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App_D

Student: ___________________________________________________________________________

1. Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth
of the company rather than distribute earnings back to investors in the form of cash dividends.

True False
2. Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year.

True False
3. When insignificant influence exists, the investment should be accounted for by the equity method.

True False
4. When significant influence exists, the investment should be accounted for by the equity method.

True False
5. When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend
revenue.

True False
6. Investments are reported at fair value when a company has an insignificant influence over another company
in which it invests.

True False
7. Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as
part of current net income.

True False
8. Unrealized gains and losses from changes in the fair value of trading securities are reported as part of
current net income.

True False
9. Gains and losses on the sale of equity investments are recorded in the income statement as part of net
income.

True False
10. The statement of comprehensive income is a statement in which we report all changes in stockholders'
equity other than investment by stockholders and payment of dividends.

True False
11. The statement of comprehensive income is a statement that includes net income plus investment by
stockholders less payment of dividends.

True False
12. Investments are reported at fair value when a company has a significant influence over another company in
which it invests.

True False
13. Under the equity method, the investor includes in net income its portion of the investee's net income.

True False
14. When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue.

True False
15. Consolidated financial statements combine the separate financial statements of the purchasing company
and the acquired company into a single set of financial statements.

True False
16. Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term
liabilities that incur interest expense.

True False
17. The cash received from interest equals the face value of the investment in bonds times the stated interest
rate.

True False
18. Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

True False
19. Because the carrying value of bonds purchased at a premium increases over time, interest revenue will also
increase each semi-annual interest period.

True False
20. Because the carrying value of bonds purchased at a discount increases over time, interest revenue will also
increase each semi-annual interest period.

True False
21. One of the primary reasons for investing in equity securities includes:

A. Acquiring debt of competing companies.


B. Appreciation in the value of the stock.
C. Earning interest revenue.
D. Deducting dividend payments for tax purposes.
22. One of the primary reasons for investing in debt securities includes:

A. Receiving dividend payments.


B. Acquiring significant influence.
C. Earning interest revenue.
D. Deducting interest payments for tax purposes.
23. Which of the following is true with regard to how to account for company A's investment in company B's
common stock?

A. The fair value method is used when A owns more than 50% of B.
B. The equity method is used when A owns from 20% to 50% of B.
C. The consolidation method is used when A owns less than 20% of B.
D. All of the above are true. (Is this type answer option OK??)
24. Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the
end of the year, the fair value of the securities was $105,000. How should the investment be reported in the
year-end financial statements?

A. The investment in trading securities would be reported in the balance sheet at its $100,000 cost.
B. The investment in trading securities would be reported in the balance sheet at its $105,000 fair value.
C. An unrealized holding gain would be reported in other comprehensive income.
D. Both b. and c. are correct.
25. Libby Company purchased equity securities for $100,000 and classified them as available-for-sale
securities. At the end of the year, the fair value of the securities was $105,000. How should the investment
be reported in the year-end financial statements?

A. The investment in available-for-sale securities would be reported in the balance sheet at its $100,000
cost.
B. The investment in available-for sale securities would be reported in the balance sheet at its $105,000
market value.
C. An unrealized holding gain would be reported in other comprehensive income.
D. Both b. and c. are correct.
26. Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The
investment is properly classified as a trading security. By the end of the year, the stock price has increased
to $32 per share. How would the change in stock price affect Sports Spectacular's net income?

A. Increase net income by $32,000.


B. Increase net income by $30,000.
C. Increase net income by $2,000.
D. No effect.
27. Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The
investment is properly classified as an available-for-sale security. By the end of the year, the stock price has
increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?

A. Increase net income by $32,000.


B. Increase net income by $30,000.
C. Increase net income by $2,000.
D. No effect.
28. The primary difference in accounting for available-for-sale securities and accounting for trading securities

is:

A. Option a
B. Option b
C. Option c
D. Option d
29. On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke
Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the
following at December 31, 2012:

What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in

Burke?

A. Option a
B. Option b
C. Option c
D. Option d
30. When the equity method of accounting for investments is used by the investor, the Investments account
increases when:

A. A cash dividend is received from the investee.


B. The investee reports a net income for the year.
C. The investor records additional depreciation related to the investment.
D. The investee reports a net loss for the year.
31. When using the equity method to account for an investment, cash dividends received by the investor from
the investee should be recorded:

A. As a reduction in the Investments account.


B. As an increase in the Investments account.
C. As dividend income.
D. As a contra item to stockholders' equity.
32. The equity method of accounting for investments in voting common stock is appropriate when:

A. The investor can significantly influence the investee.


B. The investor has voting control over the investee.
C. The investor intends to hold the common stock indefinitely.
D. The investor is assured of a continued supply of a valuable raw material.
33. Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The
investment is properly recorded using the equity method. By the end of the year, the stock price has
increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income
under the equity method?

A. Increase net income by $32,000.


B. Increase net income by $30,000.
C. Increase net income by $2,000.
D. No effect.
34. On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke
Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over
Burke and properly records the investment using the equity method. The records of Burke Corporation
showed the following at December 31, 2012:

What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in

Burke?

A. Option a
B. Option b
C. Option c
D. Option d
35. Consolidated financial statements are prepared when one company has:

A. Accounted for the investment using the equity method.


B. Accounted for the investment as available-for-sale securities.
C. Control over another company.
D. None of these is correct. (Is this type OK??)
36. Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity
securities in its balance sheet?

A. Debt securities.
B. Equity securities.
C. Common stock.
D. All of these are correct. (Is this OK??)
37. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

GIC purchased the bonds:

A. At par.
B. At a discount.
C. At a premium.
D. Cannot be determined from the given information.
38. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

GIC purchased the bonds for:

A. $200,000.
B. $194,758.
C. $242,000.
D. Cannot be determined from the given information.
39. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

Recording the bond purchase would have what effect on the financial statements?

A. Increase assets.
B. Increase liabilities.
C. Increase assets and liabilities.
D. No effect on total assets and total liabilities.
40. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

The investment in bonds has a maturity in:

A. Two years.
B. Three years.
C. Six years.
D. Cannot be determined from the given information.
41. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

What is the annual market interest rate on the bonds?

A. 4%.
B. 3.5%.
C. 7%.
D. 8%.
42. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the
following amortization schedule from purchase until maturity:

GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12. What gain or loss, if
any, would GIC record on this date?

A. No gain or loss.
B. $370 loss.
C. $4,000 loss.
D. $4,000 gain.
43. On September 1, Investors, Inc. purchases 1,000 shares (insignificant influence) of $1 par value common
stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share.
Record the purchase and sale of the investment in Hamilton International.

44. California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in
the common stock of Oregon Outfitters. California Designs engages in the following transactions relating
to its investment:
January 1 Purchases 1,000 shares of Oregon Outfitters common stock for $20 per share. The investment is
properly classified as an available-for-sale security.
July 12 Sells 300 shares of Oregon Outfitters stock for $18 per share.
September 30 Receives a cash dividend of $1 per share.
December 31 Adjusts the investment to fair value. The fair value of Oregon Outfitters stock is now $15 per
share.
1. Record each of these transactions, including the December 31 adjustment to fair value.
2. Calculate the balance of the Investments account on December 31.

45. Athletic Accessories has the following transactions related to investments in common stock.
May 1 Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $22 per
share. The investment is properly classified as an available-for-sale security.
June 30 Receives a cash dividend of $1 per share.
October 18 Sells 2,000 shares of Endurance Wear common stock at $25 per share.
December 31 Adjusts the investments to fair value. The fair value of Endurance Wear common stock is
now $30 per share.
1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair
value.
2. Calculate the balance of the investment account on December 31.
46. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on
January 1, 2012. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received
semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.

47. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $18,641 on
January 1, 2012. The market interest rate for bonds of similar risk and maturity is 8%. Interest is received
semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.

48. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $21,488 on
January 1, 2012. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received
semi-annually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.

49. How can an investor benefit from an equity investment that does not pay dividends?
50. Investments in equity securities for which the investor has insignificant influence over the investee are
classified for reporting purposes under the fair value method in one of two categories. What are these two
categories? How do we report unrealized holding gains and losses under each of these two categories?

51. Under what circumstances do we use the equity method to account for an investment in stock? Explain how
we record dividends received from an investment in a company accounted for using the equity method.

52. Discuss the meaning of consolidated financial statements. When is it appropriate to consolidate financial
statements of two companies?

53. Investments in debt securities are classified for reporting purposes in one of three categories. List these
three categories and explain which investments are included in each category. Also briefly describe how
the reporting differs for each category.
54. Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each
phrase with the best term placing the letter designating the term in the space provided.

1. Held-to- __
maturity securities Used when an investor has controlling influence.__

__
2. Equity method This category is not used for equity investments.__

3. Trading Used when an investor has insignificant influence__


securities and does not expect to sell in the near future.__

4. Available-for- Used when an investor has significant, but not__


sale securities controlling influence.__

5. Consolidation Used when an investor expects to sell in the near__


method future.__
55. Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each
phrase with the best term placing the letter designating the term in the space provided.

1. Consolidation __
method This category is used only for debt securities.__

An investor owns 40% of the common voting shares__


2. Equity method in the company and can exercise significant influence.__
3. Held-to-
maturity Common stock not held for immediate resale__
securities and the investor owns 2% of the outstanding shares.__

4. Trading An investor owns over 50% of the common voting__


securities shares in the company.__

5. Available-for- __
sale securities Common stock held for immediate resale.__
App_D Key
1. TRUE

2. TRUE

3. FALSE

4. TRUE

5. TRUE

6. TRUE

7. FALSE

8. TRUE

9. TRUE

10. TRUE

11. FALSE

12. FALSE

13. TRUE

14. FALSE

15. TRUE

16. TRUE

17. TRUE

18. FALSE

19. FALSE

20. TRUE

21. B

22. C

23. B

24. B

25. D

26. C

27. D

28. C

29. A

30. B

31. A

32. A
33. D

34. C

35. C

36. A

37. B

38. B

39. D

40. B

41. D

42. B

43.

44.
The balance in the Investments account on December 31 is $10,500, equal to the 700 remaining shares times $15 per share fair value. The balance in
the Investments account can be verified by posting all transactions to a T-account.
45.
The balance in the Investments account on December 31 is $90,000, equal to the 3,000 remaining shares times $30 per share fair value. The balance
in the Investments account can be verified by posting all transactions to a T-account.

46.

47.
48.

49. Companies can gain from the increase in the value of their investment. Even without receiving dividends, investors still benefit when companies
reinvest earnings, leading to even more profits in the future, and eventually higher stock prices. Many companies also make investments for strategic
purposes to develop closer business ties, increase market share, or expand into new industries.

50. The two categories are trading securities and available-for-sale securities. Trading securities are reported at fair value, and resulting holding gains
and losses are included in the determination of net income for the period. Available-for-sale securities are reported at fair value, and resulting holding
gains and losses are not included in the determination of net income for the period. Rather, they are reported as part of other comprehensive income.

51. The equity method is used when an investor can't control, but can "significantly influence" the investee. For example, if effective control is
absent, the investor still might be able to exercise significant influence over the operating and financial policies of the investee if the investor owns a
large percentage of the outstanding shares relative to other shareholders. By voting those shares as a block, the investor often can sway decisions in
the direction desired. We presume, in the absence of evidence to the contrary, that the investor exercises significant influence over the investee when
it owns between 20% and 50% of the investee's voting shares.
The investor should account for dividends from the investee as a reduction in the Investments account. Since investment revenue is recognized as the
investee earns it, it would be inappropriate to recognize revenue again when earnings are distributed as dividends.

52. Consolidated financial statements combine the parent's and subsidiary's operating activities as if the two companies were a single reporting
company, even though both companies continue to operate as separate legal entities.
It is appropriate to consolidate financial statements of two companies when the parent company owns a controlling interest (more than 50%) in the
voting stock of the subsidiary.

53. Investments in debt securities are classified as "held-to-maturity," "trading," or "available-for-sale" securities. Held-to-maturity securities are
debt securities that the company expects to hold until they mature, which means until they become payable. Trading securities are securities that
the investor expects to sell in the near future. These investments are adjusted to fair value with the unrealized gain or loss included in net income.
Available-for-sale securities are investments that do not fit the other two categories; they are not expected to be sold in the near future, yet they are
not expected to be held to maturity either. These investments are adjusted to fair value with the unrealized gain or loss included in comprehensive
income.

54. Consolidation method :: Used when an investor has controlling influence. and Held-to-maturity securities :: This category is not used for equity
investments. and Available-for-sale securities :: Used when an investor has insignificant influence and does not expect to sell in the near future. and
Equity method :: Used when an investor has significant, but not controlling influence. and Trading securities :: Used when an investor expects to
sell in the near future.

55. Held-to-maturity securities :: This category is used only for debt securities. and Equity method :: An investor owns 40% of the common voting
shares in the company and can exercise significant influence. and Available-for-sale securities :: Common stock not held for immediate resale
and the investor owns 2% of the outstanding shares. and Consolidation method :: An investor owns over 50% of the common voting shares in the
company. and Trading securities :: Common stock held for immediate resale.
App_D Summary
Category # of Questions
AACSB: Analytic 16
AACSB: Reflective Thinking 39
AICPA: Critical Thinking 14
AICPA: Measurement 19
AICPA: Reporting 22
Blooms: Analysis 12
Blooms: Application 4
Blooms: Comprehension 25
Blooms: Knowledge 14
Difficulty: Easy 13
Difficulty: Hard 9
Difficulty: Medium 33
Learning Objective: AppD-01 Explain why companies invest in other companies. 8
Learning Objective: AppD-02 Account for investments in equity securities when the investor has insignificant 19
influence.
Learning Objective: AppD-03 Account for investments in equity securities when the investor has significant influence. 11
Learning Objective: AppD-04 Account for investments in equity securities when the investor has controlling influence. 5
Learning Objective: AppD-05 Account for investments in debt securities. 18
Spiceland - Appendix D... 55