Advanced Financial Accounting Christensen 10th Edition Test Bank

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Advanced Financial Accounting
Advanced Financial Accounting Christensen Cottrell Baker
Advanced Financial Accounting Christensen Cottrell Baker 10th
Advanced Financial Accounting Christensen Cottrell Baker 10th Test Bank
Advanced Financial Accounting Christensen 10th Edition Test Bank

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Chapter 02
Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Multiple Choice Questions

1. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

A. Cost method

B. Consolidation

C. Equity method

D. Merger method

2. Usually, an investment of 20 to 50 percent in another company’s voting stock is reported under the:

A. cost method

B. equity method

C. full consolidation method

D. fair value method

3. From an investor’s point of view, a liquidating dividend from an investee is:

A. a dividend declared by the investee in excess of its earnings in the current year

B. a dividend declared by the investee in excess of its earnings since acquisition by the investor

C. any dividend declared by the investee since acquisition

D. a dividend declared by the investee in excess of the investee’s retained earnings

4. Which of the following observations is NOT consistent with the cost method of accounting?

A. Investee dividends from earnings since acquisition by investor are treated as a reduction of the investment.

B. Investments are carried by the investor at historical cost.

C. No journal entry is made regarding the earnings of the investee.

D. It is consistent with the treatment normally accorded noncurrent assets.

5. On January 1, 20X9 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlyingvalue. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon’s investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0

B. $16,500

C. $4,500

D. $12,000

6. On January 1, 20X8, William Company acquired 30 percent of eGate Company’s common stock, at underlyingvalue of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment.

Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000

B. $21,600

C. $18,600

D. $54,000

7. On January 1, 20X8, William Company acquired 30 percent of eGate Company’s common stock, at underlyingvalue of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment.

Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?

A. $45,000

B. $42,000

C. $62,000

D. $35,000

8. On January 1, 20X8, William Company acquired 30 percent of eGate Company’s common stock, at underlyingvalue of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment.

Based on the preceding information, what amount would be reported by William Company as the balance in its investment account on December 31, 20X8?

A. $100,000

B. $123,400

C. $120,400

D. $142,000

9. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8, if it used the equity method of accounting?

A. $7,500

B. $11,250

C. $18,750

D. $26,250

10. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the equity method of accounting?

A. $108,250

B. $118,750

C. $100,000

D. $122,500

11. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X7 if it used the fair value option to account for its investment in Spiel?

A. $17,500

B. $12,500

C. $11,250

D. $7,500

12. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8 if it used the fair value option to account for its investment in Spiel?

A. $11,250

B. $2,500

C. $6,250

D. $7,500

13. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the fair value option to account for its investment in Spiel?

A. $105,000

B. $118,750

C. $100,000

D. $122,500

14. A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

A. only a footnote disclosure

B. that the cumulative amount of the change be shown as a line item on the income statement, net of tax

C. that the change be accounted for as an unrealized gain included in other comprehensive income

D. retroactive restatement as if the investor always had used the equity method

15. Under the equity method of accounting for a stock investment, the investment initially should be recorded at:

A. cost

B. cost minus any differential

C. proportionate share of the fair value of the investee company’s net assets

D. proportionate share of thevalue of the investee company’s net assets

16. Which of the following observations is consistent with the equity method of accounting?

A. Dividends declared by the investee are treated as income by the investor.

B. It is used when the investor lacks the ability to exercise significant influence over the investee.

C. It may be used in place of consolidation.

D. Its primary use is in reporting nonsubsidiary investments.

17. Note: This is a Kaplan CPA Review Question

On July 1, 20X4, Denver Corp. purchased 3,000 shares of Eagle Co.’s 10,000 outstanding shares of common stock for $20 per share. On December 15, 20X4, Eagle paid $40,000 in dividends to its common stockholders. Eagle’s net income for the year ended December 31, 20X4, was $120,000, earned evenly throughout the year. In its 20X4 income statement, what amount of income from this investment should Denver report?

A. $12,000

B. $36,000

C. $18,000

D. $6,000

18. Note: This is a Kaplan CPA Review Question

On January 2, 20X5, Well Co. purchased 10 percent of Rea, Inc.’s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well’s officers are a majority on Rea’s board of directors. As a result, Well is able to exercise significant influence over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its December 31, 20X5, balance sheet, what amount should Well report as investment in Rea?

A. $385,000

B. $450,000

C. $400,000

D. $435,000

19. Note: This is a Kaplan CPA Review Question

The Jamestown Corporation (Jamestown) reported net income for the current year of $200,000 and paid cash dividends of $30,000. The Stadium Company (Stadium) holds 22 percent of the outstanding voting stock of Jamestown. However, another corporation holds the other 78 percent ownership and does not take Stadium’s wants and wishes into consideration when making financing and operating decisions for Jamestown. What investment income should Stadium recognize for the current year?

A. $6,600

B. $0

C. $44,000

D. $50,600

20. Note: This is a Kaplan CPA Review Question

Grant, Inc. acquired 30 percent of South Co.’s voting stock for $200,000 on January 2, 20X4. Grant’s 30 percent interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5.

What amount should Grant include in its 20X4 income statement as a result of the investment?

A. $15,000

B. $24,000

C. $50,000

D. $80,000

21. Note: This is a Kaplan CPA Review Question

Grant, Inc. acquired 30 percent of South Co.’s voting stock for $200,000 on January 2, 20X4. Grant’s 30 percent interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5.

In Grant’s December 31, 20X4, balance sheet, what should be the carrying amount of this investment?

A. $224,000

B. $200,000

C. $234,000

D. $209,000