Financial Accounting 7th Edition

Harrison Test Bank

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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) On the statement of cash flows, the cash paid to acquire another company is reported as a(n): 1)
A) investing inflow. B) financing outflow.
C) financing inflow. D) investing outflow.
Answer: D
Explanation: A)
B)
C)
D)

2) The investor should generally use the equity method of accounting for the investee if the investor 2)
owns what percentage of the outstanding stock of the investee?
A) 50% - 100% B) 0% - 15% C) 20% - 50% D) More than 50%
Answer: C
Explanation: A)
B)
C)
D)

3) The receipt of a stock dividend: 3)

A) increases assets and increases retained earnings.
B) increases assets and decreases stockholders' equity.
C) increases assets and increases paid-in-capital.
D) has no effect on assets or total equity.
Answer: D
Explanation: A)
B)
C)
D)

4) When a premium on a held-to-maturity bond investment is amortized by the company holding the 4)
investment,:
A) the amount of interest revenue recognized will increase.
B) the amount of cash received as an interest payment will be reduced.
C) the amount of cash received as an interest payment will be increased.
D) the amount of interest revenue recognized will decrease.
Answer: D
Explanation: A)
B)
C)
D)

1
5) Tupelo Corporation used the equity method to account for a 25% ownership interest in Jordan 5)
Corporation. If Jordan Corporation reports $300,000 of income and pays $60,000 of dividends, the
net effect of the entries made by Tupelo Corporation will be to:
A) increase the Investment account by $60,000.
B) increase the Investment account by $240,000.
C) reduce the Investment account by $240,000.
D) reduce the Investment account by $60,000.
Answer: A
Explanation: A)
B)
C)
D)

6) How are available-for-sale investments in stock reported on the balance sheet? 6)

A) As both long-term assets and stockholders' equity
B) As current assets
C) As either current assets or long-term assets, depending on when the investment is expected to
be sold
D) As long-term assets
Answer: C
Explanation: A)
B)
C)
D)

7) NewLook Company owns all of the stock of Harlow Corporation and 80% of the stock of Tamblyn 7)
Corporation. NewLook earned net income of $500,000; Harlow earned $130,000; and Tamblyn
earned $115,000. NewLook's consolidated income statement would report net income of:
A) $722,000. B) $745,000. C) $805,000. D) $630,000.
Answer: A
Explanation: A)
B)
C)
D)

8) A foreign-currency transaction gain/loss is: 8)

A) not reported on the income statement, but is adjusted by debiting or crediting Retained
Earnings.
B) reported on the income statement as an extraordinary item.
C) reported on the balance sheet as an equity account.
D) reported on the income statement as other income/expense.
Answer: D
Explanation: A)
B)
C)
D)

2
 9) Amortizing a discount on a held-to-maturity investment will cause the Investment account and 9)
interest revenue respectively to:
A) increase and decrease. B) decrease and increase.
C) increase and increase. D) decrease and decrease.
Answer: C
Explanation: A)
B)
C)
D)

10) Which of the following is the method used when one company owns 20% to 50% of the shares of 10)
another parent company?
A) Consolidation method B) Equity method
C) Amortized method D) Market value method
Answer: B
Explanation: A)
B)
C)
D)

11) Amortizing a premium on a held-to-maturity investment will cause the Investment account and 11)
interest revenue respectively to:
A) increase and decrease. B) decrease and increase.
C) decrease and decrease. D) increase and increase.
Answer: C
Explanation: A)
B)
C)
D)

12) An investment in common stock acquired during the year at a cost of $20,000 has a year-end 12)
market value of $21,250. The year-end adjusting entry requires a:
A) debit to Long-Term Investments for $1,250.
B) credit to Allowance to Adjust investment to Market for $1,250.
C) debit to Allowance to Adjust Investments to Market for $1,250.
D) debit to Unrealized Gain on Investment for $1,250.
Answer: C
Explanation: A)
B)
C)
D)

3
13) On a worksheet for a consolidated entity balance sheet, the elimination entry requires: 13)
A) debits to the stockholders' equity accounts of the parent.
B) a debit to Investment in Subsidiary.
C) a credit to Investment in Subsidiary.
D) credits to the stockholders' equity accounts of the subsidiary.
Answer: C
Explanation: A)
B)
C)
D)

14) A foreign-currency transaction gain or loss on a credit purchase is calculated as the difference 14)
between the exchange rates on the date:
A) of the purchase and the date of cash payment for the purchase.
B) the merchandise is ordered and the date it arrives.
C) the merchandise is ordered and the date payment is made for the merchandise.
D) the merchandise is purchased and the date it is sold.
Answer: A
Explanation: A)
B)
C)
D)

15) Which of the following terms represents a subsidiary company's equity that is held by stockholders 15)
other than the parent company?
A) Minority interest B) Directing interest
C) Equity interest D) Controlling interest
Answer: A
Explanation: A)
B)
C)
D)

16) The gain or loss on the sale of an investment classified as "available-for-sale" is measured by 16)
comparing the amount received from the sale of investment with the:
A) cost of the investment.
B) amortized cost of the investment.
C) market value of the investment.
D) lower-of-cost-or-market value of the investment.
Answer: A
Explanation: A)
B)
C)
D)

4
17) The three methods of accounting for stock investments are the market value method, the 17)
consolidation method, and the equity method. The appropriate method to use depends on the
percentage of ownership. Which of the following statements is true?
A) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
market value method, consolidation method, and equity method should be used, respectively.
B) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
consolidation method, equity method, and market value method should be used, respectively.
C) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
market value method, equity method, and consolidation method should be used, respectively.
D) When the percentages of ownership are less than 20%, 20%-50%, and greater than 50%, the
equity method, market value method, and consolidation method should be used, respectively.
Answer: C
Explanation: A)
B)
C)
D)

18) Subsidiary Company borrowed $75,000 from Parent Company on a note payable during the year. 18)
Before the consolidation entries were made on the worksheet, the balances in Parent Company's
Notes Receivable and Notes Payable accounts were $175,000 and $255,000, respectively. A
consolidated balance sheet shows:
A) Notes Receivable of $100,000 and Notes Payable of $255,000.
B) Notes Receivable of $175,000 and Notes Payable of $180,000.
C) Notes Receivable of $175,000 and Notes Payable of $330,000.
D) Notes Receivable of $250,000 and Notes Payable of $255,000.
Answer: A
Explanation: A)
B)
C)
D)

19) If a parent company and its subsidiary have accounts receivable from mutually exclusive external 19)
sources in the amounts of $155,000 and $145,000, respectively, the consolidated balance sheet for
the parent and its subsidiary will show:
A) net accounts receivable of $10,000.
B) only the parent's accounts receivable balance.
C) one accounts receivable balance of $300,000.
D) both amounts, but it will list them in two separate accounts.
Answer: C
Explanation: A)
B)
C)
D)

5
20) On April 1, Allen Company purchased $25,000 of Stevens Corporation's 8% bonds at a purchase 20)
price of 96. Allen Company, whose year end is December 31, expects to hold the bonds until their
maturity date 5 years from the date of purchase. Interest on the bonds will be paid every April 1
and October 1 until maturity. Allen Company uses the straight-line method to amortize premium
or discount on held-to-maturity investments. What is the carrying value of the investment at
December 31?
A) $23,850 B) $25,000 C) $24,150 D) $24,000
Answer: C
Explanation: A)
B)
C)
D)

21) How do consolidation entries in a worksheet affect the stockholders' equity of parent and 21)
subsidiary corporations?
A) The stockholders' equity of the parent will be eliminated, but investment in subsidiary will be
presented.
B) Neither investment in subsidiary nor the subsidiary's stockholders' equity will be presented.
C) Both investment in subsidiary and the stockholders' equity of the parent will be eliminated.
D) Investment in subsidiary will be presented, but the stockholders' equity of the subsidiary will
be eliminated.
Answer: B
Explanation: A)
B)
C)
D)

22) The Hammer Company paid $1,300,000 to purchase 35% of the outstanding stock of the Anvil 22)
Corporation. Anvil Corporation reports $425,000 of net income and paid a cash dividend of
$115,000. These three events will increase Hammer Company's Investment account from $0 to:
A) $1,725,000. B) 1,408,500. C) $1,610,000. D) $40,250.
Answer: B
Explanation: A)
B)
C)
D)

23) A controlling interest exists when the investor: 23)

A) owns more than 50% of the investee's voting stock.
B) uses the market value method of accounting for the investment.
C) uses the equity method to account for the investment.
D) owns more than 20% of the investee's voting stock.
Answer: A
Explanation: A)
B)
C)
D)

6
24) Which of the following brings the dollar amount of the total liabilities and stockholders' equity of a 24)
foreign subsidiary into agreement with the dollar amount of its total assets?
A) The foreign-currency hedging adjustment
B) The foreign-currency rate of return adjustment
C) The foreign-currency translation adjustment
D) The foreign-currency amortization adjustment
Answer: C
Explanation: A)
B)
C)
D)

25) Consolidated net income for a parent and its partially owned subsidiary would always be equal to 25)
the total of the parent company’s net income:
A) plus the subsidiary's net income and the net income of the minority interest.
B) plus the minority percentage of the subsidiary's net income.
C) plus the subsidiary's net income.
D) plus the parent's share of the subsidiary's net income.
Answer: D
Explanation: A)
B)
C)
D)

26) Douglas Company purchased 40% of the outstanding shares of Outrigger Corporation on January 1 26)
at a cost of $675,000. Outrigger Corporation reported net income of $87,000 and paid total
dividends of $33,000 for the year. At the end of the year, the Outrigger shares had a current market
value of $680,000. After all necessary adjusting entries are made for the year, the balance in
Douglas Company's Long-Term Investment account will be:
A) $729,000. B) $680,000. C) $696,600. D) $675,000.
Answer: C
Explanation: A)
B)
C)
D)

27) When a parent-subsidiary relationship exists between two companies,: 27)

A) the parent company must use the cost method to account for the subsidiary.
B) the parent company will keep one set of accounting records covering both companies.
C) both the parent and the subsidiary will continue to keep their own separate accounting
records as if the parent-subsidiary relationship does not exist.
D) the subsidiary company will keep one set of accounting records covering both companies.
Answer: C
Explanation: A)
B)
C)
D)

7
28) Held-to-maturity investments are reported on the balance sheet at their: 28)
A) amortized cost. B) historical cost.
C) par value or stated value. D) current market value.
Answer: A
Explanation: A)
B)
C)
D)

29) A gain or loss on the sale of a long-term investment using the equity method is determined by 29)
comparing the cash received with the:
A) lower-of-cost-or-market value of the long-term investment.
B) market value of the long-term investment.
C) cost of the long-term investment.
D) cost of the long-term investment adjusted for the investor's share of the investee's net income
and cash dividends, while the investment was held by the investor company.
Answer: D
Explanation: A)
B)
C)
D)

30) Which of the following would NOT be presented on a consolidated balance sheet after the accounts 30)
of the parent and subsidiary have been combined?
A) Stockholders' equity accounts for the parent
B) Liabilities of the subsidiary
C) Assets of the subsidiary
D) Stockholders' equity accounts for the subsidiary
Answer: D
Explanation: A)
B)
C)
D)

31) Which of the following terms represents an increase in foreign currency value relative to the U.S. 31)
dollar between the dates of purchase and payment?
A) Exchange decrease B) Exchange translation
C) Exchange loss D) Exchange gain
Answer: C
Explanation: A)
B)
C)
D)

8
32) On January 1, 2008, Centurian Corporation purchased 40% of the outstanding stock of Street Kings 32)
Corporation for $750,000. Net income reported by Street Kings Corporation for 2007 was $110,000.
Dividends paid by Street Kings Corporation during 2007 were $65,000. The long-term investment
will appear on Centurian Corporation's December 31, 2008 balance sheet at:
A) $750,000. B) $860,000. C) $768,000. D) $795,000.
Answer: C
Explanation: A)
B)
C)
D)

33) An investor who owns 35% of the outstanding stock of another company should report the 33)
investment using the:
A) historical cost. B) equity method.
C) consolidated method. D) market value method.
Answer: B
Explanation: A)
B)
C)
D)

34) The journal entry to record the sale of an available-for-sale investment includes a loss on sale of 34)
investment for $700. The income statement will reflect:
A) an other expense of $700.
B) nothing, since the entry impacts only asset accounts.
C) an extraordinary loss of $700.
D) a decrease in net sales of $700.
Answer: A
Explanation: A)
B)
C)
D)

35) Which of the following terms represents a decrease in foreign currency value relative to the U.S. 35)
dollar between the dates of purchase and payment?
A) Exchange gain B) Exchange translation
C) Exchange decrease D) Exchange loss
Answer: A
Explanation: A)
B)
C)
D)

9
36) A U.S. company sold merchandise on account to a Greek company, for 500,000 euros. The relevant 36)
exchange rates for the Euro were as follows:

Date of sale $ 1.47

Date of cash receipt $ 1.49
Date of delivery $ 1.51

The exchange rate gain or loss for the U.S. company on this transaction was a:
A) $10,000 gain. B) $10,000 loss. C) $20,000 loss. D) $20,000 gain.
Answer: A
Explanation: A)
B)
C)
D)

37) The journal entry to record amortization of a bond discount on a held-to-maturity investment 37)
includes a:
A) debit to Investment in Bonds and a credit to Interest Revenue.
B) debit to Cash and a credit to Investment in Bonds.
C) debit to Cash and a credit to Interest Revenue.
D) debit to Interest Revenue and a credit to Investment in Bonds.
Answer: A
Explanation: A)
B)
C)
D)

38) Blueberry Jam Company owns 37% of Georgia Peach Company. Net income for Georgia Peach 38)
Company for the year is $317,000. The journal entry prepared by Blueberry Jam Company includes
a:
A) credit to Long-Term Investments for $199,710.
B) debit to Long-Term Investments for $117,290.
C) credit to Long-Term Investments for $117,290.
D) debit to Long-Term Investments for $199,710.
Answer: B
Explanation: A)
B)
C)
D)

39) The foreign-currency translation adjustment appears on the: 39)

A) balance sheet as a contra-asset account.
B) income statement as other income/expense.
C) balance sheet as part of stockholders' equity.
D) income statement as separate revenue account.
Answer: C
Explanation: A)
B)
C)
D)

10
40) On April 1, Everjoy Company purchased $30,000 of Miller Corporation's 8% bonds at a purchase 40)
price of 95. Everjoy Company, whose year end is December 31, expects to hold the bonds until their
maturity date 5 years from the date of purchase. Interest on the bonds will be paid every April 1
and October 1 until maturity. Assuming the premium or discount is amortized every interest
payment date using straight-line amortization, how much cash will Everjoy receive and how much
total interest revenue will Everjoy Company report relative to the October 1 interest payment?
A) Cash 1,350; Interest Revenue 1,350 B) Cash 1,350; Interest Revenue 1,200
C) Cash 900; Interest Revenue 1,200 D) Cash 1,200; Interest Revenue 1,350
Answer: D
Explanation: A)
B)
C)
D)

41) The purchase of held-to-maturity investments would appear on a statement of cash flows in: 41)
A) the operating activities section.
B) the financing activities section.
C) the investing activities section.
D) none of the above. The purchase would not appear on a statement of cash flows.
Answer: C
Explanation: A)
B)
C)
D)

42) Which of the following terms represents converting the cost of an item given in one currency to its 42)
cost in a different currency?
A) Foreign currency exchange rate B) Foreign currency translation
C) Foreign market value D) Dollar value exchange rate
Answer: B
Explanation: A)
B)
C)
D)

43) Issuing bonds are shown on the statement of cash flows as: 43)
A) investing activities.
B) operating activities.
C) financing activities.
D) none of the above. It is not shown on the statement of cash flows.
Answer: C
Explanation: A)
B)
C)
D)

11
44) The Allowance to Adjust Investment to Market account has a current debit balance of $900. 44)
Available-for-sale investments with a cost a $5,000 have a current market value of $6,350. The
adjusting entry will require a:
A) credit to Allowance to Adjust Investments to Market for $450.
B) debit to Allowance to Adjust Investments to Market for $1,350.
C) debit to Allowance to Adjust Investments to Market for $450.
D) credit to Allowance to Adjust Investments to Market for $1,350.
Answer: C
Explanation: A)
B)
C)
D)

45) The journal entry to record the receipt of a cash dividend arising from an available-for-sale 45)
investment held by a company includes:
A) a debit to Cash and a credit to Dividend Revenue.
B) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
C) a debit to Cash and a credit to Unrealized Gain on Investments.
D) no journal entry. Only a memorandum entry is required.
Answer: A
Explanation: A)
B)
C)
D)

46) If an investor company owns between 20% and 50% of the common stock of another business, cash 46)
dividends received from the investee company are generally recorded by the investor company by:
A) decreasing the value of the investor's Investment account.
B) decreasing the investor company's Common Stock account.
C) increasing the Dividend Revenue account.
D) increasing the value of the investor's Investment account.
Answer: A
Explanation: A)
B)
C)
D)

47) A US company purchased merchandise on account from a Spanish firm for 200,000 euros. Assume 47)
the exchange rates for the Euro were as follows:

Date of sale $ 1.47

Date of cash receipt $ 1.49
Date of delivery $ 1.51

The exchange rate gain/loss for the U.S. company on this transaction was a:
A) $1,500 gain. B) $4,000 loss. C) $4,500 gain. D) $4,500 loss.
Answer: B
Explanation: A)
B)
C)
D)

12
48) The Unrealized Gains and Losses on Available-for-sale Securities account appear in which 48)
financial statement?
A) The balance sheet in the assets section
B) The balance sheet in the liabilities section
C) The income statement as an operating expense
D) The balance sheet as part of stockholders' equity
Answer: D
Explanation: A)
B)
C)
D)

49) The amortized cost of a held-to-maturity investment is the: 49)

A) par value plus issue cost.
B) purchase price minus annual bond expense.
C) purchase price adjusted for any change in market value.
D) purchase price plus any unamortized premium.
Answer: D
Explanation: A)
B)
C)
D)

50) Assets and liabilities of a foreign subsidiary are translated into dollars on a consolidated balance 50)
sheet at the:
A) older, historical exchange rates on the date of the purchase of the subsidiary's stock.
B) anticipated exchange rate in effect over the next 5 years.
C) exchange rate in effect on the date of the financial statements.
D) average exchange rate in effect over the past 5 years.
Answer: C
Explanation: A)
B)
C)
D)

51) Abba Company purchased 1,000 shares of Dabber Company at $20 per share. Abba received an 51)
additional 250 shares from Dabber Company as a stock dividend. After receiving the stock
dividend, the total value of the investment in Dabber and cost per share of Dabber, respectively is:
A) $25,000 and $20. B) $20,000 and $20.
C) $20,000 and $16. D) $25,000 and $16.
Answer: C
Explanation: A)
B)
C)
D)

13
52) A consolidated balance sheet shows: 52)
A) combined assets and liabilities for the parent and the subsidiary, but stockholders' equity for
solely the parent.
B) combined assets and stockholders' equity for the parent and the subsidiary, but liabilities for
solely the subsidiary.
C) combined assets and liabilities for the parent and the subsidiary, but stockholders' equity for
solely the subsidiary.
D) combined liabilities and stockholders' equity for the parent and subsidiary, but assets for
solely the parent.
Answer: A
Explanation: A)
B)
C)
D)

53) The equity method of accounting for a stock investment should generally be used when the 53)
investor owns a level of stock ownership that:
A) requires the investor to notify the government of any plans to acquire a controlling interest in
the investee company.
B) gives the investor significant influence over the investee company.
C) usually indicates a plan to acquire a controlling interest in the investee company.
D) is the controlling interest in the investee company.
Answer: B
Explanation: A)
B)
C)
D)

54) When referring to foreign-currency transactions, hedging is a process in which: 54)

A) a company protects itself from losing money in one transaction by engaging in a
counterbalancing transaction.
B) companies sell the same product in various countries at similar prices to minimize the
currency risks associated with any one particular country.
C) companies wager that the currency of one country will rise relative to their own.
D) a company wagers that the currency of one country will fall relative to its own.
Answer: A
Explanation: A)
B)
C)
D)

55) On the statement of cash flows, the cash paid for 30% of a corporation to be accounted for under the 55)
equity method is shown as a(n):
A) increase in financing activities. B) decrease in financing activities.
C) increase in investing activities. D) decrease in investing activities.
Answer: D
Explanation: A)
B)
C)
D)

14
56) Which of the following is the method used when one company owns more than 50% of the shares 56)
of another company?
A) Market value method B) Equity method
C) Amortized method D) Consolidation method
Answer: D
Explanation: A)
B)
C)
D)

57) A US company purchased merchandise on account from a Canadian firm for $900,000 Canadian. 57)
Assume the exchange rates for the Canadian dollar were as follows:

Date of purchase $ 0.70

Date of delivery $ 0.75
Date of cash payment $ 0.80

The purchase cost of the merchandise was:

A) $900,000. B) $675,000. C) $630,000. D) $720,000.
Answer: C
Explanation: A)
B)
C)
D)

58) The journal entry to record amortization of a bond premium on a held-to-maturity investment 58)
includes a:
A) debit to Investment in Bonds and a credit to Interest Revenue.
B) debit to Cash and a credit to Investment in Bonds.
C) debit to Interest Revenue and a credit to Investment in Bonds.
D) debit to Cash and a credit to Interest Revenue.
Answer: C
Explanation: A)
B)
C)
D)

59) On the statement of cash flows, the cash paid to purchase available-for-sale investments is shown 59)
as a(n):
A) decrease in investing activities. B) increase in investing activities.
C) decrease in financing activities. D) increase in financing activities.
Answer: A
Explanation: A)
B)
C)
D)

15
60) On January 1, 2008, Rider Corporation purchased 30% of the outstanding stock of Arapahoe 60)
Corporation for $770,000. Net income reported by Arapahoe Corporation for 2008 was $120,000.
Dividends paid by Arapahoe Corporation during 2008 were $70,000. The amount of investment
revenue that Rider should recognize for 2008 is:
A) $21,000. B) $15,000. C) $36,000. D) $50,000.
Answer: C
Explanation: A)
B)
C)
D)

61) The exchange rate for the Euro was $1.30 on April 3 and $1.35 on April 12. These facts indicate that 61)
the U.S. dollar is:
A) rising and getting weaker. B) falling and getting weaker.
C) falling and getting stronger. D) rising and getting stronger.
Answer: B
Explanation: A)
B)
C)
D)

62) A foreign-currency translation adjustment is most closely associated with: 62)

A) consolidations. B) sales on account.
C) purchases on account. D) all of the above.
Answer: A
Explanation: A)
B)
C)
D)

63) The receipt of a cash dividend: 63)

A) increases assets and increases retained earnings.
B) has no effect on assets or total equity.
C) increases assets and decreases stockholders' equity.
D) increases assets and increases paid-in-capital.
Answer: A
Explanation: A)
B)
C)
D)

16
64) The Allowance to Adjust Investment to Market account has a current credit balance of $979. 64)
Available-for-sale investments with a cost of $19,000 have a current market value of $20,250. The
adjusting entry will require a:
A) credit to Allowance to Adjust Investment to Market for $2,229.
B) debit to Allowance to Adjust Investment to Market for $2,229.
C) debit to Allowance to Adjust Investment to Market for $271.
D) credit to Allowance to Adjust Investment to Market for $271.
Answer: B
Explanation: A)
B)
C)
D)

65) A company that owns between 20% and 50% of the common stock of another business recognizes 65)
revenue from the investment when:
A) the company sells the shares in the investee company.
B) the investee company recognizes net income.
C) the company receives a cash dividend from the investee company.
D) any of the above occur.
Answer: B
Explanation: A)
B)
C)
D)

66) On April 1, 2008, Country Pride Company purchased $8,000 of 7% bonds as a long-term 66)
investment to be held to maturity. Country Pride's year end is December 31. Interest dates are April
1 and October 1. The bonds mature 36 months from the purchase date. The purchase price of the
bonds was $8,570, and the premium is amortized on the straight-line basis. Assume the proper
adjusting entry was made on December 31, 2008 to record accrued interest receivable and
amortization of the premium. The total interest revenue recorded by Country Pride Company on
April 1, 2009 will be:
A) $92.50. B) $46.67. C) $123.33. D) $15.83.
Answer: A
Explanation: A)
B)
C)
D)

67) The journal entry to record the receipt of a stock dividend arising from an available-for-sale 67)
investment held by a company includes:
A) a debit to Cash and a credit to Dividend Revenue.
B) a debit to Cash and a credit to Unrealized Gain on Investments.
C) no journal entry. Only a memorandum entry is required.
D) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
Answer: C
Explanation: A)
B)
C)
D)

17
68) The Allowance to Adjust Investments to Market account has a current credit balance of $950 after 68)
adjustment. Available-for-sale investments have a current market value of $15,000. The carrying
value of the investments is:
A) $15,000.
B) $14,050.
C) $15,950.
D) unknown. The carrying value cannot be computed without knowing the cost of the
investment.
Answer: A
Explanation: A)
B)
C)
D)

69) The entry to eliminate the Investment in Subsidiary account affects: 69)
A) total assets and total stockholders' equity reported by the consolidated company.
B) total assets reported by the parent company and total liabilities reported by the subsidiary
company.
C) total equity reported by the parent company and total equity reported by the subsidiary
company.
D) total assets and total liabilities reported by the consolidated company.
Answer: A
Explanation: A)
B)
C)
D)

70) Which of the following is the method used when one company owns 20% to 50% of the shares of 70)
another company?
A) Equity method B) Consolidation method
C) Market value method D) Amortized method
Answer: A
Explanation: A)
B)
C)
D)

71) A company using the equity method to account for long-term investments should report an 71)
unrealized gain on the investment:
A) only if market exceeds cost.
B) only if market is below cost.
C) if the investee stock has fallen below or risen above its cost to the investor.
D) in no instance. No adjusting entry is made.
Answer: D
Explanation: A)
B)
C)
D)

18
72) A minority interest is defined as: 72)
A) a subsidiary company that represents less than 20% of the value of the consolidated company.
B) a parent company that owns less than 50% of the shares in the subsidiary company.
C) all of the stock of a subsidiary company relative to the parent company.
D) a subsidiary company's equity held by stockholders other than the parent company.
Answer: D
Explanation: A)
B)
C)
D)

73) Under the equity method of accounting for stock investments, cash dividends received from the 73)
investee are recorded by the investor as:
A) a debit to the Investment account of the investor company.
B) a credit to the Investment account of the investor company.
C) a credit to Dividend Revenue of the investor company.
D) no entry. There is no entry made to record dividends in this accounting situation.
Answer: B
Explanation: A)
B)
C)
D)

74) Which of the following is the method used when one company owns less than 20% of the shares of 74)
another company?
A) Amortized method B) Equity method
C) Consolidation method D) Market value method
Answer: D
Explanation: A)
B)
C)
D)

75) In international trade, companies use hedging to protect themselves from the effects of fluctuations 75)
in:
A) interest rates. B) foreign-currency exchange rates.
C) demand for the company's products. D) invoice prices.
Answer: B
Explanation: A)
B)
C)
D)

19
76) Goodwill arises when a parent company: 76)
A) pays less to acquire a subsidiary company than the market value of the subsidiary's net assets.
B) pays more to acquire a subsidiary company than the book value of the subsidiary's net assets.
C) pays less to acquire a subsidiary company than the book value of the subsidiary's net assets.
D) pays more to acquire a subsidiary company than the market value of the subsidiary's net
assets.
Answer: D
Explanation: A)
B)
C)
D)

77) The sale of a held-to-maturity investment would appear on a statement of cash flows as a: 77)
A) cash outflow in the investing activities section.
B) cash inflow in the financing activities section.
C) cash inflow in the investing activities section.
D) cash inflow in the operating activities section.
Answer: C
Explanation: A)
B)
C)
D)

78) Which of the following terms represents more than 50% interest in a subsidiary company? 78)
A) Equity interest B) Minority interest
C) Controlling interest D) Directing interest
Answer: C
Explanation: A)
B)
C)
D)

79) Purchases and sales of held-to-maturity investments are shown on the statement of cash flows as: 79)
A) financing activities.
B) operating activities.
C) investing activities.
D) none of the above. They are not shown on the statement of cash flows.
Answer: C
Explanation: A)
B)
C)
D)

20
80) Available-for-sale investments in stock are reported on the balance sheet at: 80)
A) their historical cost or current market value on the balance sheet date.
B) their current market value.
C) the lower-of-cost-or-market value on the balance sheet date.
D) their amortized cost.
Answer: B
Explanation: A)
B)
C)
D)

81) X Company purchased bonds issued by Z Company on November 1. Z Company's bonds pay 81)
interest semiannually on April 30 and October 31. X Company's financial statements at December
31 will include:
A) Interest Receivable and Interest Revenue. B) Interest Payable and Interest Revenue.
C) Interest Receivable and Interest Expense. D) Interest Payable and Interest Expense.
Answer: A
Explanation: A)
B)
C)
D)

82) With regard to available-for-sale securities, which of the following is used to compute net income? 82)
A) Neither realized gains nor unrealized gains
B) Both unrealized gains and realized gains
C) Realized gains
D) Unrealized gains
Answer: C
Explanation: A)
B)
C)
D)

83) Which of the following would NOT be included in the elimination entries shown on a worksheet 83)
used in preparing consolidated financial statements?
A) A debit to Common Stock-Subsidiary
B) A debit to Retained Earnings-Subsidiary
C) A credit to Notes Receivable from Subsidiary
D) A debit to Investment in Subsidiary
Answer: D
Explanation: A)
B)
C)
D)

21
84) Which of the following is NOT eliminated on a consolidated balance sheet? 84)
A) Assets of the subsidiary
B) Loans made by a subsidiary to a parent company
C) Stockholders' equity accounts of the subsidiary
D) Investment in Subsidiary account
Answer: A
Explanation: A)
B)
C)
D)

85) On the statement of cash flows, the cash paid to purchase held-to-maturity investments is shown 85)
as a(n):
A) decrease in financing activities. B) increase in investing activities.
C) decrease in investing activities. D) increase in financing activities.
Answer: C
Explanation: A)
B)
C)
D)

86) Amortization of a discount or premium on a held-to-maturity investment affects all of the 86)
following EXCEPT:
A) the amount of cash received when interest payments are made.
B) retained earnings of the investor.
C) the carrying value of the bonds on the investor's books.
D) interest revenue of the investor.
Answer: A
Explanation: A)
B)
C)
D)

87) On the statement of cash flows, the cash received from selling available-for-sale securities is shown 87)
as a(n):
A) increase in investing activities. B) decrease in financing activities.
C) increase in financing activities. D) decrease in investing activities.
Answer: A
Explanation: A)
B)
C)
D)

22
 88) Which of the following terms represents the measure of one country's currency against another 88)
country's currency?
A) Dollar value exchange rate B) Foreign currency translation
C) Foreign currency exchange rate D) Foreign market value
Answer: C
Explanation: A)
B)
C)
D)

89) Abler Company owns 40% of Saparo Company. Saparo Company paid $40,000 cash dividends for 89)
the year. Abler Company's journal entry to record the dividends includes a:
A) credit to Dividend Revenue for $16,000.
B) credit to Long-Term Investments for $40,000.
C) credit to Dividend Revenue for $40,000.
D) credit to Long-Term Investments for $16,000.
Answer: D
Explanation: A)
B)
C)
D)

90) An investor company with a 40% interest in an investee debited the Investment account for $70,000 90)
and credited the account for $55,000. Based on this information, the investee must have paid
dividends of:
A) $28,000. B) $137,500. C) $6,000. D) $22,000.
Answer: B
Explanation: A)
B)
C)
D)

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

91) For multinational companies, stockholders' equity in the foreign subsidiaries' financial statements 91)
is translated into U.S. dollars at the historical exchange rate on the date of the financial statements.
Answer: True False
Explanation:

92) The Allowance to Adjust Investment to Market is a companion account to Long-Term Investments. 92)
Answer: True False
Explanation:

93) The equity method is used to account for stock investments in which the investor company owns 93)
between 20% and 50% of another company's stock.
Answer: True False
Explanation:

23
 94) When the exchange rate of nation A's currency rises relative to another nation's currency, the 94)
currency of nation A is said to have weakened.
Answer: True False
Explanation:

95) When the equity method is used to account for stock investments, the investor company recognizes 95)
revenue when it receives a cash dividend from the investee company.
Answer: True False
Explanation:

96) A year-end elimination entry is required to remove the parent company's equity from the books of 96)
the subsidiary company.
Answer: True False
Explanation:

97) Short-term investments in bonds are referred to as held-to-maturity investments. 97)

Answer: True False
Explanation:

98) Held-to-maturity investments are shown on the balance sheet at their current market value. 98)
Answer: True False
Explanation:

99) Unrealized gains and losses on available-for-sale securities are used to compute net income. 99)
Answer: True False
Explanation:

100) An investee reports available-for-sale securities that might be sold in the next 12 months as a 100)
long-term investment.
Answer: True False
Explanation:

101) The Allowance to Adjust Investment to Market is reported in the Long-Term Assets section of the 101)
balance sheet.
Answer: True False
Explanation:

102) Purchases and sales of held-to-maturity investments are reported as financing activities on the 102)
cash-flow statement.
Answer: True False
Explanation:

103) Realized gains on the sale of available-for-sale securities are used to compute net income. 103)
Answer: True False
Explanation:

104) Most bonds are held by financial institutions. 104)

Answer: True False
Explanation:

24
105) The Unrealized Gain/Loss on the Investment account is reported as other comprehensive income or 105)
other comprehensive expense on the income statement.
Answer: True False
Explanation:

106) When a U.S. company owns a foreign company, a foreign-currency translation adjustment is made 106)
after consolidation entries are made.
Answer: True False
Explanation:

107) An investment in common stock acquired during the year at a cost of $45,000 has a market value at 107)
year end of $45,771. The adjusting entry requires a debit to Allowance to Adjust Investment to
Market for $771.
Answer: True False
Explanation:

108) The International Accounting Standards Board sets accounting standards for all countries EXCEPT 108)
the United States.
Answer: True False
Explanation:

109) Consolidation accounting is an exception to the GAAP entity concept. 109)

Answer: True False
Explanation:

110) Goodwill arises when a parent company must pay more to acquire a subsidiary company than the 110)
market value of the subsidiary's net assets.
Answer: True False
Explanation:

111) Long-term investments are listed on the balance sheet after current assets but before property, 111)
plant, and equipment.
Answer: True False
Explanation:

112) A decrease in foreign currency value relative to the U.S. dollar between the date of purchase and 112)
date of payment will create an exchange gain.
Answer: True False
Explanation:

113) A company that owns less than 20% of another company's stock must use the consolidation method 113)
of accounting.
Answer: True False
Explanation:

114) In international trade a hedge can be used to mitigate expected exchange losses. 114)
Answer: True False
Explanation:

25
115) Available-for-sale investments in stock are reported on the balance sheet at their current market 115)
value.
Answer: True False
Explanation:

116) When an investor owns 35% of the stock of another business, cash dividends received from the 116)
investee company are generally recorded by decreasing the value of the Investment account.
Answer: True False
Explanation:

117) U.S. GAAP has been universally accepted for use as an international accounting standard. 117)
Answer: True False
Explanation:

118) Company A is said to have a minority interest in the subsidiary Company B when it owns less than 118)
100% of the outstanding shares of Company B.
Answer: True False
Explanation:

119) When the equity method is used to account for stock investments, the carrying value of an 119)
investment is computed as the cost of the investment plus a proportional share of investee net
income minus a proportional share of cash dividends paid by the investee.
Answer: True False
Explanation:

26
Answer Key
Testname: C10

1) D
2) C
3) D
4) D
5) A
6) C
7) A
8) D
9) C
10) B
11) C
12) C
13) C
14) A
15) A
16) A
17) C
18) A
19) C
20) C
21) B
22) B
23) A
24) C
25) D
26) C
27) C
28) A
29) D
30) D
31) C
32) C
33) B
34) A
35) A
36) A
37) A
38) B
39) C
40) D
41) C
42) B
43) C
44) C
45) A
46) A
47) B
48) D
49) D
50) C
27
Answer Key
Testname: C10

51) C
52) A
53) B
54) A
55) D
56) D
57) C
58) C
59) A
60) C
61) B
62) A
63) A
64) B
65) B
66) A
67) C
68) A
69) A
70) A
71) D
72) D
73) B
74) D
75) B
76) D
77) C
78) C
79) C
80) B
81) A
82) C
83) D
84) A
85) C
86) A
87) A
88) C
89) D
90) B
91) TRUE
92) TRUE
93) TRUE
94) FALSE
95) FALSE
96) FALSE
97) FALSE
98) FALSE
99) FALSE
100) FALSE
28
Answer Key
Testname: C10

101) FALSE
102) FALSE
103) TRUE
104) TRUE
105) TRUE
106) FALSE
107) TRUE
108) FALSE
109) FALSE
110) TRUE
111) TRUE
112) TRUE
113) FALSE
114) TRUE
115) TRUE
116) TRUE
117) FALSE
118) TRUE
119) TRUE

29