BACC 513 Exam 2 MC paractice

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2025 for $1,000,000. In 2025, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. In 2026, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2026, Rich sold half of its stock in Doane for $660,000 cash. The carrying amount of this investment reported in Rich's December 31, 2025 balance sheet is

$1,045,000

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2025, paying $1,410,375. The bonds mature on January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2025, Patton should report interest revenue from the Scott Company bonds of

$155,283.

On its December 31, 2024 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2025 in the composition of Calhoun's portfolio of debt investments held as available-for- sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/25 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 The amount of unrealized loss reported as a component of comprehensive income for the year ending December 31, 2025 is

$40,000.

Judd, Inc. owns 35% of Crosby Corporation. During the calendar year 2025, Crosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

Understate, overstate, overstate

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure the smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.

New Age Computers manufactures and sells pagers and radio paging systems which include a 180-day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include

a credit to Sales Revenue of $4,500 and a credit to Unearned Warranty Revenue of $1,400.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities

Unrealized holding gains or losses that are recognized in income are from debt securities classified as

available-for-sale.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities.

The second step in the process for revenue recognition is to

identify the separate performance obligations in the contract.

A contract

is an agreement that creates enforceable rights and obligations.

On January 15, 2024, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000, 30 days after delivery. The revenue for this contract should be

recorded on March 31, 2024.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are

securities where a company has holdings of less than 20%