Chapter 16 MCQ's

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation

B.

Instrument Corporation has the following investment which was held throughout 2025-2026: COST$900,000 FAIR VALUE: 12/31/25: $1,200,000 FAIR VALUE 12/31/26: $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2026 related to this investment? a. $60,000 gain b. $60,000 loss c. $300,000 gain d. $240,000 gain

B.

Unrealized holding gains or losses that are recognized in income are from debt securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. None of these answers are correct

C.

On August 1, 2025, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2025, and mature on April 30, 2030, with interest payable each October 31 and April 30. The bonds will beheld to maturity. What entry should Fowler make to record the purchase of the bonds onAugust 1, 2025? a. Debt Investments 520,000 Interest Revenue ......12,500 Cash. 532,500 b. Debt Investments 532,500 Cash 532,500 c. Debt Investments 532,500 Interest Revenue 12,500 Cash 520,000 d. Debt Investments 500,000 Premium on Bonds 32,500 Cash 532,500

A.

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 Totals: $405,000 $375,000 The amount of unrealized loss reported as a component of comprehensive income for the year ending December 31, 2025 is a. $40,000. b. $30,000. c. $20,000. d. $0.

A.

A correct valuation for debt securities is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. None of these answers are correct.

B.

At December 31, 2025, Atlanta Company has an equity portfolio of trading securities valued at $160,000. Its cost was $132,000. If the Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31,2025? a. Fair Value Adjustment 28,000 Unrealized Holding Gain or Loss-Income 28,000 b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 c. Unrealized Holding Gain or Loss-Income 28,000 Fair Value Adjustment 28,000 d. Unrealized Holding Gain or Loss-Income 20,000 Fair Value Adjustment 20,000

B.

On January 2, 2025, Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment.During 2025, Jobs reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod account at December 31, 2025 was $960,000 after applying the equity method during 2025. What purchase price did Pod pay for its investment in Jobs, Inc? a. $510,000 b. $780,000 c. $1,140,000 d. $1,410,000

B.

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 Total: $405,000 $375,000 What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2025? a. $40,000 b. $30,000 c. $20,000 d. $0

B.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

B.

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income

C.

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 a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

C.

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2025 with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis decreased theAvailable-for-Sale Debt Securities account for the Ritter bonds on July 1, 2025 andDecember 31, 2025 by the amortized premiums of $10,620 and $10,980, respectively. AtApril 1, 2026, Landis sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2026 was $3,097,440. Assuming Landis has a portfolio of Available-for-Sale Debt Securities, what should Landis report as a gain or loss on the bonds? a. ($88,110) b. ($65,610) c. ($7,440) d. $0

C.

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 ? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate

D.