Wise Company owns 30% interest in the stock of Dark Corporation. During the year, Dark pays $20,000 in dividends to Wise, and reports $200,000 in net income. Wise Company’s investment in Dark will increase Wise’s net income by
On January 1, 2013, Audrey Corp. paid $800,000 for 100,000 shares of Off Company’s common stock, which represents 40% of Off’s outstanding common stock. Off reported net income of $200,000 and paid cash dividends of $60,000 during 2013. Audrey should report the investment in Off Company on its December 31, 2013, balance sheet at:
Corporations invest in other companies for all of the following reasons except to
1) Dayton Corporation purchased 1,000 shares of Kart common stock at $77 per share plus $2,000 brokerage fees as a short-term investment. The shares were subsequently sold at $80 per share less $3,400 brokerage fees. The cost of the securities purchased and gain or loss on the sale were
Cost
Gain or Loss
$79,000
$2,400 loss
$77,000
$1,400 loss
$3,000 gain
$2,000 gain
2) The company whose stock is owned by the parent company is called the
sibling company.
controlled company.
subsidiary company.
investee company.
3) Debt investments that are held to maturity are recorded at
fair value.
maturity value.
original cost.
amortized cost.
4) The balance sheet presentation of an unrealized loss on a non-trading security is similar to the statement presentation of
discount on bonds payable.
treasury stock.
allowance for doubtful accounts.
prepaid expenses.
5) An unrealized loss on non-trading securities is
reported under Other Expenses and Losses in the income statement.
reported as a separate component of stockholders’ equity.
deducted from the cost of the investment.
closed-out at the end of the accounting period
6) The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment
enables the investor to exercise significant influence over the investee.
is obtained by an exchange of stock for stock.
ensures a source of supply of raw materials for the investor.
is composed of common stock and it is the investor’s intent to vote the common stock
7) On January 1, 2013, Danner Company purchased at face value, a $1,000, 8% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end. The entry for the receipt of interest on July 1, 2013, is
Cash
80
Interest Revenue
Interest Receivable
40
8) If a company acquires a 40% common stock interest in another company,
the equity method is usually applicable.
all influence is classified as controlling.
the cost method is usually applicable.
the ability to exert significant influence over the activities of the investee does not exist.
9) If a short-term debt investment is sold, the Investment account is
debited for the cost of the bonds at the sale date.
credited for the cost of the bonds at the sale date.
credited for the face value of the bonds at the sale date.
credited for the fair value of the bonds at the sale date.
10) Cost and fair value data for the trading securities of Carson Company at December 31, 2013, are $115,000 and $85,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value?
Dec. 31
Unrealized Loss – Income
30,000
Trading Securities
Fair Value Adjustment – Trading
Unrealized Gain – Income
11) Nadia Corp. has common stock of $5,500,000, retained earnings of $3,000,000, unrealized gains on trading securities of $100,000 and unrealized losses on non-trading securities of $200,000. What is the total amount of its stockholders’ equity?
$8,600,000
$8,300,000
$8,500,000
$8,400,000
12) On January 1, Talent Company purchased as a short-term investment a $1,000, 8% bond for $1,050. 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?
1,200
Debt Investments
1,050
Gain on Sale of Debt Investments
150
1,220
20
13) Temper Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale of Debt Investments for
$2,000.
$1,700.
$1,400.
$2,300.
14) If the cost method is used to account for a long-term investment in common stock,
it is presumed that the investor has significant influence on the investee.
the Investment account may be, at times, greater than the acquisition cost.
the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
net income of the investee is not considered earned by the investor until dividends are declared by the investee.
15) When bonds are sold, the gain or loss on sale is the difference between the
sales price and the cost of the bonds.
net proceeds and the cost of the bonds.
sales price and the fair value of the bonds.
net proceeds and the fair value of the bonds
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