Multiple Choice Examples Appendix H

On January 1, 2017, Valentine Corporation purchased 25% of the common stock outstanding of Betz Corporation for $200,000. During 2017, Betz Corporation reported net income of $80,000 and paid cash dividends of $48,000. The balance of the Stock Investments—Betz account on the books of Valentine Corporation at December 31, 2017, is

$208,000.

Corporations invest in other companies for all of the following reasons except

1) house excess cash until needed 2) generate earnings 3) meet strategic goals

. Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company's investment in ABX will increase Barcelona net income by

120,000

McComb Inc. earns $1,350,000 and pays cash dividends for $450,000 during 2017. SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb. How much revenue from investment should SFX report in 2017?

450,000 (70,000/210,000)= .33 .33* 1,350,000= answer

Which of the following statements is true about investments classified as trading securities?

Changes in market value are reflected as part of net income.

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2017 for $80,000. The journal entry to record this investment includes a debit to

Debt Investments for $80,000.

The equity method should generally be used to account for an investment in stock when the level of ownership is

between 20% and 50%

If the cost method is used to account for an investment in common stock, dividends received should be

credited to the Dividend Revenue account.

Consolidated financial statements are useful to all of the following except

creditors of subsidiary companies.

Banks and financial institutions often purchase debt securities to

generate earnings

Under the equity method, the Stock Investments account is increased when the

investee company reports net income

When a company holds stock of several different corporations, the group of securities is identified as a(n)

investment portfolio

If a stock investment is sold at a gain, the gain

is reported in the Other Revenue and Gain section of the income statement.

If an investor owns less than 20% of the common stock of another corporation as an investment

it is presumed that the investor has relatively little influence on the investee.

The Fair Value Adjustment account

relates to the entire portfolio of securities held by the company.

. The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as

significant influence

. If 10% of the common stock of an investee company is purchased as an investment, the appropriate method of accounting for the investment is

the cost method

. In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because

the securities have not been sold.

Which of the following is a debt security?

treasury bills