Exam 2019, questions and answers PDF

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1Multiple Choice Identify the choice that best completes the statement or answers the question.____ 1. Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July 2008. The following January, Shaver announced a $100,000 net income for 2008 and declared a cash dividend of $.5...

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1 Multiple Choice Identify the choice that best completes the statement or answers the question. ____

1. Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July 2008. The following January, Shaver announced a $100,000 net income for 2008 and declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common stock. The Northwick Company dividend revenue from Shaver Corp. in January 2008 would be a. $0. b. $2,500. c. $5,000. d. $10,000.

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2. On January 2, 2007, Reynolds Corporation bought 15 percent of Scorpio Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Scorpio's net incomes for the years ended December 31, 2007, and 2008, were $20,000 and $100,000, respectively. During 2008, Scorpio declared a dividend of $140,000. No dividends were declared in 2007. On December 31, 2008, the fair value of the Scorpio stock owned by Reynolds had increased to $90,000. How much should Reynolds show on its 2008 income statement as income from this investment? a. $3,150 b. $15,000 c. $21,000 d. $51,000

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3. On January 2, 2008, Adler Co. acquired 2,000 shares of Boxworth Co. common stock for $8,000 and classified these shares as available-for-sale securities. During 2008, Adler received $6,000 of cash dividends. Adler's share of Boxworth's 2008 earnings (net income) was $5,000. The fair value of Boxworth's stock on December 31, 2008, was $7 per share. Adler should report what amount in 2008 related to Boxworth Co.? a. Revenue of $6,000 b. Revenue of $12,000 c. A $1,000 decrease in the investment account d. A $1,000 increase in the investment account

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4. On January 1, 2008, Young Co. paid $500,000 for 20,000 shares of Montana Co.'s common stock and classified these shares as trading securities. Young does not have the ability to exercise significant influence over Montana. Montana declared and paid a dividend of $.50 a share to its stockholders during 2008. Montana reported net income of $260,000 for the year ended December 31, 2008. The fair value of Montana Co.'s stock at December 31, 2008, is $27 per share. What is the net asset amount (which includes both investments and any related market adjustments) attributable to the investment in Montana that will be included on Young's balance sheet at December 31, 2008? a. $530,000 b. $540,000 c. $569,000 d. $579,000

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5. Martin Co. purchased the following portfolio of trading securities during 2008 and reported the following balances at December 31, 2008. No sales occurred during 2008. All declines are considered to be temporary. Security X Y

Cost $ 80,000 140,000

Market Value at 12/31/05 $ 82,000 132,000

Z

32,000

28,000

The carrying value of the portfolio at December 31, 2008, on Martin Co.'s balance sheet would be a. $222,000. b. $240,000. c. $242,000. d. $252,000.

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6. Martin Co. purchased the following portfolio of available-for-sale securities during 2008 and reported the following balances at December 31, 2008. No sales occurred during 2008. All declines are considered to be temporary. Security X Y Z

Cost $ 80,000 140,000 32,000

Market Value at 12/31/05 $ 82,000 132,000 28,000

Martin Co. should report what amount related to the securities transactions in its 2008 income statement? a. $0 b. $2,000 unrealized loss c. $10,000 unrealized loss d. $12,000 unrealized loss

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7. Marino Corporation purchased the following portfolio of trading securities during 2008 and reported the following balances at December 31, 2008. No sales occurred during 2008. All declines are considered to be temporary. Security X Y Z

Cost $ 80,000 140,000 32,000

Market Value at 12/31/05 $ 82,000 132,000 28,000

The only transaction in 2009 was the sale of security Z for $34,000 on December 31, 2009. The market values for the other securities at December 31, 2009, were the same as at December 31, 2008. Marino's entry to record the sale of security Z would include a. a credit of $2,000 to Realized Gain on Sale of Trading Securities. b. a debit of $2,000 to Realized Gain on Sale of Trading Securities. c. a $2,000 debit to Market Adjustment-Trading Securities. d. a $4,000 debit to Market Adjustment-Trading Securities.

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8. In March of 2007, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for $450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2007. Moon changed the classification of these shares to trading securities in June of 2008 when the market value of this investment in McMahon's stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2008? a. $0 b. $45,000 c. $105,000 d. $150,000

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9. Walsh, Inc. began business on January 1, 2008, and at December 31, 2008, Walsh had the following investment portfolios of equity securities: Trading $150,000 120,000

Aggregate cost Aggregate market value

Available-For-Sale $225,000 185,000

None of the declines is judged to be other than temporary. Unrealized losses at December 31, 2008, should be recorded with corresponding charges against Stockholders' Equity

Income a. b. c. d.

$70,000 $40,000 $30,000 $0

$0 $30,000 $40,000 $70,000

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10. In January 2008, Henry Corporation acquired 20 percent of the outstanding common stock of Davis Company for $1,120,000. This investment gave Henry the ability to exercise significant influence over Davis. The book value of the acquired shares was $840,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Davis' balance sheet and that had a remaining useful life of ten years. For the year ended December 31, 2008, Davis reported net income of $252,000 and paid cash dividends of $56,000 on its common stock. What is the proper carrying value of Henry's investment in Davis at December 31, 2008? a. $1,080,800 b. $1,092,000 c. $1,131,200 d. $1,181,600

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11. On January 1, 2008, Capitech Corporation acquired Logirun, Inc. as a long-term investment for $250,000 (a 30 percent common stock interest in Logirun). On that date, Logirun had net assets with a book value and current market value of $800,000. During 2008, Logirun reported net income of $90,000 and declared and paid cash dividends of $20,000. What is the maximum amount of income that Capitech should report from this investment for 2008? a. $6,000 b. $21,000 c. $27,000 d. $33,000

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12. On January 1, 2008, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2005, was $360,000. During 2005, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. On December 31, 2005, the investment in Pirates should be recorded as a. $396,000. b. $468,000. c. $612,000. d. $624,000.

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13. On January 1, 2008, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2008, was $360,000. During 2005, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. Ignoring income taxes, Mets' statement of income for the year ended December 31, 2005, should include "Income From Investment in Pirates Corporation Stock" in the amount of a. $68,000. b. $96,000. c. $108,000. d. $120,000.

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14. On April 1, 2008, Ziba Inc. purchased as a temporary investment $100,000, face amount, 10% U.S. Treasury notes; they pay interest semiannually on January 1 and July 1. The notes were purchased at 102. Which of the following entries correctly records this purchase? a. Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 2,500 Premium on Trading Securities............... 2,000 Cash..................................... 104,500 b. Trading Securities--10% U.S. Treasury Notes. 102,000 Interest Receivable......................... 2,500 Cash..................................... 104,500 c. Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 4,500 Cash..................................... 104,500 d. Trading Securities--10% U.S. Treasury Notes. 102,000 Cash..................................... 102,000

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15. Edwards Company began business in February of 2007. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2007, balance sheet, Edwards appropriately reported a $4,000 credit balance in its Market Adjustment--Trading Securities account. There was no change during 2008 in the composition of Edward's portfolio of trading securities. Pertinent data are as follows:

Security A B C

Cost $120,000 90,000 160,000 $370,000

Market Value December 31, 2008 $126,000 80,000 157,000 $363,000

What amount of loss on these securities should be included in Edward's income statement for the year ended December 31, 2008? a. $0 b. $3,000 c. $7,000 d. $11,000

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16. Edwards Company began business in February 2007. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2007, balance sheet, Edwards appropriately reported a $4,000 debit balance in its Market Adjustment--Trading Securities account. There was no change in 2008 in the composition of Edward's portfolio of marketable equity securities held as a temporary investment. Pertinent data are as follows:

Security A B C

Cost $120,000 90,000 160,000 $370,000

Market Value December 31, 2008 $126,000 80,000 157,000 $363,000

What amount should Edwards credit to the Market Adjustment--Trading Securities account at December 31, 2008? a. $0 b. $3,000 c. $7,000 d. $11,000

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17. Tyler Company began operations in 2007. The company's trading securities portfolio, which did not change in composition during 2008, is as follows: December 31, 2008

Archer, Inc. Kelly Company Pelt Company

Cost $100,000 200,000 250,000 $550,000

Market $100,000 150,000 260,000 $510,000

Unrealized Gain (Loss) $ 0 (50,000) 10,000 $(40,000)

December 31, 2007

Archer, Inc. Kelly Company Pelt Company

Cost $100,000 200,000 250,000 $550,000

Market $135,000 210,000 180,000 $525,000

Unrealized Gain (Loss) $ 35,000 10,000 (70,000) $(25,000)

Ignoring income taxes, what amount should be reported as an unrealized loss on trading securities in Tyler's 2008 income statement? a. $0 b. $15,000 c. $25,000 d. $40,000

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18. On August 31, 2008, Stiggins Company purchased the following available-for-sale securities:

Security D E F

Cost $ 96,000 152,000 162,000

Market Value December 31, 2008 $ 84,000 158,000 146,000

On December 31, 2008, Stiggins reclassified its investment in security F from available-for-sale securities to trading securities. What total amount of loss on these securities should be included in Stiggins' income statement for the year ended December 31, 2008? a. $0 b. $16,000 c. $22,000 d. $28,000

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19. During 2007, Barney Company purchased marketable equity securities as a short- term investment and classified them as trading securities. The cost and market value at December 31, 2007, were as follows:

Security X 200 shares Y 2,000 shares Z 4,000 shares

Cost $ 8,400 51,000 94,500 $153,900

Market Value December 31, 2007 $ 10,200 45,900 88,500 $144,600

Barney sold 1,000 shares of Company Y stock on March 16, 2008, for $25 per share, incurring $1,200 in brokerage commissions and taxes. On the sale, Barney should report a realized loss of a. $0. b. $500. c. $850. d. $1,700.

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20. On October 1, Dennis Company purchased $200,000 face value 12% bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700. At what amount should this acquisition of bonds be recorded? a. $196,000 b. $196,700 c. $202,000 d. $202,700

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21. EB Company reports its income from its investment in JB Company under the equity method. EB recognized income of $150,000 from its investment in JB during the current year. JB declared and paid dividends of which EB's share was $25,000 during the current year. The effect of these activities on the operating section of the statement of cash flows of EB Company prepared for the current year under the indirect method would be: a. an increase of $150,000. b. a deduction of $150,000. c. a deduction of $125,000. d. an increase of $125,000.

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22. In January of 2007, Clyde Corporation acquired 20% of the outstanding voting common stock of Blake Company for $280,000. This investment enabled Clyde to exercise significant influence over Blake. The book value of the acquired shares was $210,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Blake’s balance sheet and that had a remaining useful life of 10 years.

For the year ended December 31, 2007, Blake reported income of $63,000 and paid cash dividends of $14,000 on its common stock. What is the proper carrying value of Clyde’s investment in Blake at December 31, 2007? a. $270,000. b. $273,000. c. $280,000. d. $282,800.

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23. The following information relates to Rowling Company’s short-term investment in equity securities available for sale at the end of 2007 and 2008 (in 000s):

Equity Security A B C

Date Acquired 7/1/2007 8/1/2007 1/1/2008

Date Cost Sold $ 28 6/30/2008 48 7/15/2008 $ 84

Selling Price $ 30 44

Market Value Dec. 31 Dec. 31 2007 2008 $ 32 40 $ 68

Rowling’s net realized and unrealized gains and losses for 2008, respectively, would be: a. $2 realized loss; $8 unrealized loss. b. $2 realized loss; $16 unrealized loss. c. $2 realized loss; $16 unrealized gain. d. $2 realized loss; $8 unrealized gain.

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24. Benjamin Corporation held the following short-term investments in equity securities classified as trading securities:

Equity Security A Common Stock B Common Stock C Common Stock

Number of Shares 1,000 1,500 2,000

Cost Per Share $ 100 50 ?

Market Price at Year-End 2007 2008 $ 104 $ 98 48 46 36 36

The valuation account is a net credit of $8,000 at the end of 2008. What was the original cost per share of the C common stock? a. $22. b. $26. c. $30. d. $36.

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25. When an entity reduces its interest in an investment in equity securities accounted for by the equity method, and changes to the fair value method, what is the initial cost value for purposes of subsequent changes in market value? a. Book value at the date of change b. Original cost c. Market value at the date of the change d. Market value at the date of acquisition

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26. A firm purchased bonds to be classified as an investment in securities available-for-sale. The bonds were purchased at a premium. Assume the market price of the bond is volatile. Given these facts, which of the following is correct? a. Less cash interest is received each year than interest revenue is recognized b. The ending valuation allowance account balance will depend on ending market value and original cost c. The ending valuation allowance account balance will depend on ending market value and original cost adjusted for amortization of premium d. The premium is ignored because the bonds are not classified as held- to-maturity

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27. Ignoring income taxes, choose the correct response below regarding total stockholders’ equity resulting from classifying all investments for a firm either as trading securities or securities available-for-sale. a. Stockholders’ equity is greater if the investments are classified as trading securities. b. Stockholders’ equity is greater if the investments are classified as available-for-sale. c. Stockholders’ equity is the same regardless of the classification. d. If there have been unrealized gains, classification as trading securities results in higher stockholders’ equity.

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28. When an enterprise increases its interest in an investment in equity securities accounted for by the fair value method, and changes to the equity method, what is the initial carrying value for purposes of subsequent application of the equity method? a. Book value at the date of the change b. Original cost plus or minus the net market value change since acquisition c. Market value at the date of the change d. The amount that would be reflected in the investment account had equity method been in use continually since the purchase of the securities.

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29. LFM owned 40 percent of EMD’s common stock, and as a result, accounted for the investment using the equity method. After the fifth year of owning the stock, the investment account had a credit balance. This could only happen if LFM: a. recorded net losses that were more than the net income. b. distributed dividends in excess of the accumulated earnings. c. had accumulated income that was less than the additional depreciation that LFM recorded as a result of purchasing the stock when market value of the assets was in excess of book value. d. experienced any, or a combination, of the conditions described in responses a, b, and c.

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30. The following information is available for an enterprise’s security investments as of December 31, 2008:

Investment Costco stock Wal-Mart bonds

Original Cost $ 40,000 $ 30,000

Valuation Allowance 12/31/2007 $3,000 dr. $ 2,000 cr.

Classification SAS TS

Market Value 12/31/2008 $ 39,000 $ 32,000

The Wal-Mart bonds were purchased at par value. SAS = securities available-for-sale TS = trading securities What is the 2008 holding gain or loss recognized in 2008 earnings and directly to stockholders’ equity? a. Earnings: $4,000 loss Stockholders’ Equity: $4,000 loss

b. c. d.

Earnings: $4,000 gain Stockholders’ Equity: $4,000 gain Earnings: $4,000 loss Stockholders’ Equity: $4,000 gain Earnings: $4,000 gain Stockholders’ Equity: $4,000 loss

The following information is available for an enterprise’s security investments as of December 31, 2008:

Investment Costco stock Wal-Mart bonds

Original Cost $ 40,000 $ 30,000

Valuation Allowance 12/31/2007 $3,000 dr. $ 2,000 cr.

Classification SAS TS

Market Value 12/31/2008 $ 39,000 $ 32,000

The Wal-Mart bonds were purchased at...