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Which of the following accounts is only created as the result of acquiring a controlling interest in another company?


A) Patents
B) Goodwill
C) Acquisition expense
D) Acquisition revenue

E) B) and C)
F) A) and B)

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A realized gain or loss is reported on the income statement when an investment account is adjusted to reflect changes in fair value.

A) True
B) False

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Rye Company purchased 15% of Lena Company's common stock during 2016 for $150,000. The Investment in Lena had a $160,000 fair value at the end of 2016 and a $140,000 fair value at the end of 2017. Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?


A) The 2016 unrealized gain is $10,000, but is not included in Rye's 2016 net income.
B) The 2017 unrealized loss is $20,000, but is not included in Rye's 2017 net income.
C) The 2017 unrealized loss is $10,000 and is included in Rye's 2017 net income.
D) The 2016 unrealized gain is $10,000 and is reported on Rye's balance sheet as a component of stockholders' equity.

E) None of the above
F) C) and D)

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On January 1, 2016, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2016, Rocker Company reported net income of $1,500,000 and dividends were declared and paid in the amount of $250,000. How much income will be reported during 2016 from the Rocker investment?


A) $225,000.
B) $37,500.
C) $187,500.
D) $250,000.

E) A) and B)
F) None of the above

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The assets of a subsidiary are depreciated and amortized over their remaining useful lives as a part of the consolidation process.

A) True
B) False

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As a long-term investment, Martha Company purchased 5,000 of the 12,500 outstanding voting shares of Stewart Corporation at $20 per share on January 1, 2016. At the end of 2016, Stewart reported net income of $100,000 and declared and paid dividends of $10,000. The market price of the Stewart stock at the end of 2016 was $23 per share. Required: Calculate the net balance in Martha's investment account at the end of 2016.

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5,000/12,500 = 40% o...

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On January 1, 2016, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment. During 2016, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2016, the shares had a fair value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 2016 balance sheet of Palmer, Inc.?


A) $150,000.
B) $157,000.
C) $145,000.
D) $163,000.

E) None of the above
F) All of the above

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Rye Company purchased 15% of Lena Company's common stock during 2016 for $150,000. The Investment in Lena had a $160,000 fair value at the end of 2016 and a $140,000 fair value at the end of 2017. Which of the following statements is correct if Rye classifies the investment as a trading security?


A) The 2016 unrealized gain is $10,000 and is included in Rye's 2016 net income.
B) The 2017 unrealized loss is $20,000, but is not included in Rye's 2017 net income.
C) The 2017 unrealized loss is $10,000 and is included in Rye's 2017 net income.
D) The 2016 unrealized gain is $10,000 and is reported on Rye's balance sheet as a component of other comprehensive income.

E) A) and B)
F) None of the above

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Required: A.Discuss the similarities of accounting for available-for-sale and trading securities portfolios. B.Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

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A. The similarities of accounting for av...

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On July 1, 2016, Surf Company purchased long-term investments in available-for-sale securities as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share. The quoted market prices per share on December 31, 2016 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the balance sheet at December 31, 2016 would be which of the following?


A) $77,000.
B) $73,500.
C) $71,500.
D) $75,000.

E) B) and C)
F) All of the above

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Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2016, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2016: Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2016, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2016: At what amount should Gilman Company report the Burke investment on the December 31, 2016 balance sheet? A) $4,218,000. B) $4,000,000. C) $4,124,000. D) $3,800,000. At what amount should Gilman Company report the Burke investment on the December 31, 2016 balance sheet?


A) $4,218,000.
B) $4,000,000.
C) $4,124,000.
D) $3,800,000.

E) C) and D)
F) A) and B)

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Significant influence over the operating and financial policies of another company would not be indicated by:


A) Participation on its board of directors.
B) Participation in its policy-making process.
C) Evidence of material transactions between the two companies.
D) Both firms using the services of the same law firms and investment advisors.

E) A) and D)
F) None of the above

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Which of the following is the best description of investments in trading securities?


A) Investments in bonds that management intends to hold to maturity.
B) Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future.
C) Investments in more than fifty percent of the voting stock of another company.
D) Investments that provide the investor significant influence over the investee, but not control over the investee.

E) A) and B)
F) None of the above

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Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, and Heartfelt accounts for the investment using the equity method. During 2016, Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2016. At what amount is the Candle investment reported on the December 31, 2016 balance sheet of Heartfelt Company?


A) $496,000.
B) $500,000.
C) $536,000.
D) $540,000.

E) B) and D)
F) C) and D)

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Barnum Company owns an investment and uses the equity method of accounting. Under the equity method of accounting, Barnum would decrease the Investment in Affiliates account for the proportionate share of the affiliate's reported net loss.

A) True
B) False

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Which of the following statements is false with regard to investments and the cash flow statement?


A) Dividends received from stock investments increase cash flows from investing activities.
B) Income from investments accounted for using the equity method does not create cash flows.
C) Sale of stock investments is a cash inflow from investing activities.
D) Dividends received from stock investments accounted for using the equity method are not reported as income but are reported as cash flows.

E) A) and C)
F) A) and B)

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McGinn Company purchased 10% of RJ Company's common stock during 2016 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2016 and a $105,000 fair value at the end of 2017. Which of the following statements is correct if McGinn classifies the investment as a trading security?


A) The 2016 unrealized loss is $10,000, but is not included in McGinn's 2016 net income.
B) The 2017 unrealized gain is $15,000, but is not included in McGinn's 2017 net income.
C) The 2017 unrealized gain is $15,000 and is included in McGinn's 2017 net income.
D) The 2016 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity and is not reported on the income statement.

E) All of the above
F) None of the above

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Rye Company purchased 15% of Lena Company's common stock during 2016 for $150,000. The Investment in Lena had a $160,000 fair value at the end of 2016 and a $140,000 fair value at the end of 2017. Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 2018 for $148,000?


A) The 2018 realized loss is $2,000 and is included in Rye's 2018 income statement.
B) The 2018 realized gain is $8,000 and is included in Rye's 2018 income statement.
C) The 2018 unrealized gain is $8,000 and is included in Rye's 2018 income statement.
D) The 2018 unrealized loss is $2,000 and is included in Rye's 2018 income statement.

E) B) and C)
F) C) and D)

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On January 1, 2016, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2016, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2016, the shares had a fair value of $160,000. How much investment income will Turtle report for equity in affiliate earnings during 2016?


A) $12,000.
B) $22,000.
C) $10,500.
D) $1,500.

E) B) and D)
F) C) and D)

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When is the equity method not used to account for a long-term investment in common stock?


A) When the investment is 30% of the voting stock and significant influence can be achieved.
B) When the investment is 15% and significant influence can be achieved.
C) When the investment is greater than 50% of the voting stock and control is achieved.
D) When the investment is 40% of the voting stock and significant influence can be achieveD.The investment must be 50% or less of the voting stock and the ability to exert significant influence must exist.

E) A) and B)
F) B) and C)

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