江西财经大学高级财务会计国际学院题库chapter_02

导读:AdvancedAccounting,11e(Beams/Anthony/Bettinghaus/Smith)Chapter2StockInvestments—InvestorAccountingandReportingMultipleChoiceQuestions1)Whatmethodofaccountingwillgenerallybeusedwhen

江西财经大学高级财务会计国际学院题库chapter_02

Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

Chapter 2 Stock Investments — Investor Accounting and Reporting

Multiple Choice Questions

1) What method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company? A) Only the fair value method may be used. B) Only the equity method may be used.

C) Either the fair value method or the equity method may be used, depending upon the relationship between the companies.

D) Neither the fair value method nor the equity method may be used, regardless of the level of ownership. Answer: C

Objective: LO1 Difficulty: Easy

2) What method of accounting will generally be used when one company purchases between 20% to 50% of the outstanding stock of another company? A) Only the fair value method may be used. B) Only the equity method may be used.

C) Either the fair value method or the equity method may be used, depending upon the relationship between the companies.

D) Neither the fair value method nor the equity method may be used, regardless of the level of ownership. Answer: C

Objective: LO1 Difficulty: Easy

3) Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis? A) Amortization expense of goodwill

B) Depreciation expense on the excess fair value attributed to machinery

C) Amortization expense on the excess fair value attributed to lease agreements D) Interest expense on the excess fair value attributed to long-term bonds payable Answer: A

Objective: LO5

Difficulty: Moderate

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4) Which one of the following statements is correct for an investor company?

A) The balance in the Investment in Osprey Co. account can be reduced to represent a decline in the fair market value of the investment, but will not be adjusted if the fair market value increases.

B) Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss.

C) Once the balance in the Investment in Osprey Co. is reduced to zero, it will not be reduced any further. D) Under the equity method, the balance in the Investment in Osprey Co. account will increase when cash dividends are received. Answer: C

Objective: LO2

Difficulty: Moderate

5) Pinkerton Inc. owns 10% of Sable Company. In the most recent year, Sable had net earnings of $40,000 and paid dividends of $6,000. Pinkerton's accountant mistakenly assumed Pinkerton had considerable influence over Sable and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively?

A) By using the equity method, the accountant has understated the investment account and overstated the net earnings.

B) By using the equity method, the accountant has overstated the investment account and understated the net earnings.

C) By using the equity method, the accountant has understated the investment account and understated the net earnings.

D) By using the equity method, the accountant has overstated the investment account and overstated the net earnings. Answer: D

Objective: LO3

Difficulty: Moderate

6) Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the following circumstances?

A) Griffon has surrendered significant stockholder rights by agreement between Griffon and Duck. B) Griffon has been unable to secure a position on the Duck Corporation's Board of Directors. C) Griffon has inadequate or untimely information to apply the equity method. D) The ownership of Duck Corporation is diverse. Answer: D

Objective: LO1 Difficulty: Easy

7) Pond Corporation uses the fair value method of accounting for its investment in Swan Company. Which one of the following events would affect the Investment in Swan Co. account? A) Investee losses

B) Investee dividend payments

C) An increase in the investee's share price from last period

D) All of the above would affect the Investment in Swan Co. account. Answer: C

Objective: LO2 Difficulty: Easy

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8) Sadie Corporation's stockholders' equity at December 31, 2010 included the following:

6% Preferred stock, $10 par value $1,000,000 Common stock, $1 par value 10,000,000 Other paid-in capital—common 4,000,000 Retained earnings 4,000,000 $19,000,000

Pilga Corporation purchased a 30% interest in Sadie's common stock from other shareholders on January 1, 2011 for $5,800,000. What was the book value of Pilga's investment in Sadie on January 1, 2011? A) $5,400,000 B) $5,700,000 C) $7,120,000 D) $7,440,000 Answer: A

Explanation: A) Total stockholders' equity$19,000,000 Less: preferred equity (1,000,000) Equals: common equity 18,000,000 x Pilga's percentage × 30% Book value of Pilga investment $5,400,000 Objective: LO5

Difficulty: Moderate

9) Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2008 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2010 was $440,000. The original excess purchase

transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2011, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2011 for $500,000, how much gain was recognized on this transaction? A) $278,950 B) $280,000 C) $280,950 D) $282,000 Answer: C

Explanation: C)

Dec 31, 2010 investment balance $440,000 Jabiru's interest in Fish's income from Jan 1-July 31: ($4,000 × 7 months × 20%) = 5,600 Less: Dividends ($20,000 × 20%) = (4,000) Less: Seven months of patent amortization: $500 × 7 = (3,500) Investment account balance at July 31, 2011 $438,100

Amount received from sale: $500,000 Book value of one-half interest (219,050) Gain on sale $280,950 Objective: LO5

Difficulty: Moderate

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Copyright ? 2012 Pearson Education, Inc. Publishing as Prentice Hall

10) An investor uses the cost method of accounting for its investment in common stock. During the

current year, the investor received $25,000 in dividends, an amount that exceeded the investor's share of the investee company's undistributed income since the investment was acquired. The investor should report dividend income of what amount? A) $25,000

B) $25,000 less the amount in excess of its share of undistributed income since the investment was acquired

C) $25,000 less the amount that is not in excess of its share of undistributed income since the investment was acquired

D) None of the above is correct. Answer: A

Objective: LO3 Difficulty: Easy

Use the following information to answer the question(s) below.

On January 1, 2011, Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings. Book values of Sunflower's net assets equaled their fair values on this date. Sunflower's net income and dividends for 2011 through 2013 were as follows: 2011 2012 2013 Net income $ 8,000 $ 10,000 $15,000 Dividends paid 5,000 5,000 5,000

11) Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2013 was A) $76,700. B) $80,000. C) $83,300. D) $95,000. Answer: B

Explanation: B) Income and dividends are not added or deducted from the investment account under the cost method unless liquidating dividends are received

Objective: LO3

Difficulty: Moderate

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12) Assume that Pansy has significant influence and uses the equity method of accounting for its

investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2013 was A) $78,200. B) $80,000. C) $81,800. D) $83,300. Answer: C

Explanation: C)

Initial Investment in Sunflower $80,000 adjustments: 2011: 10% × ($8,000-$5,000)= 300 2012: 10% × ($10,000-$5,000)= 500 2013: 10% × ($15,000-$5,000)= 1,000 Investment balance at 12/31/2013: $81,800 Objective: LO3

Difficulty: Moderate

13) Pyming Corporation accounts for its 40% investment in Sillabog Company using the equity method. On the date of the original investment, fair values were equal to the book values except for a patent, which cost Pyming an additional $40,000. The patent had an estimated life of 10 years. Sillabog has a steady net income of $20,000 per year and consistently pays out 40% of its net income as dividends to its shareholders. Which one of the following statements is correct?

A) The net change in the investment account for each full year will be a debit of $8,000. B) The net change in the investment account for each full year will be a debit of $4,800. C) The net change in the investment account for each full year will be a debit of $800. D) The net change in the investment account for each full year will be a credit of $800. Answer: C

Objective: LO3

Difficulty: Moderate

14) Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1, 2010, but was not able to exercise significant influence over Lilypad. During 2011, Jacana

reported income of $120,000, excluding its income from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000 during 2011 and paid dividends of $20,000. Jacana should report net income for 2011 in the amount of A) $115,000. B) $120,000. C) $125,000. D) $130,000. Answer: C

Explanation: C)

Jacana's separate income $ 120,000 Dividend income from Lilypad equals $20,000 × 25% = 5,000 Jacana's net income = $ 125,000 Objective: LO4

Difficulty: Moderate

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Copyright ? 2012 Pearson Education, Inc. Publishing as Prentice Hall

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