(Test Bank) Financial Accounting

Thomas,Tietz, 13

Business

Test Bank

13th Edition

• $15.00 $50.00

---

Description

Test Bank for Financial Accounting, The downloadable file consists of 850 pages, and the total size of the file is 6.24 MB. Purchase now only for highly discounted price.

Author(s): Thomas, Tietz

---

---

Study Note Preview

1 Copyright © 2022 Pearson Education, Inc. Financial Accounting, 13e (Thomas/Tietz) Appendix E: Investments Learning Objective E-1 1) To be classified as a current asset, an investment must either be liquid or the investor must intend to use it to pay a current liability. Answer: FALSE Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) One reason a company invests in securities of other companies is because they may have a long-term strategic plan. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 3) GAAP rules for investments differ based on whether an investment is composed of equity securities or debt securities. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 4) Equity securities are investments in bonds or notes payable. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 5) If an investor owns 25% of the voting stock of an investee, the investor has controlling influence. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2 Copyright © 2022 Pearson Education, Inc. 6) Investments with insignificant influence: A) are reported at amortized cost on the balance sheet. B) are more liquid than cash. C) are reported at historical cost on the balance sheet. D) are reported using the fair value method on the balance sheet. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 7) Investments with insignificant influence are reported on the: A) income statement using fair value method. B) balance sheet at cost. C) balance sheet using fair value method. D) income statement at cost. Answer: C Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 8) To be classified as a current asset, an investment must meet which of the following criteria: A) the investment must be liquid. B) the investor must intend to either convert the investment to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability. C) the investment must be easily convertible to cash. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 9) Marathon Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Marathon Corporation is the ________ and Mini Company is the ________. A) investee; investor B) investor; investee C) parent company; subsidiary company D) controlling company; noncontrolling company Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3 Copyright © 2022 Pearson Education, Inc. 10) When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is reported on the balance sheet as: A) a current asset. B) a long-term asset. C) stockholders' equity. D) a cash equivalent. Answer: A Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 11) Long-term investments include: A) stocks and bonds that are not liquid or readily convertible to cash. B) securities that the investor expects to hold longer than one year or operating cycle, whichever is longer. C) securities reported in the non-current asset section of the balance sheet. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: D Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Mason Corporation owns 1,500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: C Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4 Copyright © 2022 Pearson Education, Inc. 14) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective E-2 1) Unrealized gains and losses on equity securities when the investor has insignificant influence are reported on the income statement. Answer: TRUE Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) Cash dividends received on stock investments with less than 20% ownership of the investee should be credited to the Equity-Method Investment account. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Investments in equity securities (stock) can be classified as either current or long-term assets depending on the company's ability and intent to hold or sell them. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 5 Copyright © 2022 Pearson Education, Inc. 4) GAAP requires equity securities (stocks) that comprise an insignificant influence in other companies to be recorded using the fair value method—regardless of whether they are classified as current or long-term assets. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 5) Fair (market) value is the amount the owner of a security paid for it. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) An unrealized gain on an equity security when the investor has insignificant influence: A) is recorded when an investment is sold for more than its cost. B) is recorded when an investment is sold for less than its cost. C) is recorded when the fair market value of the investment is more than its cost, but it has not been sold. D) is recorded when the fair market value of the investment is less than its cost, but it has not been sold. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A company's investment with insignificant influence has a fair market value which exceeds its cost. When recording the year-end adjustment, the: A) Investment in Equity Securities account will be credited. B) Unrealized Gain on Equity Securities account will be credited. C) Unrealized Loss on Equity Securities account will be debited. D) Unrealized Loss on Equity Securities account will be credited. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6 Copyright © 2022 Pearson Education, Inc. 8) Unrealized gains on equity securities when the investor has insignificant influence are reported on the: A) statement of cash flows as investing activities. B) balance sheet as an element of other comprehensive income. C) statement of cash flows as financing activities. D) income statement as Other Income. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) Investments in equity securities with insignificant influence were purchased for $400,000, and had a fair value of $410,000 at the end of the year. The adjusting entry to record this difference includes a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Unrealized Loss on Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Michael Company's investment in equity securities with insignificant influence had a fair value of $34,200 at the end of the prior year. Management decided to sell the investment. The investment was purchased for $30,300. If Michael Company sold this investment for $47,400, Michael will have a(n): A) Gain on Sale of Equity Securities for $17,100. B) Gain on Sale of Equity Securities for $13,200. C) Unrealized Loss on Equity Securities of $13,200. D) Unrealized Gain on Equity Securities of $17,100. Answer: B Explanation: $47,400 - $34,200 = $13,200 gain Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7 Copyright © 2022 Pearson Education, Inc. 11) When a company receives a cash dividend from equity securities with insignificant influence, the journal entry is: A) debit to Investment in Equity Securities and credit Cash. B) debit to Cash and credit to Dividend Revenue. C) debit to Dividend Revenue and credit to Cash. D) debit to Cash and credit to Investment in Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 12) The Investment in Equity Securities account when the investor has insignificant influence is reported on the: A) income statement using the equity method. B) income statement using the fair value method. C) balance sheet using the equity method. D) balance sheet using the fair value method. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 13) At the beginning of the year, an investment in equity securities with insignificant influence was purchased for $400,000, and it has a fair value of $420,000 at the end of the year. The year-end journal entry will have a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Gain on Sale of Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 8 Copyright © 2022 Pearson Education, Inc. 14) If an investor owns less than 20% of the common stock of another company as a long-term investment: A) the equity method of accounting should be used for the investment. B) the investor has a controlling interest in the investee. C) the investor usually has little or no influence on the investee. D) the investor has significant influence on the investee. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) For accounting purposes, the method used to account for long-term investments in common stock is determined by: A) the size of the investor. B) the size of the investor when compared to the size of the investee. C) vote by the Board of Directors of the investor. D) the investor's percentage ownership of the investee's stock. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) If 15% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is: A) the equity method. B) the consolidation method. C) the fair value method. D) the lower of cost or market method. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The fair value method of accounting for long-term investments in stock should be used when the: A) investor owns less than 20% of the outstanding stock of the investee. B) investor has significant influence over the investee's operating decisions and policies. C) investor has little or no influence on the investee. D) A and C. Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9 Copyright © 2022 Pearson Education, Inc. 18) An investor receives a cash dividend from an investment with 3% ownership and insignificant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Interest Revenue C) a debit to Cash and credit to Equity-Method Investment D) a debit to Cash and credit to Interest Receivable Answer: A Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Jones Corporation purchases $600,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. What is the journal entry on December 31, 2024 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 B) a debit to Unrealized Loss on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 C) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Loss on Equity Securities $50,000 D) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Gain on Equity Securities $50,000 Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10 Copyright © 2022 Pearson Education, Inc. 20) On January 1, 2022, Max Company purchased 1,000 shares of Engel common stock at $41 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $45 per share. On February 1, 2023, the Engel's stock is sold for $50 per share. What is the journal entry on December 31, 2022 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 B) a debit to Unrealized Loss on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 C) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Loss on Equity Securities $4,000 D) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Gain on Equity Securities $4,000 Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) On January 1, 2022, Max Company purchased 6,000 shares of Engel common stock at $49 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $54 per share. On February 1, 2023, the Engel's stock is sold for $59 per share. What is the journal entry on February 1, 2023 for the sale of the stock? A) a debit to cash for $354,000; credit to Investment in Equity Securities for $324,000 and credit to Gain on Sale of Equity Securities for $30,000. B) a debit to cash for $354,000; credit to Investment in Equity Securities for $294,000 and credit to Gain on Sale of Equity Securities for $60,000. C) a debit to cash for $294,000 and debit to Loss on Sale of Equity Securities for $60,000; credit to Investment in Equity Securities for $354,000. D) a debit to cash for $354,000; credit to Investment in Equity Securities for $354,000. Answer: A Explanation: Date Accounts Debit Credit 2023 2/1 Cash (6,000 × $59 = $354,000) 354,000 Investment in Equity Securities (6,000 × $54) 324,000 Gain on Sale of Equity Securities 30,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11 Copyright © 2022 Pearson Education, Inc. 22) Smith Corporation purchases $620,000 of TMI Corporation's stock on October 18, 2024 at cost. Smith owns less than 2% of TMI's outstanding shares, and thus has insignificant influence. On December 1, 2024, Smith Corporation received a cash dividend of $12,000 on the TMI Corporation's stock. On December 31, 2024, Smith Corporation's investment in TMI Corporation has a fair value of $600,000. Required: Prepare the necessary journal entries. Explanations are not required. Date Accounts Debit Credit Answer: Date Accounts Debit Credit Oct. 18, 2024 Investment in Equity Securities 620,000 Cash 620,000 Dec. 1, 2024 Cash 12,000 Dividend Revenue 12,000 Dec. 31, 2024 Unrealized Loss on Equity Securities 20,000 Investment in Equity Securities 20,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12 Copyright © 2022 Pearson Education, Inc. 23) Jones Corporation purchases $500,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. Required: Prepare the necessary journal entries. Explanations are not required. Date Accounts Debit Credit Answer: Date Accounts Debit Credit Oct. 1, 2024 Investment in Equity Securities 500,000 Cash 500,000 Dec. 1, 2024 Cash 15,000 Dividend Revenue 15,000 Dec. 31, 2024 Unrealized Loss on Equity Securities 50,000 Investment in Equity Securities 50,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13 Copyright © 2022 Pearson Education, Inc. 24) On January 1, 2022, Innocente Company purchased 1,000 shares of Entel common stock at $40 per share. Innocente owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Entel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Entel's stock is $44 per share. On February 1, 2023, the Entel's stock is sold for $48 per share. Prepare the journal entries on: 1. January 1, 2022 2. June 1, 2022 3. December 31, 2022 4. February 1, 2023 Explanations are not required. Answer: Date Accounts Debit Credit 2022 1/1 Investment in Equity Securities 40,000 Cash (1,000 × $40 = $40,000) 40,000 6/1 Cash (1,000 × $0.5) 500 Dividend Revenue 500 2022 12/31 Investment in Equity Securities 4,000 Unrealized Gain on Equity Securities 4,000 (1,000 × ($44 - $40)) 2023 2/1 Cash (1,000 × $48 = $48,000) 48,000 Investment in Equity Securities 44,000 Gain on Sale of Equity Securities 4,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14 Copyright © 2022 Pearson Education, Inc. Learning Objective E-3 1) When an investor owns 35% of the stock of another business, cash dividends received from the investee company are recorded by decreasing the Equity-method Investment account. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The equity method is used to account for stock investments in which the investor company owns less than 20% of the outstanding stock of the investee. Answer: FALSE Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Investments accounted for by the equity method are recorded initially at cost. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) If an investor owns between 20% and 50% of an investee's voting stock, it is assumed that the investor has significant influence over the investee. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Under the equity method, when the investee reports net income, the Equity-method Investment account increases. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement