Gleim Test #1 – Flashcards
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Question: 1 Pendragon Co. issues 200,000 shares of $5 par value common stock to acquire Squire Co. in a business combination. The market value of Pendragon's common stock is $12. Legal and consulting fees incurred in relationship to the combination are $110,000. Direct registration and issuance costs for the common stock are $35,000. What should be recorded in Pendragon's additional paid-in capital (APIC) for this business combination? A. $1,400,000 B. $1,545,000 C. $1,365,000 D. $1,255,000
answer
C. $1,365,000
question
Fact Pattern: Grant, Inc., acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1, and did not elect the fair value option. The price equaled the carrying amount and the fair value of the interest purchased in South's net assets. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the 6 months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2. In Grant's December 31, Year 1, balance sheet, what should be the carrying amount of this investment? A. $200,000 B. $230,000 C. $224,000 D. $209,000
answer
D. $209,000
question
Birk Co. purchased 30% of Sled Co.'s outstanding common stock on December 31 for $200,000. On that date, Sled's equity was $500,000, and the fair value of its net assets was $600,000. On December 31, what amount of goodwill should Birk attribute to this acquisition? A. $50,000 B. $30,000 C. $20,000 D. $0
answer
C. $20,000
question
Lee Corp. reported the following for an equity security on its December 31, Year 1, balance sheet: Neu Corp. common stock, at cost $100,000 Unrealized holding loss 20,000 At December 31, Year 2, the fair value of Lee's investment in the Neu Corp. stock was $85,000. All changes in fair value are deemed to be temporary. As a result of the Year 2 increase in this stock's fair value, Lee's Year 2 earnings should include A. No gain or loss. B. An unrealized loss of $15,000. C. An unrealized gain of $5,000. D. A realized gain of $5,000.
answer
A. No gain or loss.
question
Dates on which the fair value option (FVO) may be elected include A. Acquisition of an interest in a variable interest entity required to be consolidated. B. Issuance of a financial instrument partly classified in equity. C. Recognition of a capital lease liability. D. The date on which financial assets no longer qualify for fair value reporting under a specialized accounting principle.
answer
D. The date on which financial assets no longer qualify for fair value reporting under a specialized accounting principle.
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On both December 31, Year 1, and December 31, Year 2, Kopp Co.'s only available-for-sale security had the same fair value, which was below amortized cost. Kopp considered the decline in value to be temporary in Year 1 but other than temporary in Year 2. At the end of both years the security was classified as a noncurrent asset. Kopp could not exercise significant influence over the investee, and the security was not the hedged item in a fair value hedge. What should be the effects of the determination that the decline was other than temporary on Kopp's Year 2 net noncurrent assets and net income? A. Decrease in both net noncurrent assets and net income. B. Decrease in net noncurrent assets and no effect on net income. C. No effect on both net noncurrent assets and net income. D. No effect on net noncurrent assets and decrease in net income.
answer
D. No effect on net noncurrent assets and decrease in net income.
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How should the acquirer recognize a bargain purchase in a business acquisition? A. As a deferred gain that is amortized into earnings over the estimated future periods benefited. B. As goodwill in the statement of financial position. C. As a gain in earnings at the acquisition date. D. As negative goodwill in the statement of financial position.
answer
C. As a gain in earnings at the acquisition date.
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According to GAAP, a business must A. Be capable of being managed to provide economic benefits. B. Have inputs, outputs, and processes. C. Generate a return. D. Have goodwill.
answer
A. Be capable of being managed to provide economic benefits.
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An entity should report the marketable equity securities that it has classified as trading at A. Lower of cost or market, with holding gains and losses included in earnings. B. Fair value, with holding gains and losses included in earnings. C. Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses. D. Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.
answer
B. Fair value, with holding gains and losses included in earnings
question
On December 31, Ott Co. had investments in trading securities as follows: Fair Cost Value Man Co. $10,000 $ 8,000 Kemo, Inc. 9,000 11,000 Fenn Corp. 11,000 9,000 $30,000 $28,000 Ott's December 31 balance sheet should report the trading securities as A. $30,000 B. $26,000 C. $28,000 D. $29,000
answer
C. $28,000
question
Beach Co. determined that the decline in the fair value (FV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FV by including it in which of the following? A. Earnings section of the income statement and writing down the cost basis to FV. B. Other comprehensive income section of the income statement, and writing down the cost basis to FV. C. Extraordinary items section of the income statement, net of tax, and writing down the cost basis to FV. D. Other comprehensive income section of the income statement only.
answer
A. Earnings section of the income statement and writing down the cost basis to FV.
question
Acquirer Co. and Acquiree Co. are in negotiations for a business combination. Acquirer suggested to Acquiree that it reach agreements with certain key executives to make payments with a total amount of $5,000,000 if negotiations succeed. Acquiree already had a contract with its chief executive to make a $10,000,000 payment if the company was acquired. This contract was agreed to several years before any acquisition was contemplated. What amount, if any, of these payments most likely is part of the exchange for the acquiree? A. $0 B. $15,000,000 C. $10,000,000 D. $5,000,000
answer
C. $10,000,000
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On January 1, Year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2, Year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny's outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled their carrying amounts. Hence, no adjustment to investment income for acquisition differentials is necessary. For the years ended December 31, Year 1 and Year 2, Penny reported the following: Year 1 Year 2 Dividends paid $200,000 $300,000 Net income 600,000 650,000 In Year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to Year 1 investment income? Year 2 Adjustment to Investment Year 1 Investment Income Income A. $195,000 $160,000 B. $195,000 $40,000 C. $105,000 $40,000 D. $195,000 $120,000
answer
B. $195,000 $40,000
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On April 1, Dart Co. paid $620,000 for all the issued and outstanding common stock of Wall Corp. The recorded assets and liabilities of Wall Corp. on April 1 follow: Cash $ 60,000 Inventory 180,000 Property and equipment (net of accumulated depreciation of $220,000) 320,000 Goodwill 100,000 Liabilities (at fair value) (120,000) Net assets $ 540,000 On April 1, Wall's inventory had a fair value of $150,000, and the property and equipment (net) had a fair value of $380,000. What is the amount of goodwill resulting from the business combination? A. $150,000 B. $120,000 C. $50,000 D. $20,000
answer
A. $150,000
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When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year, given no election of the fair value option? Debt Securities Classified As Held-to-Maturity Available-for-Sale A. Amortized cost Fair value B. Fair value Fair value C. Amortized cost Amortized cost D. Fair value Amortized cost
answer
A. Amortized cost Fair value
question
In its financial statements, Prak, Inc., uses the cost method of accounting for its 15% ownership of Sabe Co. because the fair value of the shares is not readily determinable. At December 31, Prak has a receivable from Sabe. How should the receivable be reported in Prak's December 31 balance sheet? A. The total receivable should be included as part of the investment in Sabe without separate disclosure. B. Eighty-five percent of the receivable should be reported separately with the balance offset against Sabe's payable to Prak. C. The total receivable should be offset against Sabe's payable to Prak without separate disclosure. D. The total receivable should be reported separately.
answer
D. The total receivable should be reported separately.
question
Pal Corp's current year dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal's carrying amount for its Ima investment. This reflects the fact that Pal accounts for its Ima investment by the A. Cost method, and its carrying amount exceeded the proportionate share of Ima's fair value. B. Equity method, and Ima incurred a loss in the current year. C. Equity method, and its carrying amount exceeded the proportionate share of Ima's fair value. D. Fair value method or cost method, and only a portion of Ima's dividends represent earnings after Pal's acquisition.
answer
D. Fair value method or cost method, and only a portion of Ima's dividends represent earnings after Pal's acquisition.
question
Kale Co. purchased bonds at a discount on the open market as an investment and has the intent and ability to hold these bonds to maturity. Absent an election of the fair value option, Kale should account for these bonds at A. Cost. B. Fair value. C. Lower of cost or market. D. Amortized cost.
answer
D. Amortized cost.
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Primor, a manufacturer, owns 75% of the voting interests of Sublette, an investment firm. Sublette owns 60% of the voting interests of Minos, an insurer. In Primor's consolidated financial statements, should consolidation accounting or equity method accounting be used for Sublette and Minos? A. Consolidation used for Sublette and equity method used for Minos. B. Equity method used for Sublette and consolidation used for Minos. C. Equity method used for both Sublette and Minos. D. Consolidation used for both Sublette and Minos.
answer
D. Consolidation used for both Sublette and Minos.
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An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is A. Not affected by its share of the earnings of the investee, but is decreased by its share of the losses of the investee. B. Not affected by its share of the earnings or losses of the investee. C. Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee. D. Increased by its share of the earnings of the investee, but is not affected by its share of the losses of the investee.
answer
C. Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee.
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The amount by which the fair value of an equity security exceeds its cost should be accounted for in the financial statements when the security is classified as Trading Available-for-Sale A. Yes Yes B. No Yes C. Yes No D. No No
answer
A. Yes Yes
question
An investor uses the equity method to account for an investment in common stock. The investor's equity in the earnings of the investee is affected by A Change in Fair Cash Dividends Value of the Investee's from Investee Common Stock A. No Yes B. No No C. Yes Yes D. Yes No
answer
B. No No
question
Which one of the following statements with regard to marketable securities is incorrect? A. The held-to-maturity portfolio consists only of debt securities. B. In the trading portfolio of marketable equity securities, unrealized gains and losses are recorded on the income statement. C. Securities may be transferred from the held-to-maturity to the available-for-sale portfolio. D. In the available-for-sale portfolio of marketable equity securities, unrealized gains and losses are recorded on the income statement.
answer
D. In the available-for-sale portfolio of marketable equity securities, unrealized gains and losses are recorded on the income statement.
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Fact Pattern: Sun Corp. had investments in trading securities costing $650,000. On June 30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as available-for-sale on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. What amount should Sun report as net unrealized loss on available-for-sale securities in its Year 2 other comprehensive income? A. $85,000 B. $45,000 C. $160,000 D. $40,000
answer
D. $40,000
question
Pare, Inc., purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2 for $50,000. On December 31, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill or other acquisition differential as a result of either purchase, and Tot did not issue any additional stock during the year. Tot reported earnings of $300,000 for the year. What amount should Pare report in its December 31 balance sheet as investment in Tot? A. $230,000 B. $290,000 C. $170,000 D. $200,000
answer
A. $230,000
question
An available-for-sale debt security was purchased on September 1, Year 4, between interest dates. The next interest payment date was February 1, Year 5. Because of a permanent decline in fair value, the cost of the debt security substantially exceeded its fair value at December 31, Year 4. On the balance sheet at December 31, Year 4, the debt security should be carried at A. Cost plus the accrued interest paid. B. Fair value. C. Fair value plus the accrued interest paid. D. Cost.
answer
B. Fair value.
question
On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should Wynn report for the bond if it is classified as an available-for-sale security? A. $920,000 B. $950,000 C. $945,000 D. $910,000
answer
C. $945,000
question
Alton Corporation purchased 100% of the shares of Jones Corporation for $600,000. Financial information for Jones Corporation is provided below. A. $200,000 B. $150,000 C. $0 D. $100,000
answer
D. $100,000
question
Company A holds 25% of Company B's voting interests. Which of the following statements is true? A. Under IFRS, Company A may account for its investment in Company B at fair value or according to the equity method. B. Under U.S. GAAP, Company A must account for its investment in Company B at fair value. C. Under IFRS, Company A may account for its investment in Company B using the revaluation model or the equity method. D. Under U.S. GAAP, Company A may account for its investment in Company B at fair value or according to the equity method.
answer
D. Under U.S. GAAP, Company A may account for its investment in Company B at fair value or according to the equity method.
question
On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year? A. $1,000,000 B. $950,000 C. $1,020,000 D. $900,000
answer
C. $1,020,000
question
Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1? A. $60,000 B. $90,000 C. $30,000 D. $0
answer
A. $60,000
question
Consolidated financial statements are typically prepared when one entity has a majority voting interest in another unless A. The fiscal year ends of the two entities are more than 3 months apart. B. Control does not rest with the majority owner(s). C. The subsidiary is a finance entity. D. The two entities are in unrelated industries, such as manufacturing and real estate.
answer
B. Control does not rest with the majority owner(s).
question
Acquirer Corporation acquired for cash at $10 per share 100,000 shares of the outstanding common stock of Acquiree Company. The total fair value of the identifiable assets acquired minus liabilities assumed of Acquiree was $1.4 million on the acquisition date, including the fair value of its property, plant, and equipment (its only noncurrent asset) of $250,000. The consolidated financial statements of Acquirer Corporation and its wholly owned subsidiary must reflect A. Goodwill of $150,000. B. A gain of $150,000. C. A gain of $400,000. D. A deferred credit of $150,000.
answer
C. A gain of $400,000.
question
Rolan Corporation issued 10,000 shares of common stock in exchange for all of Sandin Corporation's outstanding stock on September 1. Rolan's common stock had a market price of $60 per share on September 1. The market price of Sandin's stock was not readily ascertainable. Condensed balance sheets of Rolan and Sandin immediately prior to the combination are indicated below. A. $100,000 B. $600,000 C. $500,000 D. $350,000
answer
B. $600,000
question
Noncontrolling interests (NCIs) (if any) must be measured by the acquirer on the acquisition date of a business combination. According to IFRS, which of the following statements is false? A. NCIs may be measured at their proportionate share of the fair value of the acquiree's identifiable assets and liabilities. B. NCIs may be measured at their proportionate share of the carrying amount of the acquiree's identifiable net assets. C. NCIs may be measured at their fair value. D. When an investor acquires 100% of an investee's ordinary share capital, NCIs do not exist.
answer
B. NCIs may be measured at their proportionate share of the carrying amount of the acquiree's identifiable net assets.
question
On January 1, Year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For Year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for Year 1 attributable to the investment? A. $6,000 B. $10,000 C. $16,000 D. $18,000
answer
C. $16,000
question
A business combination occurred on December 31, Year 1, the end of the acquirer's fiscal year. Which of the following should be subtracted in determining the consolidated net income for Year 1? Issue Costs Direct Issue of Debt Costs of Equity A. No Yes B. Yes No C. No No D. Yes Yes
answer
C. No No
question
On December 29, Year 2, BJ Co. sold an equity security, not accounted for under the equity method and not designated as being hedged in a fair value hedge, that had been purchased on January 4, Year 1. BJ owned no other security. An unrealized loss was reported in the Year 1 income statement. A realized gain was reported in the Year 2 income statement. Was the security classified as an available-for-sale security and did its Year 1 fair value decline exceed its Year 2 fair value recovery? Year 1 Fair Value Decline Exceeded Year 2 Available-for-Sale Fair Value Recovery A. No Indeterminate B. Yes No C. No Yes D. Yes Yes
answer
A. No Indeterminate
question
Investments classified as held-to-maturity are measured at A. Amortized cost, with no unrealized gains or losses reported. B. Fair value, with unrealized gains and losses reported in net income. C. Fair value, with unrealized gains and losses reported in other comprehensive income (OCI). D. Replacement cost, with no unrealized gains or losses reported.
answer
A. Amortized cost, with no unrealized gains or losses reported.
question
Under IFRS, a financial asset not at fair value through profit or loss is measured initially at A. Fair value minus transaction costs. B. Fair value or fair value plus transaction costs, at the entity's election. C. Fair value plus transaction costs. D. Fair value.
answer
C. Fair value plus transaction costs.
question
Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction? A. $80,000 B. $70,000 C. $250,000 D. $55,000
answer
B. $70,000
question
At December 31, Hull Corp. had the following equity securities that were purchased during the year, its first year of operations: All changes in fair value are considered temporary. Security A is a trading security, and the other securities are available-for-sale securities. What amounts should be charged to earnings and other comprehensive income at December 31? Other Comprehensive Earnings Income A. $(25,000) $0 B. $(30,000) $(30,000) C. $(60,000) $0 D. $(25,000) $(30,000)
answer
B. $(30,000) $(30,000)
question
Vanity Corporation holds investments in equity securities. These investments were acquired last year and have been properly classified as available-for-sale (AFS) securities. During the current year, the company sold some of the AFS securities at a loss. At year end, the remaining portfolio of AFS securities had appreciated in total value compared with the value at the end of last year. Based on these facts, which one of the following should Vanity report in its financial statements at the end of the current year? Income Statement Balance sheet A. Realized loss on sale of AFS securities Unrealized holding gain on appreciation of AFS securities B. Unrealized loss on sale of AFS securities Unrealized holding gain on appreciation of AFS securities C. Realized loss on sale of AFS securities and unrealized holding gain on appreciation of AFS securities Unrealized holding gains/losses not reported here on AFS securities D. Unrealized holding gain on appreciation of AFS securities Unrealized loss on sale of AFS securities.
answer
A. Realized loss on sale of AFS securities Unrealized holding gain on appreciation of AFS securities
question
An investor uses the fair value method to account for an investment in common stock. A portion of the dividends received this year were in excess of the investor's share of investee's earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year is A. The total amount of dividends received this year. B. Zero. C. The portion of the dividends received this year that were not in excess of the investor's share of investee's earnings subsequent to the date of investment. D. The portion of the dividends received this year that were in excess of the investor's share of investee's earnings subsequent to the date of investment.
answer
C. The portion of the dividends received this year that were not in excess of the investor's share of investee's earnings subsequent to the date of investment.
question
On January 1, Point, Inc., purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point's income statement report? A. Amount equal to dividends received from Iona. B. 10% of Iona's income for January 1 to July 31 plus 40% of Iona's income for August 1 to December 31. C. 40% of Iona's income for August 1 to December 31 only. D. 40% of Iona's income.
answer
B. 10% of Iona's income for January 1 to July 31 plus 40% of Iona's income for August 1 to December 31.
question
Acquirer and Acquiree are the combining entities in a business combination. As part of the bargain, Acquirer assumed a contingent liability based on a suit brought against Acquiree because of a defect in one of its products. However, the former owner of Acquiree has agreed to pay the amount of any damages in excess of $5,000,000. In the consolidated balance sheet issued on the acquisition date, the contingent liability is reported at acquisition-date fair value. Accordingly, A. No indemnification asset is recognized until the contingency is resolved. B. An exception to the customary accounting for a business combination applies. C. An indemnification asset is recognized at acquisition-date fair value. D. A valuation allowance is reported for the indemnification asset.
answer
C. An indemnification asset is recognized at acquisition-date fair value.
question
At the end of Year 1, Lane Co. held trading securities that cost $86,000 and had a year-end market value of $92,000. During Year 2, all of these securities were sold for $104,500. At the end of Year 2, Lane had acquired additional trading securities that cost $73,000 and had a year-end market value of $71,000. What is the impact of these stock activities on Lane's Year 2 income statement? A. Loss of $2,000. B. Gain of $18,500. C. Gain of $10,500. D. Gain of $16,500.
answer
C. Gain of $10,500.
question
On January 2, Year 1, Adam Co. purchased as a long-term investment 10,000 shares of Mill Corp.'s common stock for $40 a share. These securities were properly classified as available-for-sale. On December 31, Year 1, the market price of Mill's stock was $35 a share, reflecting a temporary decline in market price. On January 28, Year 2, Adam sold 8,000 shares of Mill stock for $30 a share. For the year ended December 31, Year 2, Adam should report a realized loss on disposal of a long-term investment of A. $100,000 B. $60,000 C. $40,000 D. $80,000
answer
D. $80,000
question
On November 30, Pindar Co. purchased for cash at $30 per share all 250,000 shares of the outstanding common stock of Shimoda Co., a business entity. Shimoda reported net assets on that date with a carrying amount of $6 million. This amount reflected acquisition-date fair value except for property, plant, and equipment, which had a fair value that exceeded its carrying amount by $800,000. In its November 30 consolidated balance sheet, what amount should Pindar report as goodwill? A. $0 B. $700,000 C. $1,500,000 D. $800,000
answer
B. $700,000
question
On December 15, Year 4, Far-Lap Co. paid $200,000 cash for 40% of the outstanding common shares of Dunwunder, Inc. On that date, Far-Lap intended to sell all of these shares soon after the close of its fiscal year on December 31, Year 4. Far-Lap's equity stake permitted it to exercise significant influence over Dunwunder. For the period March 1 through December 15, Year 4, Dunwunder reported $5,600 in net income. Under IFRS, which of the following is the best reason for Far-Lap not to use the equity method to account for its investment in Dunwunder? A. Far-Lap held no previous equity stake in Dunwunder before the purchase date. B. The purchase did not result in recognition of goodwill. C. Far-Lap classified the investment as held for sale. D. Far-Lap's equity stake is only 40%.
answer
C. Far-Lap classified the investment as held for sale.
question
Sage, Inc., bought 40% of Adams Corp.'s outstanding voting common stock on January 2 for $400,000, which equaled a proportionate share of the fair value of the net assets. The carrying amount of the net assets at the purchase date was $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during the year. During the year, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31? A. $36,000 B. $48,000 C. $42,000 D. $34,000
answer
C. $42,000
question
Park Co. uses the equity method to account for its January 1 purchase of Tun, Inc.'s common stock. On January 1, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's earnings for the year? Inventory Excess Land Excess A. Increase Increase B. Decrease Decrease C. Increase No effect D. Decrease No effect
answer
D. Decrease No effect
question
At year end, Slim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and equity securities purchased for $35,000. At year end, the bonds were selling on the open market for $105,000, and the equity securities had a market value of $50,000. What amount should Slim report as trading securities in its year-end balance sheet? A. $50,000 B. $142,000 C. $155,000 D. $127,000
answer
C. $155,000
question
Fact Pattern: On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. The amount of goodwill related to Jennie's acquisition of Katlee at January 1 was A. $200,000 B. $140,000 C. $60,000 D. $0
answer
B. $140,000
question
When a business is acquired, the acquirer may recognize goodwill. This amount is the excess of the sum of the acquisition-date fair values (with some exceptions) of (1) the consideration transferred, (2) any noncontrolling interest in the acquiree, and (3) a previously held equity interest in the acquiree over the A. Carrying amount of the net tangible assets acquired. B. Carrying amount of the net assets acquired. C. Acquisition-date fair value of the net assets acquired. D. Fair value of the net tangible assets acquired.
answer
C. Acquisition-date fair value of the net assets acquired.
question
On December 1, Wall Company purchased trading securities. Pertinent data are as follows: On December 31, Wall reclassified its investment in security C from trading to available-for-sale because Wall intends to retain security C. What net loss on its securities should be included in Wall's income statement for the year ended December 31? A. $0 B. $11,000 C. $14,000 D. $9,000
answer
D. $9,000
question
A reclassification of available-for-sale securities to the held-to-maturity category will result in A. The amortization of an unrealized gain or loss existing at the transfer date. B. The reversal of any unrealized gain or loss previously recognized in earnings. C. The reversal of any unrealized gain or loss previously recognized in other comprehensive income. D. The recognition in earnings on the transfer date of an unrealized gain or loss.
answer
A. The amortization of an unrealized gain or loss existing at the transfer date.
question
King Company has the following investment portfolio: The total amount of these investments to be reported on King's statement of financial position is A. $892,000 B. $902,000 C. $920,000 D. $954,000
answer
C. $920,000
question
The following information pertains to Lark Corp.'s available-for-sale securities: December 31 Year 2 Year 3 Cost $100,000 $100,000 Fair value 90,000 120,000 Differences between cost and fair values are considered to be temporary. The decline in fair value was properly accounted for at December 31, Year 2. Ignoring tax effects, by what amount should other comprehensive income (OCI) be credited at December 31, Year 3? A. $10,000 B. $20,000 C. $30,000 D. $0
answer
C. $30,000
question
During Year 6, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 that are classified as trading securities. The fair value of this investment was $29,500 at December 31, Year 6. Wall sold all of the Hemp common stock for $14 per share on December 15, Year 7, incurring $1,400 in brokerage commissions and taxes. In its income statement for the year ended December 31, Year 7, Wall should report a recognized loss of A. $3,500 B. $2,900 C. $1,500 D. $4,900
answer
B. $2,900
question
Under IFRS, which of the following is an exemption from applying the equity method? A. The investor elects to issue consolidated statements. B. The investor exercises only significant influence. C. The investment is classified as held for sale. D. The change to the equity method would be from the fair value method.
answer
C. The investment is classified as held for sale
question
In Year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following? A. The unrealized loss should be credited to beginning retained earnings. B. The unrealized loss should be credited to the investment account. C. The unrealized loss should be credited to the other comprehensive income account. D. The unrealized loss should be debited to the other comprehensive income account.
answer
C. The unrealized loss should be credited to the other comprehensive income account.
question
A business combination must be accounted for as an acquisition. Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined entity for the period in which the expenses are incurred? Fees of finders Registration fees for and consultants equity securities issued A. No Yes B. No No C. Yes No D. Yes Yes
answer
C. Yes No
question
Fact Pattern: Sun Corp. had investments in trading securities costing $650,000. On June 30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as available-for-sale on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. What amount of loss should Sun report in its Year 2 earnings? A. $120,000 B. $160,000 C. $45,000 D. $85,000
answer
C. $45,000
question
Fact Pattern: On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. What amount should Jennie report for its investment in Katlee at the end of the current year? A. $500,000 B. $584,000 C. $620,000 D. $600,000
answer
B. $584,000
question
Election of the fair value option (FVO) A. Results in recognition of unrealized gains and losses in other comprehensive income of a business entity. B. Requires deferral of related upfront costs. C. Permits only for-profit entities to measure eligible items at fair value. D. Results in recognition of unrealized gains and losses in earnings of a business entity.
answer
D. Results in recognition of unrealized gains and losses in earnings of a business entity.
question
On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in subsidiary? A. $276,000 B. $210,000 C. $220,000 D. $280,000
answer
D. $280,000
question
Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be A. Allocated on a pro rata basis to the nonmonetary assets acquired. B. Capitalized as part of goodwill and tested annually for impairment. C. Expensed as incurred in the current period. D. Capitalized as an other asset and amortized over 5 years.
answer
C. Expensed as incurred in the current period.
question
Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14 and did not elect the fair value option. Plack received a stock dividend of 2,000 shares on April 30, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15. In its income statement for the year, what amount should Plack report as dividend income? A. $24,000 B. $90,000 C. $20,000 D. $94,000
answer
A. $24,000
question
When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? Goodwill Amortization Related Cash Dividends to the Purchase from Investee A. Yes Yes B. No Yes C. No No D. Yes No
answer
C. No No
question
Securities held primarily for sale in the near term to generate income on short-term price differences are known as A. Equity securities. B. Held-to-maturity securities. C. Trading securities. D. Available-for-sale securities.
answer
C. Trading securities.
question
Company A acquired 30% of Company B's voting rights on January 1, Year 1, and accounts for its investment using the equity method. On January 1, Year 2, Company A sold 60% of its investment in Company B for $150,000. The carrying amount of the investment on January 1, Year 2, before the sale was $210,000. The fair value of the retained investment after the sale was $100,000. What gain or loss, if any, on the disposal of the investment was recognized in the Year 2 income statement prepared under IFRS? A. Gain on disposal of $24,000. B. Gain on disposal of $40,000. C. $0 D. Loss on disposal of $60,000.
answer
B. Gain on disposal of $40,000.
question
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? A. The reason for the company's decision to invest in the investee company. B. The names and ownership percentages of the other stockholders in the investee company. C. Whether the investee company is involved in any litigation. D. The company's accounting policy for the investment.
answer
D. The company's accounting policy for the investment.
question
For available-for-sale securities included in noncurrent assets, which of the following amounts should be included in the period's net income? Unrealized holding losses during the period Realized gains during the period Changes in fair value during the period A. I and II only. B. I, II, and III. C. II only. D. III only.
answer
C. II only.
question
The reporting entity may elect the fair value option (FVO) for A. An investment consisting of more than 50% of the outstanding voting interests of another entity. B. Its obligation for pension and other postretirement employee benefits. C. An interest in a variable interest entity (VIE) if the reporting entity is the primary beneficiary. D. Most financial assets and liabilities.
answer
D. Most financial assets and liabilities.
question
When the fair value of an investment in debt securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year? Held-to-Maturity Available-for-Sale Securities Securities A. Fair value Carrying amount B. Fair value Fair value C. Carrying amount Fair value D. Carrying amount Carrying amount
answer
C. Carrying amount Fair value
question
Company J acquired all of the outstanding common stock of Company K in exchange for cash. The consideration transferred exceeds the acquisition-date fair value of the net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K? Plant and Equipment Long-Term Debt A. K's carrying amount K's carrying amount B. K's carrying amount Fair value C. Fair value Fair value D. Fair value K's carrying amount
answer
C. Fair value Fair value
question
Under IFRS 9, Financial Instruments, a financial asset in the form of a debt instrument is measured at amortized cost if A. It meets the business model test and the cash flow test. B. It meets the business model test or the cash flow test. C. Its redemption is reasonably assured. D. Its maturity date is less than one year.
answer
A. It meets the business model test and the cash flow test
question
On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle's net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report? A. $12,000 B. $6,000 C. $36,000 D. $18,000
answer
D. $18,000
question
IFRS and U.S. GAAP provide accounting guidance for business combinations and the presentation of consolidated financial statements. Which of the following policies is not required by both IFRS and U.S. GAAP? A. Intragroup balances and transactions must be eliminated in full. B. Uniform accounting policies must be applied. C. The subsidiary's reporting date must not differ from the parents' by more than 3 months. D. The parent must present consolidated financial statements.
answer
B. Uniform accounting policies must be applied
question
An investor in common stock received dividends in excess of the investor's share of the investee's earnings subsequent to the date of the investment. How will the investor's investment account be affected by those dividends under each of the following accounting methods? Cost Method Equity Method A. No effect Decrease B. No effect No effect C. Decrease No effect D. Decrease Decrease
answer
D. Decrease Decrease
question
Nola Co. has a portfolio of marketable equity securities that it does not intend to sell in the near term. How should Nola classify these securities, and how should it report unrealized gains and losses from these securities? Classify as Report in A. Available-for-sale securities A component of income from continuing operations B. Available-for-sale securities Other comprehensive income (OCI) C. Trading securities Other comprehensive income (OCI) D. Trading securities A component of income from continuing operations
answer
B. Available-for-sale securities Other comprehensive income (OCI)
question
When financial assets and liabilities are measured using the fair value option (FVO), A. Their fair values should be reported separately from the carrying amounts of similar items measured using other attributes. B. They should be accounted for as available-for-sale securities. C. Upfront fees related to such items are recognized when unrealized gains and losses are recognized. D. Related cash flows should be classified as cash flows from operating activities.
answer
A. Their fair values should be reported separately from the carrying amounts of similar items measured using other attributes.
question
When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes A. A proportionate interest in the net income of the investee. B. Periodic amortization of the goodwill related to the purchase. C. A cash dividend received from the investee. D. Depreciation related to the excess of fair value over the carrying amount of the investee's depreciable assets at the date of purchase by the investor.
answer
A. A proportionate interest in the net income of the investee.
question
Question: 88 The acquirer in a business combination transfers cash consideration for 100% of the voting interests of the acquiree. The acquisition-date fair value of liabilities assumed exceeds the acquisition-date fair value of the identifiable assets acquired. This excess is calculated without regard to the fair value the acquirer attributes to the acquiree's assembled workforce and certain contracts it is negotiating. Thus, goodwill must A. Be recognized in an amount equal to the cash transferred minus the acquisition-date fair value of the assembled workforce and contracts being negotiated. B. Not be recognized. C. Be recognized in an amount equal to the cash transferred plus the acquisition-date fair value of the net liabilities assumed. D. Be amortized over the period during which the discount on the long-term interest-bearing assets acquired will be amortized.
answer
C. Be recognized in an amount equal to the cash transferred plus the acquisition-date fair value of the net liabilities assumed.
question
Which of the following is an election date for the purpose of determining whether to elect the fair value option (FVO)? A. The entity enters into a firm commitment to purchase soybeans in 3 months. B. The accounting treatment of an equity investment changes because the entity must consolidate the investee. C. The accounting treatment of an equity investment changes because the entity no longer has significant influence. D. The accounting for an equity investment changes because the entity no longer consolidates a subsidiary.
answer
D. The accounting for an equity investment changes because the entity no longer consolidates a subsidiary.
question
Fact Pattern: Grant, Inc., acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1, and did not elect the fair value option. The price equaled the carrying amount and the fair value of the interest purchased in South's net assets. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the 6 months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2. Question: 90 In its Year 2 income statement, what amount should Grant report as gain from the sale of half of its investment? A. $30,500 B. $35,000 C. $45,500 D. $24,500
answer
A. $30,500
question
On January 2, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for $400,000, which equaled the carrying amount and the fair value of the interest purchased in Rea's net assets. Well did not elect the fair value option. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for the year and paid dividends of $150,000. In its December 31 balance sheet, what amount should Well report as investment in Rea? A. $385,000 B. $435,000 C. $450,000 D. $400,000
answer
B. $435,000
question
Unrealized gains and losses on trading securities should be presented in the A. Statement of financial position. B. Income statement. C. Notes to the financial statements. D. Statement of retained earnings.
answer
B. Income statement.
question
Under IFRS, when an investor uses the equity method to account for investments in common stock, the investment increases when the investor recognizes A. Periodic amortization of the goodwill related to the purchase. B. Depreciation related to the excess of fair value over the carrying amount of the investee's depreciable assets at the date of purchase by the investor. C. A proportionate interest in the profit of the investee. D. A cash dividend received from the investee.
answer
C. A proportionate interest in the profit of the investee.
question
On August 31, Planar Corp. exchanged 100,000 shares of its $40 par value common stock for all of the net assets of Sistrock Co. The fair value of Planar's common stock on August 31 was $72 per share. Planar paid a fee of $320,000 to the consultant who arranged this acquisition. Direct costs of registering and issuing the equity securities amounted to $160,000. No goodwill or bargain purchase was involved in the acquisition. At what amount should Planar record the acquisition of Sistrock's net assets? A. $7,680,000 B. $7,520,000 C. $7,360,000 D. $7,200,000
answer
D. $7,200,000
question
Costs incurred in completing a business combination are listed below. General administrative costs $240,000 Consulting fees 120,000 Direct cost to register and issue equity securities 80,000 The amount charged to the expenses of the business combination is A. $80,000 B. $360,000 C. $120,000 D. $240,000
answer
B. $360,000
question
Which of the following is a false statement about applying the equity method? A. Depending on the circumstances, an investor may be required to account for an investment in voting common stock under the fair-value method even though the investor owns more than 20% of the voting common stock. B. Company A owns 19% of Company B's voting common stock and acquires 1% more. Company A's investment, results of operations (current and prior periods presented), and retained earnings should be adjusted retroactively. C. One of the disclosures necessary under the equity method of accounting for investments is the difference, if any, between the amount at which an investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference. D. Company A owns 20% of Company B's voting common stock and sells 1%. Company A's investment, results of operations (current and prior periods presented), and retained earnings should be adjusted retroactively.
answer
D. Company A owns 20% of Company B's voting common stock and sells 1%. Company A's investment, results of operations (current and prior periods presented), and retained earnings should be adjusted retroactively.
question
Johnstone Company owns 10,000 shares of Breva Corporation's stock; Breva currently has 40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid $160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in Johnstone's equity method investment in Breva Corporation account. At the end of the year, the balance in this account should be A. $150,000 B. $240,000 C. $160,000 D. $110,000
answer
C. $160,000
question
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: Carrying amount of Larkin's investment in Devon at the beginning of the year $200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon's stockholders during the year 400,000 What is the carrying amount of Larkin's investment in Devon at year end? A. $250,000 B. $100,000 C. $350,000 D. $200,000
answer
A. $250,000
question
The decision to elect the fair value option (FVO) A. May be applied to a portion of a financial instrument. B. Must be applied to all instruments issued in a single transaction. C. Is irrevocable until the next election date, if any. D. Must be applied only to classes of financial instruments.
answer
C. Is irrevocable until the next election date, if any.
