the price paid less brokerage fees.
42. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 6% bond that
pays interest on January 1 and July 1. Brenner Company has a calendar year end.
The entry for the receipt of interest on July 1, 2014, is
a. Cash ................................................................................... 30
Interest Revenue ........................................................ 30
b. Cash ................................................................................... 60
Interest Revenue ........................................................ 60
c. Interest Receivable ............................................................. 30
Interest Revenue ........................................................ 30
d. Interest Receivable ............................................................. 60
Interest Revenue ........................................................ 60
Investments
12 - 9
43. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 8% bond that
pays interest on January 1 and July 1. Brenner Company has a calendar year end.
The adjusting entry on December 31, 2014, is
a. not required.
b. Cash ................................................................................... 40
Interest Revenue ........................................................ 40
c. Interest Receivable ............................................................. 40
Interest Revenue ........................................................ 40
d. Interest Receivable ............................................................. 40
Debt Investments ....................................................... 40
44. On January 1, 2014, Brenner Company purchased at face value, a $1,000, 10% bond that
pays interest on January 1 and July 1. Brenner Company has a calendar year end.
The entry for the receipt of interest on January 1, 2015 is
a. Cash ................................................................................... 110
Interest Revenue ........................................................ 110
b. Cash ................................................................................... 100
Interest Receivable .................................................... 100
c. Cash ................................................................................... 40
Interest Revenue ........................................................ 40
d. Cash ................................................................................... 50
Interest Receivable .................................................... 50
45. On January 1, Skills Company purchased as a short-term investment a $1,000, 6% bond
for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on October
1 for $1,200 plus accrued interest. Interest has not been accrued since the last interest
payment date. What is the entry to record the cash proceeds at the time the bond is sold?
a. Cash ................................................................................... 1,200
Debt Investments ...................................................... 1,200
b. Cash ................................................................................... 1,215
Debt Investments ....................................................... 1,000
Gain on Sale of Debt Investments .............................. 200
Interest Revenue ........................................................ 15
c. Cash ................................................................................... 1,215
Debt Investments ....................................................... 1,200
Interest Revenue ........................................................ 15
d. Cash ................................................................................... 1,200
Debt Investments ....................................................... 1,000
Gain on Sale of Debt Investments .............................. 200
Test Bank for Financial Accounting, Ninth Edition
12 - 10
46. Which of the following is not a true statement about the accounting for debt investments?
a. At acquisition, the historical cost principle applies.
b. The cost includes any brokerage fees.
c. Debt investments include investments in government and corporation bonds.
d. The cost includes any accrued interest.
47. The cost of debt investments includes each of the following except
a. brokerage fees.
b. commissions.
c. accrued interest.
d. the price paid.
48. If a short-term debt investment is sold, the Investment account is
a. credited for the book value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the bonds at the sale date.
d. debited for the cost of the bonds at the sale date.
49. In accounting for debt investments, entries are made for each of the following except the
a. acquisition.
b. interest revenue.
c. sale.
d. entries are made for each answer choice.
50. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for
$60,000.
The journal entry to record this investment includes a debit to
a. Debt Investments for $64,800.
b. Debt Investments for $60,000.
c. Cash for $60,000.
d. Stock Investments for $60,000.
51. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for
$60,000.
Assume Community pays interest on January 1 and July 1, and the July 1 entry was done
correctly. The journal entry at December 31, 2014 would include a credit to
a. Interest Receivable for $2,400.
b. Interest Revenue for $4,800.
c. Accrued Expense for $4,800.
d. Interest Revenue for $2,400.
Investments
12 - 11
52. Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for
$60,000.
If Bay sells all of its Community bonds for $64,500, what gain or loss is recognized?
a. Loss of $9,300
b. Loss of $4,500
c. Gain of $9,300
d. Gain of $4,500
53. Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees
of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the
July 1 semiannual interest payment would include a
a. debit to Interest Receivable for $1,250.
b. credit to Interest Revenue for $1,250.
c. credit to Interest Revenue for $1,262.50.
d. credit to Debt Investments for $1,262.50.
54. Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees
of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the
December 31 interest accrual would include a
a. debit to Interest Receivable for $1,250.
b. debit to Interest Revenue for $1,250.
c. credit to Interest Revenue for $1,262.50.
d. debit to Debt Investments for $1,262.50.
55. Tempest Co. purchased 60, 6% Urich Company bonds for $60,000 cash. Interest is
payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for
$32,000, the entry would include a credit to Gain on Sale of Debt Investments for
a. $1,600.
b. $1,750.
c. $1,800.
d. $2,000.
Test Bank for Financial Accounting, Ninth Edition
12 - 12
56. On January 1, Hamm Company purchased as an investment a $1,000, 6% bond for
$1,020. The bond pays interest on January 1 and July 1. What is the entry to record the
interest accrual on December 31?
a. Interest Receivable ............................................................. 30
Interest Revenue ....................................................... 30
b. Debt Investments ............................................................... 30
Interest Revenue ....................................................... 30
c. Interest Receivable ............................................................. 60
Interest Revenue ....................................................... 60
d. Debt Investments ............................................................... 60
Interest Revenue ....................................................... 60
57. Beak Corporation sells 200 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $25 a share. Beak sold the shares for
$40 a share. The entry to record the sale is
a. Cash ................................................................................... 5,000
Loss on Sale of Stock Investments .................................... 3,000
Stock Investments ..................................................... 8,000
b. Stock Investments .............................................................. 8,000
Cash .......................................................................... 8,000
c. Cash ................................................................................... 8,000
Gain on Sale of Stock Investments ............................ 3,000
Stock Investments ..................................................... 5,000
d. Cash ................................................................................... 8,000
Stock Investments ..................................................... 8,000
58. Yeloe Corporation sells 400 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $60 a share. Yeloe sold the shares for
$40 a share. The entry to record the sale is
a. Cash ................................................................................... 16,000
Loss on Sale of Stock Investments .................................... 8,000
Stock Investments ..................................................... 24,000
b. Cash ................................................................................... 24,000
Gain on Sale of Stock Investments ............................ 8,000
Stock Investments ..................................................... 16,000
c. Cash ................................................................................... 16,000
Stock Investments ..................................................... 6,000
d. Stock Investments .............................................................. 16,000
Loss on Sale of Stock Investments .................................... 8,000
Cash ........................................................................... 24,000
Investments
12 - 13
59. Blaine Company had these transactions pertaining to stock investments:
Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct. 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the purchase of the Horton stock would include a
a. debit to Stock Investments for $45,900.
b. credit to Cash for $45,900.
c. debit to Stock Investments for $51,000.
d. debit to Investment Expense for $5,100.
60. Blaine Company had these transactions pertaining to stock investments:
Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.
June 1 Received cash dividends of $3 per share on Horton stock.
Oct. 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the receipt of the dividends on June 1 would include a
a. debit to Stock Investments for $6,000.
b. credit to Dividend Revenue for $6,000.
c. debit to Dividend Revenue for $6,000.
d. credit to Stock Investments for $6,000.
61. Blaine Company had these transactions pertaining to stock investments:
Feb. 1 Purchased 2,000 shares of Norton Company (10%) for $51,000.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct. 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the sale of the stock would include a
a. debit to Cash for $30,600.
b. credit to Gain on Sale of Stock Investments for $1,200.
c. debit to Stock Investments for $30,600.
d. credit to Gain on Sale of Stock Investments for $1,800.
62. Mize Company owns 30% interest in the stock of Lyte Corporation. During the year, Lyte
pays $20,000 in dividends to Mize, and reports $300,000 in net income. Mize Company’s
investment in Lyte will increase Mizes net income by
a. $6,000.
b. $90,000.
c. $96,000.
d. $10,000.
Test Bank for Financial Accounting, Ninth Edition
12 - 14
63. Penny Company owns 20% interest in the stock of Lynn Corporation. During the year,
Lynn pays $25,000 in dividends, and reports $200,000 in net income. Penny Company’s
investment in Lynn will increase by
a. $25,000.
b. $40,000.
c. $45,000.
d. $35,000.
64. On January 1, 2014, Grgante Corporation purchased 25% of the common stock
outstanding of Long Corporation for $270,000. During 2014, Long Corporation reported
net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock
Investments—Long account on the books of Grgante Corporation at December 31, 2014
is
a. $270,000.
b. $310,000.
c. $350,000.
d. $280,000.
65. Gayton Corporation purchased 1,000 shares of Smart common stock ($50 par) at $80 per
share as a short-term investment. The shares were subsequently sold at $78 per share.
The cost of the securities purchased and gain or loss on the sale were
Cost Gain or Loss
a. $50,000 $2,000 gain
b. $50,000 $2,000 loss
c. $80,000 $2,000 gain
d. $80,000 $2,000 loss
66. In accounting for stock investments between 20% and 50%, the _______ method is used.
a. consolidated statements
b. controlling interest
c. cost
d. equity
67. When a company holds stock of several different corporations, the group of securities is
identified as a(n)
a. affiliated investment.
b. consolidated portfolio.
c. investment portfolio.
d. controlling interest.
Investments
12 - 15
68. Roxy Corporation makes a short-term investment in 180 shares of Sager Company’s
common stock. The stock is purchased for $53 a share. The entry for the purchase is
a. Debt Investments ................................................................ 9,540
Cash .......................................................................... 9,540
b. Stock Investments .............................................................. 9,540
Cash .......................................................................... 9,540
c. Stock Investments .............................................................. 9,047
Cash .......................................................................... 9,047
d. Stock Investments .............................................................. 9,000
Cash .......................................................................... 9,000
69. Alistair Corporation sells 500 shares of common stock being held as a short-term
investment. The shares were acquired six months ago at a cost of $55 a share. Alistair
sold the shares for $40 a share. The entry to record the sale is
a. Cash ................................................................................... 20,000
Loss on Sale of Stock Investments ..................................... 7,500
Stock Investments ...................................................... 27,500
b. Cash ................................................................................... 27,500
Gain on Sale of Stock Investments ............................ 7,500
Stock Investments ...................................................... 20,000
c. Cash ................................................................................... 20,000
Stock Investments ...................................................... 20,000
d. Stock Investments .............................................................. 20,000
Loss on Sale of Stock Investments ..................................... 7,500
Cash .......................................................................... 27,000
70. For accounting purposes, the method used to account for long-term investments in
common stock is determined by
a. the amount paid for the stock by the investor.
b. the extent of an investor’s influence on the operating and financial affairs of the
investee.
c. whether the stock has paid dividends in past years.
d. whether the acquisition of the stock by the investor was “friendly” or “hostile.”
71. If an investor owns less than 20% of the common stock of another corporation as a long-
term investment,
a. the equity method of accounting for the investment should be employed.
b. no dividends can be expected.
c. it is presumed that the investor has relatively little influence on the investee.
d. it is presumed that the investor has significant influence on the investee.
Test Bank for Financial Accounting, Ninth Edition
12 - 16
72. If the cost method is used to account for a long-term investment in common stock,
dividends received should be
a. credited to the Stock Investments account.
b. credited to the Dividend Revenue account.
c. debited to the Stock Investments account.
d. recorded only when 20% or more of the stock is owned.
73. If 10% of the common stock of an investee company is purchased as a long-term
investment, the appropriate method of accounting for the investment is
a. the cost method.
b. the equity method.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the stock.
74. The cost method of accounting for long-term investments in stock should be employed
when the
a. investor owns more than 50% of the investee’s stock.
b. investor has significant influence on the investee and the stock held by the investor
are marketable equity securities.
c. market value of the shares held is greater than their historical cost.
d. investor’s influence on the investee is insignificant.
75. When an investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor
a. has insignificant influence on the investee and that the cost method should be used to
account for the investment.
b. should apply the cost method in accounting for the investment.
c. will prepare consolidated financial statements.
d. has significant influence on the investee and that the equity method should be used to
account for the investment.
76. Under the equity method of accounting for long-term investments in common stock, when
a dividend is received from the investee company,
a. the Dividend Revenue account is credited.
b. the Stock Investments account is increased.
c. the Stock Investments account is decreased.
d. no entry is necessary.
Investments
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77. On January 1, 2014, Lark Corporation purchased 35% of the common stock outstanding
of Dinc Corporation for $700,000. During 2014, Dinc Corporation reported net income of
$200,000 and paid cash dividends of $100,000. The balance of the Stock Investments—
Dinc account on the books of Lark Corporation at December 31, 2014 is
a. $700,000.
b. $735,000.
c. $770,000.
d. $665,000.
78. Under the equity method, the Stock Investments account is increased when the
a. investee company reports net income.
b. investee company pays a dividend.
c. investee company reports a loss.
d. stock investment is sold at a gain.
79. The account, Stock Investments, is
a. a subsidiary ledger account.
b. a long-term liability account.
c. a long-term investment account.
d. another name for Debt Investments.
80. Which of the following would not be considered a motive for making a stock investment in
another corporation?
a. Appreciation in the market value of the stock investment
b. Use of the investment for expanding its own operations
c. Use of the investment to diversify its own operations
d. An increase in the amount of interest revenue from the stock investment
81. Revenue is recognized when cash dividends are received under
a. the controlling interest method.
b. the cost method.
c. the equity method.
d. both the cost and equity methods.
82. Which of the following is the correct matching concerning an investor’s influence on the
operations and financial affairs of an investee?
% of Investor Ownership Presumed Influence
a. Less than 20% Short-term
b. Between 20%-50% Significant
c. More than 50% Long-term
d. Between 20%-50% Controlling
Test Bank for Financial Accounting, Ninth Edition
12 - 18
83. Which of the following is the correct matching concerning the appropriate accounting for
long-term stock investments?
% of Investor Ownership Accounting Guidelines
a. Less than 20% Cost method
b. Between 20%–50% Cost method
c. More than 50% Cost or equity method
d. Between 20%–50% Consolidated financial statements
84. If the cost method is used to account for a long-term investment in common stock,
a. it is presumed that the investor has significant influence on the investee.
b. the earning of net income by the investee is considered a proper basis for recognition
of income by the investor.
c. net income of the investee is not considered earned by the investor until dividends are
declared by the investee.
d. the Investment account may be, at times, greater than the acquisition cost.
85. If a company acquires a 40% common stock interest in another company,
a. the equity method is usually applicable.
b. all influence is classified as controlling.
c. the cost method is usually applicable.
d. the ability to exert significant influence over the activities of the investee does not
exist.
86. If a common stock investment is sold at a gain, the gain
a. is reported as operating revenue.
b. is reported under a special section, “Discontinued investments,” on the income
statement.
c. is reported in the Other revenues and gains section of the income statement.
d. contributes to gross profit on the income statement.
87. If the equity method is being used, cash dividends received
a. are credited to Dividend Revenue.
b. require no entry because investee net income has already been recorded at the
proper proportion on the investor’s books.
c. are credited to the Stock Investments account.
d. are credited to the Revenue from Stock Investments account.
88. If the equity method is being used, the Revenue from Stock Investments account is
a. just another name for a Dividend Revenue account.
b. credited when dividends are declared by the investee.
c. credited when net income is reported by the investee.
d. debited when dividends are declared by the investee.
Investments
FOR INSTRUCTOR USE ONLY
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89. Under the equity method, the Stock Investments account is credited when the
a. investee reports net income.
b. investee reports a net loss.
c. investment is originally acquired.
d. investee reports net income and when the investment is originally acquired.
90. On August 1, Masters Company buys 2,000 shares of ABD common stock for $72,500
cash. On December 1, the stock investments are sold for $75,000 in cash. Which of the
following are the correct journal entries to record for the purchase and sale of the common
stock?
a. Aug. 1 Cash ..................................................... 72,500
Stock Investments .......................... 72,500
Dec. 1 Cash ..................................................... 75,000
Stock Investments .......................... 72,500
Gain on Sale of Stock Investments 2,500
b. Aug. 1 Stock Investments ................................ 72,500
Cash ............................................... 72,500
Dec. 1 Cash ..................................................... 75,000
Stock Investments .......................... 72,500
Gain on Sale of Stock Investments 2,500
c. Aug. 1 Stock Investments ................................ 72,500
Cash ............................................... 72,500
Dec. 1 Stock Investments ................................ 75,000
Cash ............................................... 72,500
Gain on Sale of Stock Investments 2,500
d. Aug. 1 Cash ..................................................... 72,500
Stock Investments .......................... 72,500
Dec. 1 Stock Investments ................................ 75,000
Cash ............................................... 72,500
Gain on Sale of Stock Investments 2,500
91. Cody Industries owns 35% of Macarthy Company. For the current year, Macarthy reports
net income of $250,000 and declares and pays a $60,000 cash dividend. Which of the
following correctly presents the journal entries to record Cody’s equity in Macarthy’s net
income and the receipt of dividends from Macarthy?
a. Dec. 31 Stock Investments .................................. 87,500
Revenue from Stock Investments …. 87,500
Dec. 31 Cash ...................................................... 21,000
Stock Investments ............................ 21,000
b. Dec. 31 Stock Investments ................................... 87,500
Revenue from Stock Investments …. 87,500
Dec. 31 Cash ....................................................... 60,000
Stock Investments ............................. 60,000
c. Dec. 31 Stock Investments ................................ 66,500
Revenue from Stock Investments … 66,500
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 20
MC 91. (cont.)
d. Dec. 31 Revenue from Stock Investments ………. 87,500
Stock Investments ........................... 87,500
Dec. 31 Stock Investments ................................. 21,000
Cash ................................................ 21,000
92. On January 1, 2014, Gene Corp. paid $800,000 for 100,000 shares of Onofine Company’s
common stock, which represents 30% of Onofines outstanding common stock. Onofine
reported net income of $200,000 and paid cash dividends of $60,000 during 2014. Gene
should report the investment in Onofine Company on its December 31, 2014, balance
sheet at:
a. $800,000
b. $758,000
c. $818,000
d. $842,000
93. Viejo Inc. earns $600,000 and pays cash dividends of $150,000 during 2014. Cruz
Corporation owns 73,500 of the 210,000 outstanding shares of Viejo.
What amount should Cruz show in the investment account at December 31, 2014 if the
beginning of the year balance in the account was $40,000?
a. $197,500
b. $210,000
c. $157,500
d. $250,000
94. Cruz Inc. earns $450,000 and pays cash dividends of $150,000 during 2014. Cruz
Corporation owns 73,500 of the 210,000 outstanding shares of Viejo.
How much revenue from investment should Viejo report in 2014?
a. $52,500
b. $105,000
c. $157,500
d. $210,000
95. On January 1, 2014, Dumas Industries acquired a 18% interest in Arlongton Corporation
through the purchase of 12,000 shares of Arlongton Corporation common stock for
$250,000. During 2014, Arlongton Corp. paid $60,000 in dividends and reported a net loss
of $90,000. Dumas is able to exert significant influence on Arlongton. However, Dumas
mistakenly records these transactions using the cost method rather than the equity
method of accounting. Which of the following would show the correct presentation for
Dumas’s investment using the equity method?
Investments
12 - 21
MC 95. (cont.)
Investment Net
Account Earnings (loss)
a. $90,000 ($30,000)
b. $223,000 ($16,200)
c. $233,800 ($16,200)
d. $233,800 ($5,400)
96. Consolidated financial statements are prepared when a company owns _________ of the
common stock of another company.
a. less than 20%
b. between 20% and 50%
c. less than 50%
d. more than 50%
97. Consolidated financial statements present all of the following except the
a. individual assets and liabilities of the parent company
b. individual assets and liabilities of the subsidiary.
c. total revenues and expenses of the subsidiary.
d. All of these are presented in consolidated financial statements.
98. The company whose stock is owned by the parent company is called the
a. controlled company.
b. subsidiary company.
c. investee company.
d. sibling company.
99. A company that owns more than 50% of the common stock of another company is known
as the
a. charge company.
b. subsidiary company.
c. parent company.
d. management company.
100. If one company owns more than 50% of the common stock of another company,
a. the cost method should be used to account for the investment.
b. a partnership exists.
c. a parent-subsidiary relationship exists.
d. the company whose stock is owned must be liquidated.
Test Bank for Financial Accounting, Ninth Edition
12 - 22
101. If a parent company has two wholly owned subsidiaries, how many legal and economic
entities are there from the viewpoint of the shareholders of the parent company?
Legal Economic
a. 3 3
b. 1 2
c. 3 1
d. 2 1
102. When a company owns more than 50% of the common stock of another company,
a. affiliated financial statements are prepared.
b. consolidated financial statements are prepared.
c. controlling financial statements are prepared.
d. significant financial statements are prepared.
103. Changes from cost are reported as part of net income for
a. available-for-sale securities.
b. held-to-maturity securities.
c. debt securities.
d. trading securities.
104. Short-term investments are listed on the balance sheet immediately below
a. cash.
b. inventory.
c. accounts receivable.
d. prepaid expenses.
105. Short-term stock investments should be valued on the balance sheet at
a. the lower of cost or fair value.
b. the higher of cost or fair value.
c. cost.
d. fair value.
106. In recognizing a decline in the fair value of short-term stock investments, an unrealized
loss account is debited because
a. management intends to realize this loss in the near future.
b. the securities have not been sold.
c. the stock market is volatile.
d. management cannot determine the exact amount of the loss in value.
107. The Fair Value Adjustment account
a. is set up for each security in the company’s portfolio.
b. relates to the entire portfolio of securities held by the company.
c. is closed at the end of each accounting period.
d. appears on the income statement as Other Expenses and Losses.
Investments
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108. The contra-account, Fair Value Adjustment, is also called a(n)
a. offset account.
b. adjustment account.
c. valuation account.
d. opposite account.
109. Reporting investments at fair value is
a. applicable to stock securities only.
b. applicable to debt securities only.
c. applicable to both debt and stock securities.
d. a conservative approach because only losses are recognized.
110. Brandy Corporation’s trading portfolio at the end of the year is as follows:
Security Cost Fair Value
Common Stock C $10,000 $12,000
Common Stock D 9,000 5,000
$19,000 $17,000
At the end of the year, Brandy Corporation should
a. set up a Fair Value Adjustment account for Stock D.
b. set up a Fair Value Adjustment account for the portfolio.
c. recognize an Unrealized Gain or Loss—Income for $4,000.
d. report a loss on the income statement for $4,000 under “Other expenses and losses.”
111. Brandy Corporation’s trading portfolio at the end of the year is as follows:
Security Cost Fair Value
Common Stock C $10,000 $12,000
Common Stock D 8,000 5,000
$18,000 $17,000
Brandy subsequently sells Stock D for $10,000. What entry is made to record the sale?
a. Cash ................................................................................... 10,000
Stock Investments ...................................................... 10,000
b. Cash ................................................................................... 10,000
Fair Value Adjustment Trading ................................... 2,000
Stock Investments ...................................................... 8,000
c. Cash ................................................................................... 10,000
Stock Investments ...................................................... 8,000
Gain on Sale of Stock Investments ............................ 2,000
d. Cash ................................................................................... 10,000
Stock Investments ...................................................... 5,000
Gain on Sale of Stock Investments ............................ 5,000
Test Bank for Financial Accounting, Ninth Edition
12 - 24
112. Which of the following would not be reported under “Other Revenues and Gains” on the
income statement?
a. Unrealized gain on available-for-sale securities
b. Dividend revenue
c. Interest revenue
d. Gain on sale of short-term debt investments
113. The balance in the Unrealized Gain or Loss—Equity account will
a. appear on the balance sheet as a contra asset.
b. appear on the income statement under Other Expenses and Losses.
c. appear as a deduction in the stockholders’ equity section.
d. not be shown on the financial statements until the securities are sold.
114. If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to
recognize the loss
a. is not required since the share prices will likely rebound in the long run.
b. will show a debit to an expense account.
c. will show a credit to a contra-asset account that appears in the stockholders’ equity
section of the balance sheet.
d. will show a debit to an unrealized loss account that is deducted in the stockholders’
equity section of the balance sheet.
115. The balance sheet presentation of an unrealized loss on an available-for-sale security is
similar to the statement presentation of
a. treasury stock.
b. discount on bonds payable.
c. allowance for doubtful accounts.
d. prepaid expenses.
116. At the end of its first year, the trading securities portfolio consisted of the following
common stocks.
Cost Fair Value
Atrium Corporation $ 46,500 $ 50,000
Barnes Inc. 60,000 58,000
Cantor Corporation 80,000 76,400
$186,500 $184,400
The unrealized loss to be recognized under the fair value method is
a. $2,000.
b. $5,600.
c. $2,100.
d. $3,600.
Investments
FOR INSTRUCTOR USE ONLY
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117. At the end of its first year, the trading securities portfolio consisted of the following
common stocks.
Cost Fair Value
Atrium Corporation $ 46,500 $ 50,000
Barnes Inc. 60,000 58,000
Cantor Corporation 80,000 76,400
$186,500 $184,400
In the following year, the Barnes common stock is sold for cash proceeds of $57,000. The
gain or loss to be recognized on the sale is a
a. gain of $1,200.
b. loss of $3,000.
c. Loss of $1,000.
d. loss of $2,000.
118. At the end of the first year of operations, the total cost of the trading securities portfolio is
$245,000. Total fair value is $250,000. The financial statements should show
a. an addition to an asset of $5,000 and a realized gain of $5,000.
b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’
equity section.
c. an addition to an asset of $5,000 in the current assets section and an unrealized gain
of $5,000 in “Other revenues and gains.”
d. an addition to an asset of $5,000 in the current assets section and a realized gain of
$5,000 in “Other revenues and gains.”
119. Comanic Corp. has common stock of $5,400,000, retained earnings of $2,000,000,
unrealized gains on trading securities of $100,000 and unrealized losses on available-for-
sale securities of $200,000. What is the total amount of its stockholders’ equity?
a. $7,200,000
b. $7,400,000
c. $7,300,000
d. $7,500,000
120. Cost and fair value data for the trading securities of McMahon Company at December 31,
2014, are $110,000 and $85,000, respectively. Which of the following correctly presents
the adjusting journal entry to record the securities at fair value?
a. Dec. 31 Unrealized Loss⎯Income .................. 25,000
Trading Securities ......................... 25,000
b. Dec. 31 Unrealized Gain⎯Income ................... 25,000
Trading Securities .......................... 25,000
c. Dec. 31 Unrealized Loss⎯Income ................... 25,000
Fair Value Adjustment⎯Trading .... 25,000
Test Bank for Financial Accounting, Ninth Edition
12 - 26
MC 120. (cont.)
d. Dec. 31 Fair Value Adjustment -Trading 25,000
Unrealized Gain-Income ................ 25,000
121. At December 31, 2014, the trading securities for Saddle, Inc. are as follows:
Security Cost Fair Value 12/31/14
A $90,000 $94,000
B 150,000 141,000
C 32,000 30,000
Saddle should report the following amount related to the securities in its 2014 income
statement:
a. $4,000 gain
b. $7,000 realized loss.
c. $7,000 unrealized loss.
d. $11,000 unrealized loss.
122. At December 31, 2014, Delta Inc. has these data on its security investments:
Security Cost Fair Value 12/31/14
Trading $ 140,000 $190,000
Available-for-sale 137,000 122,000
If the available-for-sale securities are held as long-term investments, which of the
following will be recorded to adjust the securities to fair value?
a. Securities ....................................................... 35,000
Unrealized Gain⎯Income ........................ 35,000
b. Unrealized Loss⎯Income ............................... 15,000
Securities ........................................................ 35,000
Unrealized Gain⎯Income ........................ 50,000
c. Fair Value Adjustment⎯Trading ..................... 50,000
Unrealized Gain⎯Income ........................ 50,000
Unrealized Gain or Loss⎯Equity ..................... 15,000
Fair Value Adjustment⎯Available-for-Sale 15,000
d. Unrealized Gain⎯Income ............................... 50,000
Fair Value Adjustment⎯Trading .............. 50,000
Fair Value Adjustment⎯Available-for-Sale ....... 15,000
Unrealized Gain or Loss⎯Equity .............. 15,000
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123. All of the following statements about short-term investments are true except:
a. Short-term investments are also called marketable securities
b. Trading securities are always classified as short-term investments.
c. Short-term investments are listed below accounts receivable in the current asset
section of the balance sheet.
d. Short-term assets must be readily marketable.
124. Available-for-sale securities are classified as
a. short-term investments only.
b. long-term investments only.
c. either short-term or long-term investments.
d. current assets only.
125. Which one of the following would not be classified as a short-term investment?
a. Marketable stock securities
b. Equity method investments
c. Marketable debt securities
d. Short-term paper
126. Short-term investments are securities that are readily marketable and intended to be
converted into cash within the next
a. year.
b. two years.
c. year or operating cycle, whichever is shorter.
d. year or operating cycle, whichever is longer.
127. Which of the following would not be classified as a short-term investment?
a. Short-term commercial paper
b. Idle cash in a bank checking account
c. Marketable stock securities
d. Marketable debt securities
128. If a parent company acquires wholly owned subsidiary at an amount greater than the book
value, the excess should be
a. allocated to expense on the date of acquisition.
b. allocated to identifiable assets to the extent of their fair values, with any remainder
allocated to goodwill.
c. allocated to goodwill, with any remainder allocated to the identifiable assets.
d. set up as a liability to the controlling interest.
Test Bank for Financial Accounting, Ninth Edition
12 - 28
129. The consolidated worksheet shows Excess of Cost Over Book Value of Subsidiary of
$210,000. Management of the parent company determines that the market values for
subsidiary company plant assets are $90,000 higher than book values. In the consolidated
balance sheet, goodwill will be reported at
a. $210,000.
b. $120,000.
c. $90,000.
d. $0.
130. Daniel Corporation acquired 100% of the common stock of Tysen Company for
$1,100,000. On the date of acquisition, Tysen Company’s stockholders’ equity consisted
of: Common Stock, $530,000; Retained Earnings, $410,000. The intercompany
elimination to be made on a worksheet to prepare a consolidated balance sheet is
a. Common Stock–Tysen .................................................. 530,000
Retained Earnings–Tysen ............................................. 410,000
Investment in Tysen Stock ...................................... 940,000
b. Investment in Tysen Stock ............................................ 1,100,000
Cash ....................................................................... 1,100,000
c. Common Stock–Daniel ................................................. 530,000
Retained Earnings–Daniel ............................................ 410,000
Goodwill ........................................................................ 160,000
Investment in Tysen Stock ...................................... 1,100,000
d. Common Stock–Tysen .................................................. 530,000
Retained Earnings–Tysen ............................................. 410,000
Excess of Cost Over Book Value of Subsidiary ............. 160,000
Investment in Tysen Stock ...................................... 1,100,000
131. A consolidated income statement will show
a. revenue and expense transactions between the consolidated entity and parties
outside the affiliated group.
b. only the parent company’s net income.
c. only the income of partially owned subsidiaries.
d. only the income of wholly owned subsidiaries.
132. When preparing a consolidated income statement,
a. only the revenues and expenses of the parent company are presented.
b. the income from partially owned subsidiaries is excluded.
c. all revenue and expense transactions between the parent and subsidiaries must be
eliminated.
d. intercompany transactions between affiliated companies do not have to be eliminated.
Investments
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133. Which of the following reasons best explains why a company that experiences seasonal
fluctuations in sales may purchase investments in debt or stock securities?
a. The company may have excess cash.
b. The company may generate a significant portion of its earnings from investment
income.
c. The company may invest for the strategic reason of establishing a presence in a
related industry.
d. The company may invest for speculative reasons to increase the value in pension
funds.
134. When bonds are sold, the gain or loss on sale is the difference between the
a. sales price and the cost of the bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value of the bonds.
d. net proceeds and the market value of the bonds.
135. Debt investments are recorded at the
a. face value of the bonds purchased.
b. face value of the bonds purchased plus interest.
c. price paid for the bonds plus interest.
d. price paid for the bonds plus brokerage fees.
136. Under the equity method, the investor records dividends received by crediting
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.
137. A company that acquires less than 20% ownership interest in another company should
account for the stock investment in that company using
a. the cost method.
b. the equity method.
c. the significant method.
d. consolidated financial statements.
138. The equity method of accounting for an investment in the common stock of another
company should be used by the investor when the investment
a. is composed of common stock and it is the investor’s intent to vote the common stock.
b. ensures a source of supply of raw materials for the investor.
c. enables the investor to exercise significant influence over the investee.
d. is obtained by an exchange of stock for stock.
Test Bank for Financial Accounting, Ninth Edition
12 - 30
139. On January 2, Angle Corporation acquired 40% of the outstanding common stock of
Bobbe Company for $550,000. For the year ended December 31, Bobbe reported net
income of $90,000 and paid cash dividends of $30,000 on its common stock. At
December 31, the carrying value of Angle’s investment in Bobbe under the equity method
is
a. $538,000.
b. $550,000.
c. $586,000.
d. $574,000.
140. An unrealized loss on available-for-sale securities is
a. reported under Other Expenses and Losses in the income statement.
b. closed-out at the end of the accounting period.
c. reported as a separate component of stockholders’ equity.
d. deducted from the cost of the investment.
141. Securities bought and held primarily for sale in the near term to generate income on short-
term price differences are
a. trading securities.
b. available-for-sale securities.
c. never-sell securities.
d. held-to-maturity securities.
142. Short-term investments are
a. (1) readily marketable and (2) intended to be converted into cash after the current year
or operating cycle, whichever is shorter.
b. (1) readily marketable and (2) intended to be converted into cash within the current
year or operating cycle, whichever is longer.
c. (1) readily marketable and (2) intended to be converted into cash after the current year
or operating cycle, whichever is longer.
d. (1) readily marketable and (2) intended to be converted into cash within the current
year or operating cycle, whichever is shorter.
143. Short-term investments are securities held by a company that are
a. readily marketable.
b. intended to be converted into cash within the next year.
c. readily marketable and intended to be converted into cash within the next year or
operating cycle, whichever is longer.
d. readily marketable and intended to be held until maturity.
Investments
12 - 31
144. Debt investments that are held to maturity are recorded at
a. amortized cost.
b. fair value.
c. original cost.
d. maturity value.
145. Under IFRS, equity investments are generally recorded and reported at
a. amortized cost.
b. fair value.
c. original cost.
d. maturity value.
146. Which of the following investment classifications are the same for GAAP and IFRS?
a. Available-for-sale
b. Held-to-maturity
c. Non-trading
d. Trading.
147. Which of the following are accounted for at amortized cost under IFRS?
a. Available-for-sale investments
b. Trading investments
c. Non-trading equity investments
d. Held-for-collection investments
148. Unrealized gains and losses related to available-for-sale/non-trading equity investments
are reported in other comprehensive income under
a. GAAP only.
b. IFRS only.
c. Both GAAP and IFRS.
d. Neither GAAP or IFRS.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 32
Answers to Multiple Choice Questions
Item
Ans.
Item
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Item
Ans.
Item
Ans.
Item
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Item
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Ans.
BRIEF EXERCISES
BE 149
On January 14, Balcom Corporation purchased 20, 11%, $1,000 Eiger Company bonds for
$20,000. On November 30, the company sold 10 of the Eiger Company bonds for $11,600.
Prepare journal entries for the purchase and sale of the Eiger Company bonds.
BE 150
On January 2, Penny Company purchased 45, 10%, $1,000 Mikel Company bonds for $45,000
cash. Interest is payable semiannually on July 1 and January 1. On July 1, the company received
a semiannual interest payment on the Mikel Company bonds. Journalize the entries to record the
purchase of the bonds and the receipt of the interest payment.
Investments
FOR INSTRUCTOR USE ONLY
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BE 151
On April 25, Davis Company buys 4,200 shares of Carter common stock for $94,500. On October
31, Davis sells 600 shares of Carter stock for $16,500,. Prepare journal entries for the purchase
and sale of the Carter common stock.
BE 152
On January 1, Sanchez Corporation purchased a 35% equity in Lawton Company for $380,000.
At December 31, Lawton declared and paid a $40,000 cash dividend and reported net income of
$98,000. Prepare the necessary journal entries for Sanchez Corporation.
BE 153
Jenner Company had the following transactions pertaining to its short-term stock investments.
Jan. 1 Purchased 600 shares of Pork Company stock for $8,420.
June 1 Received cash dividends of $0.60 per share on the Pork Company stock.
Sept. 15 Sold 300 shares of the Pork Company stock for $3,400 Cash.
Instructions
Journalize the transactions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 34
BE 154
On January 1, 2014, Mink Company purchased 5,000 shares of Kusher Company stock for
$360,000. Mink’s investment represents 30 percent of the total outstanding shares of Kusher.
During 2014, Kusher paid total dividends of $100,000 and reported net income of $300,000. What
revenue does Mink report related to this investment and what is the amount to be reported as an
investment in Kusher stock at December 31?
BE 155
At January 1, 2014, the trading securities portfolio held by the Darren Corporation consisted of
the following investments:
1. 2,000 shares of Temper common stock purchased for $42 per share.
2. 1,500 shares of Logan common stock purchased for $50 per share.
At December 31, 2014, the fair values per share were Temper $38 and Logan $54.
Instructions
(a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2014.
(b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014.
Investments
FOR INSTRUCTOR USE ONLY
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BE 156
At December 31, 2014, the trading securities for Eddy Company are as follows:
Security Cost Fair Value
A $16,000 $20,000
B 34,000 32,000
$50,000 $52,000
Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.
BE 157
At January 1, 2014, Grand Corporation held one available-for-sale security: 1,500 shares of
Nettle common stock purchased for $40 per share. At December 31, 2014, the fair value per
share for Nettle was $42. Prepare the adjusting entry to report the portfolio at fair value at
December 31, 2014.
BE 158
Terra Cotta Company has the following data at December 31, 2014 for its securities:
Securities Cost Fair Value
Available-for-sale $34,000 $39,000
Trading 46,000 42,000
Instructions
Journalize the December 31 adjusting entries.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 36
EXERCISES
Ex. 159
Maxim Corporation had the following transactions pertaining to debt investments.
Jan. 1 Purchased 80, 8%, $1,000 Woodrow Company bonds for $80,000.
July 1 Sold 20 Woodrow Company bonds for $21,500.
Instructions
Prepare journal entries for the purchase and sale of the Woodrow Company bonds.
Ex. 160
Quagle Company had the following transactions pertaining to debt securities held as a short-term
investment.
Jan. 1 Purchased 40, 8%, $1,000 Steve Company bonds for $40,000 cash. Interest is payable
semiannually on July 1 and January 1.
July 1 Received semiannual interest on Steve Company bonds.
Oct. 1 Sold 24 Steve Company bonds for $26,000 plus accrued interest.
Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry for the accrual of interest on December 31.
Investments
FOR INSTRUCTOR USE ONLY
12 - 37
Ex. 161
Pincher Company purchased 50 Issac Company 12%, 10-year, $1,000 bonds on January 1,
2014, for $50,000. The bonds pay interest semiannually. On January 1, 2015, after receipt of
interest, Pincher Company sold 30 of the bonds for $28,300.
Instructions
Prepare the journal entries to record the transactions described above.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 38
Ex. 162
The following transactions were made by Allen Company. Assume all investments are short-term
and are readily marketable.
June 2 Purchased 400 shares of Snoop Corporation common stock for $45 per share.
July 1 Purchased 200 Barr Corporation bonds for $228,000.
30 Received a cash dividend of $1.50 per share from Snoop Corporation.
Sept. 15 Sold 120 shares of Snoop Corporation stock for $50 per share.
Dec. 31 Received semiannual interest check for $13,000 from Barr Corporation.
31 Received a cash dividend of $2 per share from Snoop Corporation.
Instructions
Journalize the transactions.
Investments
FOR INSTRUCTOR USE ONLY
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Ex. 163
On April 1, Sign Company buys 4,000 shares of Polk common stock for $61,500. On October 1,
Sign sells 1,000 shares of Polk stock for $20,500..
Instructions
Prepare journal entries for the purchase and sale of the Polk common stock.
Ex. 164
Hungh Company had the following transactions pertaining to short-term investments in equity
securities.
Jan. 1 Purchased 1,500 shares of Antuni Company stock for $9,500 cash.
June 1 Received cash dividends of $.40 per share on Antuni Company stock.
Sept. 15 Sold 375 shares of Antuni Company stock for $2,300 less brokerage fees of $100.
Dec. 1 Received cash dividends of $.80 per share on Antuni Company stock.
Instructions
(a) Journalize the transactions.
(b) Indicate the income statement effects of the transactions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 40
Ex. 165
Stewart Corporation’s balance sheet at December 31, 2013, showed the following:
Short-term investments, at fair value $46,500
Stewart Corporation’s trading portfolio of stock investments consisted of the following at
December 31, 2013:
Stock Number of Shares Cost
Conn Common Stock 200 $28,000
Ares Preferred Stock 400 6,000
Hall Common Stock 300 9,000
$43,000
During 2014, the following transactions took place:
Feb. 5 Sold 100 shares of Conn common stock for $18,000.
Mar. 30 Purchased 25 shares of Hall common stock for $1,000.
Sept. 9 Purchased 50 shares of Hall common stock for $3,000.
At year end on December 31, 2014, the fair values per share were:
Fair Value Per Share
Conn Common Stock $158.00
Ares Preferred Stock $14.00
Hall Common Stock $24.00
Instructions
(a) Prepare the journal entries to record the 2014 stock transactions.
(b) On December 31, 2014, prepare any adjusting entry that might be necessary relative to the
trading portfolio.
(c) Show how the stock investments will appear on Stewart Corporation’s balance sheet at
December 31, 2014.
Investments
FOR INSTRUCTOR USE ONLY
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Ex. 166
On January 5, 2014, Grouse Company purchased the following stock securities as a long-term
investment:
300 shares Bonter Corporation common stock for $4,500.
500 shares Wane Corporation common stock for $10,000.
800 shares Strauss Corporation common stock for $22,800.
Assume that Grouse Company cannot exercise significant influence over the activities of the
investee companies and that the cost method is used to account for the investments.
On June 30, 2014, Grouse Company received the following cash dividends:
Bonter Corporation ...................................... $2.00 per share
Wane Corporation ....................................... $1.25 per share
Strauss Corporation ..................................... $1.50 per share
On November 15, 2014, Grouse Company sold 160 shares of Strauss Corporation common stock
for $7,200.
On December 31, 2014, the fair value of the securities held by Grouse Company is as follows:
Per Share
Bonter Corporation common stock $10
Wane Corporation common stock 16
Strauss Corporation common stock 28
Instructions
Prepare the appropriate journal entries that Grouse Company should make on the following
dates:
January 5, 2014
June 30, 2014
November 15, 2014
December 31, 2014
Test Bank for Financial Accounting, Ninth Edition
12 - 42
Ex. 167
Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a long-
term investment for $900,000. During the year, Paxton Corporation reported net income of
$300,000 and paid dividends of $100,000.
Instructions
(a) Assuming that the 35,000 shares represent a 10% interest in Paxton Corporation:
1. Prepare the journal entry to record the investment in Paxton stock.
2. Prepare any entries that Rosco Company should make in accounting for its investment
in Paxton stock during the year.
3. What is the balance of the Stock Investments account on Rosco Company’s books at
the end of the year?
(b) Repeat requirement (a) above except assume that the 35,000 shares represent a 20%
interest in Paxton Corporation.
Investments
FOR INSTRUCTOR USE ONLY
12 - 43
Solution 167 (16–21 min.)
Ex. 168
On January 1, Oetry Corporation purchased a 35% equity in Selig Company for $190,000. At
December 31, Selig declared and paid a $50,000 cash dividend and reported net income of
$80,000.
Instructions
Prepare the necessary journal entries for Oetry Corporation.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 44
Ex. 169
Information pertaining to long-term stock investments in 2014 by Bell Corporation follows:
Acquired 18% of the 250,000 shares of common stock of Kansas Company at a total cost of $8
per share on January 1, 2014. On July 1, Kansas Company declared and paid a cash dividend of
$2 per share. On December 31, Kansas’s reported net income was $654,000 for the year.
Obtained significant influence over Toto Company by buying 30% of Toto’s 100,000 outstanding
shares of common stock at a total cost of $22 per share on January 1, 2014. On June 15, Toto
Company declared and paid a cash dividend of $1.50 per share. On December 31, Toto’s
reported net income was $280,000.
Instructions
Prepare all necessary journal entries for 2014 for Bell Corporation.
Ex. 170
On February 1, Brutus Company purchased 1,000 shares (2% ownership) of Wynne Company
common stock for $25 per share. On March 20, Brutus Company sold 200 shares of Wynne stock
for $4,700. Brutus received a dividend of $1.20 per share on April 25. On June 15, Marcus sold
300 shares of Wynne stock for $8,500.
Instructions
Prepare the journal entries to record the transactions described above.
Investments
FOR INSTRUCTOR USE ONLY
12 - 45
Solution 170 (10–13 min)
Ex. 171
On January 1 Jarret Corporation purchased a 35% equity in Dorman Corporation for $220,000. At
December 31 Dorman declared and paid a $60,000 cash dividend and reported net income of
$200,000.
Instructions
(a) Journalize the transactions.
(b) Determine the amount to be reported as an investment in Dorman stock at December 31.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 46
Ex. 172
Presented below are two independent situations.
1. Guo Cosmetics acquired 10% of the 200,000 shares of common stock of Chy Fashion at
a total cost of $12 per share on March 18, 2014. On June 30, Chy declared and paid a
$50,000 dividend. On December 31, Chy reported net income of $110,000 for the year. At
December 31, the market price of Chy Fashion was $15 per share. The stock is classified
as available-for-sale.
2. Liptin, Inc., obtained significant influence over Blurr Corporation by buying 25% of Blurr
50,000 outstanding shares of common stock at a total cost of $7 per share on January 1,
2014. On June 15, Blurr declared and paid a cash dividend of $40,000. On December
31, Blurr reported a net income of $90,000 for the year.
Instructions
Prepare all the necessary journal entries for 2014 for (a) Guo Cosmetics and (b) Liptin, Inc.
Ex. 173
At December 31, 2014, the available-for-sale securities for Allison, Inc. are as follows.
Security Cost Fair Value
X $27,500 $24,000
Y 12,500 13,000
Z 23,000 18,000
$63,000 $55,000
Investments
FOR INSTRUCTOR USE ONLY
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Ex. 173 (Cont.)
Instructions
(a) Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.
(b) Show the balance sheet and income statement presentation at December 31, 2014, after
adjustment to fair value. The securities are considered to be a long-term investment.
Ex. 174
At December 31, 2014, the trading securities for Wolfe Company are as follows:
Security Cost Fair Value
X $25,000 $27,000
Y 45,000 38,000
$70,000 $65,000
Instructions
Prepare the adjusting entry at December 31, 2014, to report the securities at fair value.
Ex. 175
Plotner Corporation has the following trading portfolio of stock investments as of December 31,
2014.
Security Cost Fair Value
A $19,000 $15,000
B 22,000 27,000
C 34,000 29,000
$75,000 $71,000
On January 22, 2015, Plotner Corporation sold security C for $32,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 48
Ex. 175 (Cont.)
Instructions
(a) Prepare the adjusting entry for Plotner Corporation on December 31, 2014, to report the
portfolio at fair value.
(b) Indicate the balance sheet and income statement presentation of the fair value data for
Plotner Corporation at December 31, 2014.
(c) Prepare the journal entry for the 2015 sale.
Ex. 176
The following information is available for Lewis Corporation’s available-for-sale securities at
December 31, 2014.
Security Cost Fair Value
X $34,000 $30,000
Y 24,000 32,000
$58,000 $62,000
Instructions
Prepare the adjusting entry to record the securities at fair value at December 31, 2014.
Investments
FOR INSTRUCTOR USE ONLY
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Ex. 177
At January 1, 2014, the available-for-sale securities portfolio held by Hyde Corporation consisted
of the following investments:
1. 2,500 shares of Park common stock purchased for $42 per share.
2. 1,500 shares of Grace common stock purchased for $60 per share.
At December 31, 2014, the market values per share were Park $36 and Grace $68.
Instructions
(a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2014.
(b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014.
Ex. 178
Shallot Company has the following data at December 31, 2014 for its securities.
Securities Cost Fair Value
Trading $90,000 $93,000
Available-for-sale 74,000 68,000
Instructions
(a) Prepare the adjusting entries to report the securities at fair value.
(b) Indicate the statement presentation of the related unrealized gain (loss) accounts for each
class of securities.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 50
Ex. 179
On January 2, 2015, Parr Company purchased 100% of the common stock of Sneed Company
for $420,000. The fair value of Sneed Company’s assets and liabilities are equal to their book
values except that land has a fair value of $120,000 and buildings have a fair value of $260,000.
Instructions
(a) Complete the worksheet below for preparing a consolidated balance sheet. You may add
accounts to the worksheet if necessary.
(b) Prepare a consolidated balance sheet for Parr Company and Subsidiary on January 2, 2015.
Investments
FOR INSTRUCTOR USE ONLY
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Solution 179 (17–22 min.)
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 52
Ex. 180
On January 2, 2015, Pine Company purchased 100% of the outstanding common shares of Seely
Company for $520,000. Any excess of cost over the book value of the net assets of Seely
Company should first be allocated to Land $55,000, and Buildings $40,000 and any remainder to
goodwill.
Instructions
(a) Complete the following worksheet below for preparing a consolidated balance sheet on the
date of acquisition. You may add accounts to the worksheet that may be necessary.
(b) Prepare a consolidated balance sheet for Pine Company and Subsidiary on January 2, 2015.
PINE COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)
Assets
Pine
Company
Seely
Company
Eliminations
Consolidated
Data
Debits
Credits
Current assets
120,000
$70,000
Investment in Sneed
common stock
520,000
Land
20,000
150,000
Buildings (net)
150,000
250,000
Totals
810,000
470,000
Liabilities and Stockholders’ Equity
Current liabilities
60,000
70,000
Common stock–Pine
500,000
Common stock–Seely
270,000
Retained earnings–Pine
250,000
Retained earnings–Seely
130,000
Total
810,000
470,000
Investments
FOR INSTRUCTOR USE ONLY
12 - 53
Solution 180 (17–22 min.)
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 54
Ex. 181
The separate balance sheets of Platt Company and its wholly owned subsidiary, Speer Company,
as of the date of acquisition are shown below.
Assets
Platt
Speer
Consolidated Data
Cash
$ 170,000
$ 57,000
Accounts Receivable
240,000
283,000
Inventory
100,000
300,000
Equipment (net)
300,000
486,000
Investment in Speer Co.
810,000
Totals
$1,620,000
$1,126,000
Liabilities and Stockholders’ Equity
Accounts Payable
250,000
166,000
Bonds Payable
120,000
150,000
Common Stock
1,000,000
630,000
Retained Earnings
250,000
180,000
Totals
$1,620,000
$1,126,000
Instructions
(Provide the amount that should appear in the Consolidated Data column for each of the selected
accounts. If the accounts should not appear in the Consolidated Data column, indicate “None”.
Assume that all accounts have normal balances and that Speer Company stock was acquired for
cash at a price equal to its book value.
Investments
12 - 55
182. Debt investments are investments in government and _____________ bonds.
183. Cost of debt investments includes the price paid plus ______________
184. When an investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor has _______________ influence over the investee
and therefore, the appropriate method of accounting for this type of investment is the
_______________ method.
185. Under the cost method, dividends received from an investee company are credited to the
_______________ account, whereas under the equity method, dividends received from
an investee company are credited to the _______________ account.
186. At the beginning of the year, Price Corporation acquired 25% of Cooper Company
common stock for $400,000. Cooper Company reported net income for the year of
$85,000 and paid $25,000 cash dividends during the year. The balance of the Stock
Investments account on the books of Price Corporation at the end of the year should be
$___________.
187. A company that owns more than 50% of the common stock of another company is known
as the ______________ company and _____________ financial statements are usually
prepared.
188. _______________ securities are bought and held primarily for sale in the near future.
189. Fair Value Adjustment is a valuation _______________ account which is
_______________ to (from) the cost of the investments.
190. At the end of an accounting period, if the fair value of the trading portfolio is less than its
cost, then the company should recognize an ______________ which is reported on the
_________________.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 56
191. An unrealized loss on trading securities is reported under Other ____________________
on the income statement.
192. An unrealized gain or loss on available-for-sale securities is reported as a separate
component of _________________.
193. Short-term investments are securities that are _____________ and ______________ to
be converted into cash within the next year.
Answers to Completion Statements
Investments
FOR INSTRUCTOR USE ONLY
12 - 57
MATCHING
194. Match the items below by entering the appropriate code letter in the space provided.
A. Available-for-sale securities F. Consolidated financial statements
B. Subsidiary company G. Controlling interest
C. Equity method H. Fair Value Adjustment
D. Unrealized Gain or Loss—Equity I. Parent company
E. Fair value J. Long-term investments
____ 1. Valuation allowance account.
____ 2. Amount for which a security could be sold.
____ 3. Ownership of more than 50% of another company’s common stock.
____ 4. Securities that may be sold in the future.
____ 5. Investments that are not readily marketable and not intended to be converted into
cash within the next year.
____ 6. Financial statements that present the total assets and liabilities controlled by the
parent and the total revenues and expenses of the subsidiary companies.
____ 7. The Stock Investments account is adjusted for net income and dividends received.
____ 8. A company that owns more than 50% of the common stock of another entity.
____ 9. Entity whose stock is owned by the parent company.
____ 10. An account that is reported in the stockholders’ equity section.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 58
SHORT-ANSWER ESSAY QUESTIONS
S-A E 195
Distinguish between the cost and equity methods of accounting for investments in stocks.
S-A E 195
A consolidated balance sheet reports the financial position of two or more legal entities just as if
they were one reporting unit. Explain why all the individual items appearing on the separate
balance sheets of each of the affiliated companies cannot be added together to arrive at a
consolidated total for each item.
S-A E 197
What purposes are served by reporting Unrealized Gains (Losses)—Equity in the stockholders’
equity section?
S-A E 198
The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is
related to. Explain how this account is increased and describe the procedure followed when its
related asset account is disposed of.
Investments
FOR INSTRUCTOR USE ONLY
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S-A E 199
When a year-end adjustment is made to reduce the trading securities portfolio to market, what
effect, if any, will the adjustment have on the balance sheet and the income statement?
S-A E 200 (Ethics)
Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since
most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from
April through October. These funds are usually invested in short-term, very liquid investments,
such as stocks and bonds. Among the stocks purchased last year, was Servitronics, a company
specializing in automatic vending equipment.
The company decided not to sell its Servitronics stock at the end of last year, and has purchased
more of the stock this year. The company intends to continue to purchase stock until it holds
enough to make a takeover bid for the company. The accountants have been instructed to
continue to classify the investment as short-term until the takeover is accomplished, so that less
attention will be directed to it. (Presently, Greyhound has no long-term investment in stock at all.)
Required:
1. Is it ethical for Greyhound to attempt to take over another company? Explain.
2. Is it ethical for Greyhound to leave its investment in the short-term investment category?
Explain.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 201 (Communication)
Sue Garner is the daughter of Fred Garner, the founder and president of Big Sky Enterprises.
She has been working in various departments during school vacations throughout high school.
She burst into the accounting department excitedly one morning. She said that the stock prices of
several of the firm’s available-for-sale securities are up, and that her father said that the company
had made over $10,000 because of this jump in stock prices. She asks to see how the increase is
recorded. It is a very busy time in the accounting department, and so her question is deferred.
Required:
Prepare a brief note to answer Sue’s question.
Investments
FOR INSTRUCTOR USE ONLY
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CHALLENGE EXERCISES
*CE 1
On January 2, 2015, Parr Company purchased 100% of the common stock of Sneed Company
for $420,000. The fair value of Sneed Company’s assets and liabilities are equal to their book
values except that land has a fair value of $120,000 and building have a fair value of $260,000.
Instructions
(a) Complete the worksheet below for preparing a consolidated balance sheet. You may add
accounts to the worksheet if necessary.
(b) Prepare a consolidated balance sheet for Parr Company and Subsidiary on January 2, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
12 - 62
Investments
FOR INSTRUCTOR USE ONLY
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*CE 2
On January 2, 2015, Pine Company purchased 100% of the outstanding common shares of Seely
Company for $520,000. Any excess of cost over the book value of the net assets of Seely
Company should first be allocated to Land $55,000, and Buildings $40,000 and any remainder to
goodwill.
Instructions
(a) Complete the following worksheet below for preparing a consolidated balance sheet on the
date of acquisition. You may add accounts to the worksheet that may be necessary.
(b) Prepare a consolidated balance sheet for Pine Company and Subsidiary on January 2, 2015.
PINE COMPANY ANDSUBSIDIARY
Worksheet–Consolidated Balance Sheet
January 2, 2015 (Acquisition Date)
Assets
Pine
Company
Seely
Company
Eliminations
Consolidated
Data
Debits
Credits
Current assets
120,000
$70,000
Investment in Sneed
common stock
520,000
Land
20,000
150,000
Buildings (net)
150,000
250,000
Totals
810,000
470,000
Liabilities and Stockholders’ Equity
Current liabilities
60,000
70,000
Common stock–Pine
500,000
Common stock–Seely
270,000
Retained earnings–Pine
250,000
Retained earnings–Seely
130,000
Total
810,000
470,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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*Solution CE 2 (17–22 min.)
Investments
FOR INSTRUCTOR USE ONLY
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*CE 3
The separate balance sheets of Platt Company and its wholly owned subsidiary, Speer Company,
as of the date of acquisition are shown below.
Assets
Platt
Speer
Consolidated Data
Cash
$ 170,000
$ 57,000
Accounts Receivable
240,000
283,000
Inventory
100,000
300,000
Equipment (net)
300,000
486,000
Investment in Speer Co.
810,000
Totals
$1,620,000
$1,126,000
Liabilities and Stockholders’ Equity
Accounts Payable
250,000
166,000
Bonds Payable
120,000
150,000
Common Stock
1,000,000
630,000
Equipment (net)
250,000
180,000
Totals
$1,620,000
$1,126,000
Instructions
(Provide the amount that should appear in the Consolidated Data column for each of the selected
accounts. If the accounts should not appear in the Consolidated Data column, indicate “None”.
Assume that all accounts have normal balances and that Speer Company stock was acquired for
cash at a price equal to its book value.
