Chapter 8
Long-Term Producing Assets and Investments in Equity Securities
MULTIPLE CHOICE QUESTIONS
1. Equity investments are
a. investments in bonds of a corporation.
b. investments that pay dividends, not interest.
c. classified as long-term liabilities.
d. marketed by the SEC to any investor who wishes to buy bonds of a public company.
2. Investments in equity securities are current assets if
a. they can be sold and converted into cash on demand and a ready market exists.
b. the fair market value cannot be determined.
c. management intends to convert them into common stock within one year.
d. management owns less than 50% of the outstanding stock.
3. Income from trading and available-for-sale equity securities is recognized when
a. dividends are received from the investee due to the uncertainty of payment.
b. dividends are declared by the investee.
c. adjusting entries are made to record fair value adjustments.
d. the investee reports profits for the accounting period.
4. Trading securities are
a. readily marketable investments that management intends to hold for extended
periods.
b. always short-term investments.
c. current assets that require the equity method of accounting for investments.
d. actively ‘traded’ on the open market, but cannot be sold until they mature.
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5. Available-for-sale securities are
a. actively ‘traded’ on the open market, but cannot be sold until they mature.
b. readily marketable investments that management intends to sell for short-term
profits.
c. always short-term investments in common stock.
d. adjusted to fair value at yearend.
6. Trading securities
a. are recorded on the balance sheet at market value.
b. may have unrealized gains or losses on the balance sheet associated with price
increases or decreases.
c. are listed as long-term assets.
d. Both a and b are correct.
7. Benson Incorporated owns 32% of Denver Company’s outstanding voting stock. Benson
Incorporated should account for its investment in Denver using the
a. fair value method.
b. cost method.
c. consolidation procedure.
d. equity method.
8. Dewey Inc. owns 64% of Felicity Corporation’s outstanding voting stock. Dewey should
account for its investment in Felicity using the
a. fair value method.
b. cost method.
c. consolidation procedure.
d. mark-to-market method
9 Available-for-sale securities
a. are reported on the balance sheet at original cost.
b. may have unrealized price increases or decreases, which increase or decrease
shareholders’ equity.
c. are reported in the shareholders’ equity section of the balance sheet at fair value.
d. may have unrealized gains or losses on the income statement associated with price
increases or decreases.
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10. Which one of the following is true of the equity method?
a. The income recognized by the investor is based on the percentage of stock ownership
and the amount of earnings reported by the investee.
b. Market value adjustments are made at yearend.
c. The receipt of dividends increases net income on the investor‘s financial statements.
d. The percent of ownership must be greater than 50% to apply this method.
11. The cost method of accounting for long-term equity investments is typically used when
a. between 20% and 50% of the investee company is owned.
b. over 50% of the investee company is owned.
c. at least 20% of the investee company is owned.
d. None of the above is a consideration in choosing the cost method.
12. The equity method of accounting for long-term equity investments is typically used when
a. less than 20% of the investee company is owned.
b. between 20% and 50% of the investee company is owned.
c. over 50% of the investee company is owned.
d. any amount over 20% is acquired.
13. The consolidation procedure of accounting for long-term equity investments is typically
used
a. when less than 20% of the investee company is owned.
b. in situations when over 50% of the investee company is owned.
c. only when 100% of the investee company is owned.
d. when between 20% and 50% of the investee company is owned.
14. Which one of the following correctly reflects the effects on the financial statements
caused by a decrease in the market price of long-term available-for-sale securities?
a. Current ratio decreases.
b. Earnings per share increases.
c. Current ratio increases.
d. Earnings per share remains unchanged.
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15. The recognition of unrealized gains on marketable securities
a. depends on the classification of the securities.
b. causes net income to increase regardless of the securities’ classification.
c. causes earnings per share to increase regardless of the securities’ classification.
d. is a primary concern under the equity method.
16. Which one of the following must be met prior to classifying an investment as current?
a. It must be an equity security accounted for under the equity method.
b. The percentage of ownership must be greater than 50%.
c. The investment must be readily marketable.
d. Management must intend to hold the investment for an undetermined time period.
17. Trading securities are held primarily for the purpose of
a. anticipated increases in value over extended time periods.
b. increasing the current ratio.
c. window dressing the balance sheet.
d. generating profits on short-term price increases.
18. Which one of the following is evidence of a ready market?
a. The stock was purchased at a negotiated price from an outside party.
b. The security is actively traded on a public stock exchange.
a. A privately held corporation issued the stock.
b. The stock was purchased from an outside investor.
19. A controlling interest in another company
a. exists whenever the relationship between the investor and investee gives the investor
significant influence.
b. requires the parent to prepare consolidated financial statements.
c. is evidence that a merger will soon occur.
d. can be as low as 20 percent.
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20. Which one of the following should be classified as land on the balance sheet?
a. A shed that houses the company’s equipment.
b. Mineral rights representing gold in the soil
c. Two tracts of property that houses the company’s backup computer site
d. Sidewalks and driveways which lead to the company’s office building
21. Which of the following long-lived assets is NOT amortized or depreciated to an
expense?
a. Equipment use in production of inventory goods
b. Land improvements
c. Land
d. Company computers replaced every two years
22. The purpose of recording depreciation expense is to
a. provide cash necessary to replace plant assets when they are used up.
b. record the balance sheet amount of plant assets at replacement value.
c. match expenses with revenues using a reasonable systematic method.
d. gain a better understanding of estimating the extraction of natural resources.
23. Sage Co. purchased a tract of land paying $100,000 in cash and assumed an existing
mortgage of $70,000. The municipal tax bill disclosed an assessed valuation of
$180,000. The amount Sage should record as land connected with this acquisition is
a. $100,000.
b. $170,000.
c. $180,000.
d. $210,000.
24. The process of allocating the cost of plant and equipment over the time period of which
they are used is referred to as
a. depreciation.
b. depletion.
c. amortization.
d. deferred costs.
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25. The process of expensing the cost of patents over a period not exceeding twenty years
is referred to as
a. classification.
b. depletion.
c. depreciation.
d. amortization.
26. Accumulated depreciation is an account which
a. adjusts plant and equipment so that its balance sheet value approximates its
replacement cost.
b. is a long-term liability.
c. is equal to total depreciation expense recorded and decreases total plant and
equipment.
d. reduces intangible assets.
27. An increase in accumulated depreciation
a. increases total assets.
b. decreases total assets.
c. decreases the current ratio.
d. increases the quick ratio.
28. Equipment with a cost of $22,000 and accumulated depreciation of $15,000 was retired
with a gain of $1,000. The cash received from the disposition of equipment is
a. $7,000.
b. $8,000.
c. $6,000.
d. $14,000.
29. Depreciation is an expense that does not use cash during the period in which it is
recognized. When did (will) the cash outflow associated with the asset occur?
a. When the asset is retired
b. There is no cash outflow associated with depreciation or the asset.
c. When the replacement cost of the asset increases
d. When the asset was acquired
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30. The balance in accumulated depreciation on January 1 and December 31 is $15,000
and $18,000, respectively, during a year in which no assets were disposed. Depreciation
expense during the year is
a. $18,000.
b. $15,000.
c. $3,000.
d. $33,000.
31. The balance in accumulated depreciation on January 1 and December 31 is $12,000
and $9,000, respectively, during a year in which an asset with a cost of $4,000 and net
book value of $0 was retired. Depreciation expense for the current year is
a. $9,000.
b. $3,000.
c. $1,000.
d. $7,000.
32. Which one of the following depreciation methods will typically result in the smallest
amount of current taxes paid during the early periods of an asset‘s life?
a. 150% declining balance method.
b. Units of production method.
c. Double-declining-balance method.
d. Straight-line method.
33. Sandeep Inc. uses double-declining-balance depreciation for an asset with a 4-year life
expectancy and no salvage value. Depreciation expense for the second year of the
asset’s life is calculated by
a. [2 x Book Value]/4
b. [2 x (Cost – Salvage Value]/4
c. [(2 x Book Value)/4] – Accumulated Depreciation
d. [2 x Cost]/4
34. Kristin, Inc. depreciates its plant assets over a 10-year life with a 10% salvage value.
Using straight-line depreciation, which calculation will Kristin use during year 2 of the
asset’s life?
a. 10% x (Cost – Salvage Value)
b. (Cost – Salvage Value)/10 x 10%
c. Book Value x 10%
d. Book Value x [10% – Salvage Value]
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35. Natural resource costs
a. include rights, privileges, and benefits of an economic resource that have no
physical existence.
b. are depreciated.
c. include the cost of the equipment used to extract the natural resource.
d. include the cost of acquiring the rights to extract natural resources.
36. Which one of the following is not one of the questions asked when accounting for long-
lived assets?
a. Over what period of time should this cost be allocated?
b. What dollar amount should be included in the capitalized cost of the long-lived
asset?
c. At what rate should this cost be allocated?
d. How much will a replacement asset cost?
37. The units of production method of depreciation
a. allocates the cost of the long-lived asset based on an activity.
b. allocates an equal amount of plant asset cost to each accounting period.
c. is an accelerated method.
d. is used when an asset has no salvage value
38. Once a plant asset becomes fully depreciated, the
a. asset may no longer be used.
b. asset may still be used.
c. asset should be retired.
d. cost of the asset must be removed from the accounting records.
39. When a plant asset is sold, its original cost and its
a. market value must be removed from the accounting records.
b. accumulated depreciation must be removed from the accounting records.
c. salvage value must be expensed immediately.
d. related maintenance costs must be transferred to the income statement immediately.
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40. Intangible assets differ from plant assets in that they
a. are consumed in the current accounting period.
b. include prepaid expenses that extend beyond the current accounting period.
c. have no physical existence.
d. are matched against the revenue in the period the related revenue is recognized.
41. How will a company classify money paid for the acquisition of land on its statement of
cash flows?
a. Cash provided from operations
b. Cash used in financing activities
c. Cash provided from investing activities
d. Cash used for investing activities
42. Equipment that cost $10,000 that had a book value of $6,000 was sold for $7,000. Data
from the comparative balance sheets are:
12/31/09
12/31/08
Equipment
$420,000
$310,000
Accumulated Depreciation
59,000
36,000
Equipment purchased during 2009 cost
a. $120,000.
b. $110,000.
c. $145,000.
d. $10,000.
43. Payments for purchases of property, plant, and equipment and other productive assets
are classified as cash outflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.
44. How will a company classify money received from selling equipment no longer used in
operations on its statement of cash flows?
a. Cash provided from operations
b. Cash provided from financing activities
c. Cash provided from investing activities
d. Cash used for investing activities
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45. Which one of the following transactions is an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of cash dividend
d. Issuance of bonds payable at a discount
46. A company uses straight-line instead of the units of production method of depreciation.
Assuming a tax rate of zero, which statement is true as a result of its choice of
depreciation methods?
a. Cash flows from operations will be less than under the straight-line method
b. Cash flows from operations will be more than under the straight-line method
c. Cash used for investing activities will be more than under the straight-line method
d. Cash used for investing activities will be less than under the straight-line method.
e. Cash flows are the same as if the straight-line method had been used.
47. Which one of the following would you expect to find as part of cash flows from investing
activities?
a. The issuance of common stock in exchange for a factory
b. Cash dividends paid
c. Cash inflows from the proceeds of a sale of a building
d. The write-off of accounts receivable
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MATCHING QUESTIONS
1. Each transaction listed in 1 through 4 below relates to a long-term investment is equity
securities. Select the letters of the accounting effects (a through h) and place them in the
space provided. Transactions may have more than one answer.
Accounting Terms
a. Increase assets
b. Increase shareholders’ equity (Contributed Capital)
c. Increase shareholders’ equity (Retained Earnings)
d. Decrease liabilities
e. Decrease shareholders’ equity (Retained Earnings)
f. Decrease assets
g. Increase liabilities
h. The event is not communicated on financial statements.
____ 1. Using the equity method the market price of the investment increases above
its cost.
____ 2. Using the cost method the market price of the investment increases above its
cost.
____ 3. Using the equity method, the investee company recognizes a net loss for the
year.
____ 4. An investment in a 40%-owned subsidiary is sold for more than its carrying
value.