Chapter 8 Accounting

Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 8 Long-Term Investments & the Time Value of Money

8.1 Learning Objective 8-1
1) Long-term investments are listed on the balance sheet after current assets and property, plant, and
equipment.
Answer: FALSE
Diff: 2
LO: 8-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2) Investments can never be classified as short-term investments.
Answer: FALSE
Diff: 1
LO: 8-1
AASCB: Analytical Skills
3) Stocks and bonds projected to be held for longer than one year are long-term investments.
Answer: TRUE
Diff: 2
LO: 8-1
4) On the balance sheet, assets are listed by dollar amount (lowest to highest).
Answer: FALSE
Diff: 1
LO: 8-1
5) Long-term investments are more liquid than property, plant, and equipment, but less liquid than
current assets.
Answer: TRUE
Diff: 2
LO: 8-1
1
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6) An investment is a held-to-maturity investment if it is management's intent to sell the investment.

Answer: FALSE
Diff: 2
LO: 8-1
7) Bonds of publicly traded companies are traded similarly to stocks.
Answer: TRUE
Diff: 1
LO: 8-1
8) The interest rate on a bond determines the amount of interest the debtor company is expected to pay.
Answer: TRUE
Diff: 1
LO: 8-1
9) Market prices of bonds have no correlation to market interest rate.
Answer: FALSE
Diff: 1
LO: 8-1
10) If the market interest rate is greater than the face rate of interest on a bond, the bond will sell at a
discount.
Answer: TRUE
Diff: 2
LO: 8-1
2
11) If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face value
of the bonds until it reaches the maturity date.
Answer: TRUE
Diff: 3
LO: 8-1
12) If $125,000 face value bonds are issued at 103, the bond is selling for $103,000.
Answer: FALSE
Diff: 2
LO: 8-1
13) Bond investments are initially recorded at cost.
Answer: TRUE
Diff: 3
LO: 8-1
14) The carrying amount of bonds at maturity should be equal to the face value of the bonds.
Answer: TRUE
Diff: 2
LO: 8-1
15) On the balance sheet, Interest Receivable is reported as a fixed asset.
Answer: FALSE
Diff: 1
LO: 8-1
16) The accounting rules for investments in stock have no bearing on the percentage of ownership by the
investor
Answer: FALSE
Diff: 1
LO: 8-1
3

17) Assets are listed on the balance sheet from the smallest dollar amount to the largest dollar amount.
Answer: FALSE
Diff: 1
LO: 8-1
18) Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has
100,000 shares of common stock outstanding. Big League Corporation is the:
A) investee.
B) investor.
C) controlling company.
D) parent company.
Answer: B
Diff: 2
LO: 8-1
100,000 shares of common stock outstanding. Small Time Company is the:
A) investee.
B) investor.
C) controlling company.
D) parent company.
Answer: A
Diff: 2
LO: 8-1
100,000 shares of common stock outstanding. Big League Corporation will show the investment on their
books as:
A) an asset.
B) an equity.
C) a liability.
D) other comprehensive income.
Answer: A
Diff: 2
LO: 8-1
4

21) When the investment is readily convertible to cash and the investor plans to convert the investment to
cash within one year, the investment is shown on the balance sheet as:
A) short-term.
B) long-term.
C) equity.
D) either long-term or short-term.
Answer: A
Diff: 2
LO: 8-1
22) The following is the proper order for assets on a balance sheet:
A) Cash, intangibles, inventories, and long-term investments.
B) Cash, accounts receivable, property, plant and equipment, and long-term investments.
C) Cash, long-term investments, property, plant and equipment, and intangibles.
D) Cash, long-term investments, prepaid expenses and property, plant and equipment.
Answer: C
Diff: 2
LO: 8-1
23) All investments not classified as available-for-sale investments or trading securities are:
A) equity investments.
B) debt investments.
C) held-to-maturity investments.
D) profitable investments.
Answer: C
Diff: 2
LO: 8-1
5
24) On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a
maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth
Company has a calendar year end. The entry to record the purchase of the bond investment on January 1,
2012, would include a:
A) debit to Short-Term Investment in Bonds for $100,000.
B) debit to Short-Term Investment in Bonds for$ 90,400.
C) debit to Long-Term Investment in Bonds for $100,000.
D) debit to Long-Term Investment in Bonds for$ 90,400.
Answer: D
Diff: 2
LO: 8-1
Company has a calendar year end. The entry for the receipt of interest on July 1, 2012 would include a:
A) debit to Cash for $3,000.
B) debit to Cash for $6,000.
C) debit to Interest Receivable for $3,000.
D) debit to Interest Receivable for $6,000.
Answer: A
Diff: 2
LO: 8-1
Company has a calendar year end. The entry to amortize the bond investment on July 1, 2012 would
include a:
A) debit to Cash for $ 200.
B) debit to Cash for $1,200.
C) debit to Long-Term Investment in Bonds for $ 200.
D) debit to Long-Term Investment in Bonds for $1,200.
Answer: D
Diff: 2
LO: 8-1
6
Company has a calendar year end. The adjusting entry to accrue interest on December 31, 2012 would
include a:
A) debit to Cash $3,000.
B) debit to Cash $6,000.
C) debit to Interest Receivable $3,000.
D) debit to Interest Receivable $6,000.
Answer: C
Diff: 2
LO: 8-1
Company has a calendar year end. The adjusting entry to amortize the bond investment on December 31,
2012 would include a:
A) debit to Cash $200.
B) debit to Cash $1,200.
C) debit to Long-Term Investment in Bonds $1,200.
D) debit to Long-Term Investment in Bonds $ 200.
Answer: C
Diff: 2
LO: 8-1
Company has a calendar year end. The entry for the receipt of interest on January 1, 2012 would include
a:
A) credit to Interest Revenue $6,000.
B) credit to Interest Receivable $6,000.
C) credit to Interest Revenue $3,000.
D) credit to Interest Receivable $3,000.
Answer: D
Diff: 2
LO: 8-1
7
30) On January 1, 2012, Winston Company purchased 6% bonds for $50,000 cash. Interest is payable
semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would
include a:
A) debit to Interest Receivable for $1,500.
B) credit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $3,000.
Answer: B
Diff: 2
LO: 8-1
31) On January 1, 2012, Winston Company purchased 6% bonds for $50,000 cash. Interest is payable
semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include
a:
A) debit to Interest Receivable for $1,500.
B) credit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $3,000.
Answer: A
Diff: 2
LO: 8-1
32) On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $980. Bucket plans
to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the
interest accrual on December 31 would include a:
A) debit to Interest Receivable for $35.
B) debit to Long-Term Investment in Bonds for $35.
C) debit to Interest Receivable for $70.
D) debit to Long-Term Investment in Bonds for $70.
Answer: A
Diff: 2
LO: 8-1
8
33) On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $760. Bucket plans
to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the
amortization of the bond on December 31 would include a:
A) debit to Interest Receivable for $35.
B) debit to Long-Term Investment in Bonds for $35.
C) debit to Interest Receivable for $10.
D) debit to Long-Term Investment in Bonds for $10.
Answer: D
Diff: 2
LO: 8-1
34) Bond investments are initially recorded at:
A) cost.
B) cost plus accrued interest.
C) fair value.
D) market value.
Answer: A
Diff: 2
LO: 8-1
35) Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel
received cash interest of $1,050. The journal entry to record the purchase on January 1 would include a:
A) debit to Cash $ 1,050.
B) debit to Long-Term Investment in Bonds $42,000.
C) credit to Interest Revenue $1,050.
D) credit to Interest Revenue $42,000.
Answer: B
Diff: 2
LO: 8-1
9
36) Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel
received cash interest of $1,050. The journal entry to record the receipt of interest on July 1 would include
a:
A) debit to Cash $1,050.
B) debit to Long-Term Investment in Bonds $42,000.
C) credit to Interest Receivable $1,050.
D) credit to Interest Receivable $42,000.
Answer: A
Diff: 2
LO: 8-1

1) Dividend revenue is recorded in a stock dividend.
Answer: FALSE
Diff: 1
LO: 8-2
2) Unrealized Gain/Loss on investments account appears under other comprehensive income on a
separate section of the income statement.
Answer: TRUE
Diff: 2
LO: 8-2
3) Available-for-sale investments in stock are reported on the balance sheet at cost.
Answer: FALSE
Diff: 2
LO: 8-2
4) Available-for-sale investments are adjusted from cost to market value.
Answer: TRUE
Diff: 2
LO: 8-2
10

5) The Allowance to Adjust Investments account is a Long-Term Asset account.
Answer: TRUE
Diff: 2
LO: 8-2
6) Unrealized gains and losses result from changes in the investments fair value.
Answer: TRUE
Diff: 2
LO: 8-2
7) The Allowance to Adjust Investment to Market account will always have a debit balance.
Answer: FALSE
Diff: 2
LO: 8-2
8) GAAP requires companies to adjust their available-for-sale-securities to market value as of the balance
sheet date.
Answer: TRUE
Diff: 2
LO: 8-2
9) For accounting purposes, receipt of a stock dividend is handled the same as a receipt of a cash
dividend.
Answer: FALSE
Diff: 2
LO: 8-2
11
10) For a stock dividend, the investor records dividend revenue.

Answer: FALSE
Diff: 1
LO: 8-2
11) Realized gains on the sale of available-for-sale securities cannot be used to compute net income.
Answer: FALSE
Diff: 1
LO: 8-2
12) An investee should report available-for-sale securities that might be sold in the next 12 months as a
short-term investment.
Answer: TRUE
Diff: 1
LO: 8-2
13) Dividends received on stock investments of less than 20% should be credited to the Investment
account.
Answer: FALSE
Diff: 2
LO: 8-2
14) An investment in common stock acquired during the year at a cost of $50,000 has a market value at
year end of $50,290. The adjusting entry requires a credit to Allowance to Adjust Investment to Market for
$290.
Answer: FALSE
Diff: 2
LO: 8-2
12
15) The Allowance to Adjust Investment to Market is a companion to Interest Receivable.

Answer: FALSE
Diff: 1
LO: 8-1
16) On purchase date, Available-for-sale investments in stock are recorded at:
A) their cost.
B) the lower-of-cost-or-market.
C) their amortized cost.
D) their realizable value.
Answer: A
Diff: 1
LO: 8-2
17) On the balance sheet, Available-for-sale investments in stock are reported at:
A) their cost.
B) the lower-of-cost-or-market.
C) their amortized cost.
D) their current market value.
Answer: D
Diff: 2
LO: 8-2
13
18) Perdue Company had the following transactions pertaining to stock investments:
- February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17
per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the purchase of the Hudson stock would include a:
A) debit to Long-Term Investment for $51,000.
B) credit to Long-Term Investment for $51,000.
C) credit to Dividend Revenue for $6,000.
D) debit to Short-Term Investment for $6,000.
Answer: A
Diff: 2
LO: 8-2
- February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17
per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the receipt of the dividends would include a:
D) debit to Dividend Revenue for $6,000.
Answer: B
Diff: 2
LO: 8-2
14
February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17
per share.
June 1, Received cash dividends of $6,000 on Hudson Company stock.
October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the sale of the stock would include a:
C) debit to Gain on Sale of Investment $3,000.
D) debit to Loss on Sale of Investment $3,000.
Answer: B
Diff: 2
LO: 8-2
21) For accounting purposes, the method used to account for long-term investments in common stock is
determined by:
A) the amount paid for the stock by the investor.
B) the extent of an investor's influence on the investee's operating decisions and policies.
C) whether the stock has paid dividends in the past years.
D) whether the dividend declared is a cash or stock dividend.
Answer: B
Diff: 2
LO: 8-2
22) If an investor owns less than 20% of the common stock of another company as a long-term investment:
A) the equity method of accounting should be used for the investment.
B) no dividends are expected to be received.
C) the investor usually has little or no influence on the investee.
D) the investor has significant influence on the investee.
Answer: C
Diff: 2
LO: 8-2
15
23) If 15% of the common stock of an investee company is purchased as a long-term investment, the
appropriate method of accounting for the investment is:
A) the available-for-sale method (Market value method).
B) the equity method.
C) the preparation of the consolidated financial statements.
D) agreed upon with owners of the remaining 90% of stock.
Answer: A
Diff: 2
LO: 8-2
24) The available-for-sale method (market value method) of accounting for long-term investments in stock
should be used when the:
A) investor owns more than 50% of the investee's stock.
B) investor has significant influence over the investee's operating decisions and policies.
C) investor has little or no influence on the investee.
D) investor is a parent company.
Answer: C
Diff: 2
LO: 8-2
25) The market value of an available-for-sale security has decreased from the last carrying value. The
journal entry to record this decrease will include:
A) a debit to the Allowance to Adjust Investment to Market.
B) a credit to the Allowance to Adjust Investment to Market.
C) a credit to the Unrealized Loss on Investment.
D) a debit to the Unrealized Loss on Investment.
Answer: B
Diff: 2
LO: 8-2
16
26) The Allowance to Adjust Investment to Market has a debit balance. Therefore:
A) the Allowance account is subtracted from the carrying amount.
B) the Allowance account is added to the carrying amount.
C) the Allowance account is neither added nor subtracted from the carrying amount.
D) the Allowance account is added to Unrealized Gain or Loss.
Answer: B
Diff: 2
LO: 8-2
27) The market value of an available-for-sale security has increased from the last carrying value. The
journal entry to record this increase will include:
A) a debit to the Allowance to Adjust Investment to Market.
B) a credit to the Allowance to Adjust Investment to Market.
C) a debit to the Unrealized Gain on Investment.
D) no adjustment is required.
Answer: A
Diff: 2
LO: 8-2
28) Unrealized gains and losses from available-for-sale investments arise from:
A) the purchase of an investment.
B) the sale of the investment.
C) changes in the market value of the investment.
D) management's decision to adjust the value of the investment.
Answer: C
Diff: 2
LO: 8-2
29) Realized gains and losses from available-for-sale investments arise from:
A) the purchase of an investment.
B) the sale of the investment.
C) changes in the market value of the investment.
D) management's decision to adjust the value of the investment.
Answer: B
Diff: 2
LO: 8-2
17

30) On the balance sheet, available-for-sale investments in stock are reported as:
A) long-term assets.
B) current assets.
C) both long-term assets and stockholders' equity.
D) either current assets or long-term assets, depending on when the investment is expected to be sold.
Answer: D
Diff: 2
LO: 8-2
31) The balance in the Unrealized Gains and Losses on Available-for-sale Securities account appear in
which financial statement?
A) The balance sheet as a contra asset account.
B) The income statement under Other Expenses and Losses.
C) The balance sheet, as part of the stockholders' equity section.
D) Not shown on the financial statements until the securities are sold.
Answer: C
Diff: 2
LO: 8-2
32) The Unrealized Gain or the Unrealized Loss Account appears:
A) in Other expense.
B) in Other comprehensive income.
C) in Other comprehensive income and Accumulated other comprehensive income.
D) in Other revenue.
Answer: C
Diff: 2
LO: 8-2
18
33) When accounting for available-for-sale securities, which of the following is used to compute net
income?
A) Unrealized gains
B) Realized gains
C) Both unrealized gains and realized gains
D) Neither realized gains nor unrealized gains
Answer: B
Diff: 2
LO: 8-2
34) Receiving a stock dividend from an available-for-sale investment requires the following journal entry:
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) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
D) no journal entry. Investor makes a memorandum entry in the accounting records.
Answer: D
Diff: 2
LO: 8-2
35) Receiving a cash dividend from an available-for-sale investment requires the following journal entry:
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) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
D) no journal entry. Investor makes a memorandum entry in the accounting records.
Answer: A
Diff: 2
LO: 8-2
36) Receiving a cash dividend affects what part of the balance sheet?
A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders' equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total equity
Answer: C
Diff: 2
LO: 8-2
19

37) Receiving a stock dividend affects what part of the balance sheet?
A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders' equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total equity
Answer: D
Diff: 2
LO: 8-2
38) As a result of a stock dividend:
A) the investor's total cost in the investment increases.
B) the investor's cost per share decreases.
C) a journal entry is needed to record the receipt of the stock dividend
D) dividend revenue increases.
Answer: B
Diff: 2
LO: 8-2
39) The gain or loss on the sale of an investment classified as "available-for-sale" is calculated by
comparing the cost of the investment with the:
A) lower-of-cost-or-market value of the investment.
B) amount received from the sale of the investment.
C) market value of the investment.
D) amortized cost of the investment.
Answer: B
Diff: 2
LO: 8-2
20
40) Able Company receives a stock dividend of 50 shares from Cole Company. Able previously owned 750
shares of Cole stock that had a cost basis of $4,800. The cost basis per share of Cole stock is:
A) $6.40.
B) $6.00.
C) $6.85.
D) $96.
Answer: B
Diff: 2
LO: 8-2
41) An investment in common stock acquired during the year at a cost of $40,000 has a year-end market
value of $42,250. The year-end adjusting entry requires a:
A) debit to Long-Term Investments for $2,250.
B) debit to Allowance to Adjust Investments to Market for $2,250.
C) credit to Allowance to Adjust Investments to Market for $2,250.
D) debit to Unrealized Gain on Investment for $2,250.
Answer: B
Diff: 2
LO: 8-2
42) The journal entry to record the sale of an available-for-sale investment includes a gain on sale of
investment of $500. The income statement will reflect:
A) an increase in net sales of $500.
B) another income of $500.
C) an extraordinary gain of $500.
D) nothing, since the entry impacts only asset accounts.
Answer: B
Diff: 2
LO: 8-2
21
43) Other comprehensive income:

A) is a separate section of stockholders' equity.
B) appears on the income statement under revenues.
C) appears on the income statement in a separate section below net income.
D) is shown as a memorandum.
Answer: C
Diff: 2
LO: 8-2
44) Ace Company purchased 1,000 shares of Nott Company at $40 per share. Ace received an additional
250 shares from Nott Company as a stock dividend. After receiving the stock dividend, the total value of
the investment in Nott and cost per share of Nott, respectively is:
A) $50,000 and $40.
B) $40,000 and $32.
C) $50,000 and $32.
D) $40,000 and $40.
Answer: B
Diff: 2
LO: 8-2
45) The Allowance to Adjust Investments to Market account has a current credit balance of $1,150 after
adjustment. Available-for-sale investments have a current market value of $20,000. The carrying value of
the investments is:
A) $20,000.
B) $21,150.
C) $18,850.
D) unknown. The carrying value cannot be computed without knowing the cost of the investment.
Answer: A
Diff: 2
LO: 8-2
22
46) The Allowance to Adjust Investment to Market account has a current credit balance of $892. Availablefor-sale investments with a cost of $17,000 have a current market value of $18,500. The adjusting entry will
require a:
A) credit to Allowance to Adjust Investments to Market for $608.
B) credit to Allowance to Adjust Investments to Market for $2,392.
C) debit to Allowance to Adjust Investments to Market for $608.
D) debit to Allowance to Adjust Investments to Market for $2,392.
Answer: D
Diff: 2
LO: 8-2
47) Which of the following is the method used when one company owns less than 20% of the shares of
another company?
A) Consolidation method.
B) Market value method.
C) Equity method.
D) Minority Interest method.
Answer: B
Diff: 2
LO: 8-2
48) In accounting for investments, entries are made for each of the following except the:
A) acquisition.
B) interest revenue.
C) amortization of any discount or premium.
D) sale.
Answer: C
Diff: 2
LO: 8-2
23

1) When an investor owns 35% of the stock of another business, cash dividends received from the investee
company are generally recorded by increasing the value of the Investment account.
Answer: FALSE
Diff: 2
LO: 8-3
2) The equity method is used to account for stock investments in which the investor company owns less
than 20%.
Answer: FALSE
Diff: 1
LO: 8-3
3) If the equity method is used to account for stock investments, the investor company decreases the
investment account when it receives a cash dividend from the investee company.
Answer: TRUE
Diff: 2
LO: 8-3
4) Investments accounted for by the equity method are initially recorded at market value.
Answer: FALSE
Diff: 2
LO: 8-3
5) If an investor owns between 20% and 50% of an investee's voting stock, it is assumed that the investor
has significant influence on the investee.
Answer: TRUE
Diff: 2
LO: 8-3
24
6) Under the equity method, the investor applies its percentage of ownership in recording its share of the
investee's net income which increases the Investment account.
Answer: TRUE
Diff: 1
LO: 8-3
7) Under the equity method, when the equity of the investee increases, the investment account on the
books increases.
Answer: TRUE
Diff: 1
LO: 8-3
8) When the equity method is used to account for stock investments, the carrying value of an investment
is computed as the cost of the investment and adjusted to fair value as of the balance sheet date.
Answer: FALSE
Diff: 2
LO: 8-3
9) The investment account is debited at acquisition under both the equity method and the available-forsale method of accounting for investments in common stock.
Answer: TRUE
Diff: 2
LO: 8-3
10) Under the equity method, the investor applies its percentage of ownership in recording its share of the
investee's net income, but not dividends.
Answer: FALSE
Diff: 1
LO: 8-3
25
11) When an investor owns between 20% and 50% of the outstanding stock of another company, the
________ method is used to account for stock investments.
A) market value
B) equity
C) consolidated
D) historical cost.
Answer: B
Diff: 1
LO: 8-3
12) An investor who owns 25% of the outstanding stock of another company should report the investment
using the:
A) market value method.
B) consolidated method.
C) equity method.
D) historical cost method.
Answer: C
Diff: 1
LO: 8-3
13) The method used to account for investments in which the investor has 35% of the investee's voting
stock and can significantly influence the decisions of the investee is the:
A) market value method.
B) consolidated method.
C) equity method.
D) historical cost method.
Answer: C
Diff: 1
LO: 8-3
26
14) The investor should generally use the equity method of accounting for the investee if the investor
owns what percentage of the outstanding stock of the investee?
A) 19%
B) 10%
C) 45%
D) More than 50%
Answer: C
Diff: 1
LO: 8-3
15) The equity method of accounting for a stock investment should generally be used when the investor
owns a level of stock ownership that:
A) gives the investor an insignificant influence over the investee.
B) usually indicates a plan to acquire a controlling interest in the investee company.
C) requires the investor to prepare consolidated financial statements.
D) gives the investor significant influence over the investee company.
Answer: D
Diff: 1
LO: 8-3
16) Under the equity method, the Long-Term Investment account is debited when the:
A) investee reports net income.
B) investee reports net loss.
C) investor receives a cash dividend.
D) investment is sold.
Answer: A
Diff: 2
LO: 8-3
27
17) A company that owns 40% of the common stock of another business recognizes revenue from the
investment when:
A) the company sells the shares in the investee company.
B) the investee issues a cash dividend.
C) the investee recognizes net income.
D) the investee issues a stock dividend.
Answer: C
Diff: 1
LO: 8-3
18) Wolverine Corporation owns 29% of Buckeye Corporation. Net income for Buckeye for the year is
$250,000. The journal entry prepared by Wolverine Corporation includes a:
A) debit to Long-Term Investments for $177,500.
B) debit to Long-Term Investments for $72,500.
C) credit to Long-Term Investments for $177,500.
D) credit to Long-Term Investments for $72,500.
Answer: B
Diff: 1
LO: 8-3
19) If an investor company owns 35% of the common stock of another business, income received from the
investee company are generally recorded by the investor company by:
A) decreasing the investor company's Common Stock account.
B) increasing the value of the investor's Investment account.
C) increasing the Dividend Revenue account.
D) decreasing the value of the investor's Investment account.
Answer: B
Diff: 1
LO: 8-3
28
20) Under the equity method of accounting for long-term investments in common stock, when a cash
dividend is received from the investee company:
A) the investor's Investment account is increased.
B) the Dividend Revenue account is increased.
C) the investor's Investment account is decreased.
D) no entry is necessary.
Answer: C
Diff: 2
LO: 8-3
21) Under the equity method of accounting for stock investments, the Investment account is decreased for
the receipt of a dividend because:
A) it is assumed that income will also be received.
B) the dividend decreases the investee's owners' equity, and therefore the investor's investment decreases.
C) the dividend decreases the investee's owners' equity, and therefore the investor's investment increases.
D) no cash is received.
Answer: B
Diff: 1
LO: 8-3
22) If the equity method is used to account for a long-term investment in common stock, cash dividends
received from the investee are recorded by the investor as:
A) a credit to the Investment account.
B) a credit to the Dividend Revenue account.
C) a debit to the Investment account.
D) no entry. There is no entry made to record dividends.
Answer: A
Diff: 1
LO: 8-3
29
23) Under the equity method of accounting for stock investments, the Investment account is increased
when the:
A) investee company reports net income.
B) investee company pays a dividend.
C) investee company reports a loss.
D) the investment is sold at a gain.
Answer: A
Diff: 1
LO: 8-3
24) Acme Company owns 35% of Superior Company. Superior Company paid $35,000 cash dividends for
the year. Acme Company's journal entry to record the dividends includes a:
A) credit to Long-Term Investments for $12,250.
B) credit to Long-Term Investments for $35,000.
D) credit to Dividend Revenue for $35,000.
Answer: A
Diff: 1
LO: 8-3
25) Under the equity method, a company should report an unrealized gain on a long-term investment:
A) when the market price is greater than cost.
B) when the market price is less than cost.
C) if the investee stock has fallen below the investors cost.
D) in no instance. No adjusting entry is made.
Answer: D
Diff: 1
LO: 8-3
30
26) A gain or loss on the sale of a long-term investment using the equity method is calculated by taking
the difference between cash received and:
A) cost of the long-term investment, adjusted by the investees net income, net loss and cash dividends,
while the investment was held by the investor.
B) lower-of-cost-or-market value of the long-term investment.
C) cost of the long-term investment.
D) market value of the long-term investment.
Answer: A
Diff: 1
LO: 8-3
27) Under the equity method, if the Investment is sold at a gain, the gain is:
A) reported as operating revenue.
B) reported on the balance sheet as a long-term asset.
C) reported in the Other Revenue section of the income statement.
D) contributes to gross profit on the income statement.
Answer: C
Diff: 1
LO: 8-3
28) Under the equity method, if the investee company has a net loss, then the investor company will:
A) debit the Investment account for their share of the net loss.
B) credit the Loss on Sale of Investment account for their share of the net loss.
C) credit the Investment account for their share of the net loss.
D) debit or credit the Investment account based on market value.
Answer: C
Diff: 1
LO: 8-3
31
29) Dodson Company owns 17,500 of the 50,000 shares of outstanding common stock of Ferguson
Company. Dodson Company should account for this investment using the:
A) market method.
B) equity method.
C) lower-of-cost-or-market method.
D) consolidation method.
Answer: B
Diff: 1
LO: 8-3
30) Berger Corporation paid $800,000 for 100,000 shares of Oakley Company's common stock, which
represents 40% of Oakley's outstanding common stock. Oakley reported net income of $200,000 and paid
cash dividends of $60,000. Berger should report the investment in Oakley Company on its balance sheet
at:
A) $800,000.
B) $744,000.
C) $824,000.
D) $856,000.
Answer: D
Diff: 2
LO: 8-3
31) On January 1, 2012, Berger Corporation paid $800,000 to purchase 40% of the outstanding stock of
Oakley Company. Oakley Company reported net income of $200,000 for the year ending December 31,
2012 and paid cash dividends of $60,000 during 2012. On January 1, 2013, Berger Corporation sells its
entire investment in Oakley Company for $1,100,000. Berger Corporation will report a(n):
A) realized gain on the sale of $300,000.
B) unrealized gain on the sale of $300,000.
C) realized gain on the sale of $244,000.
D) unrealized gain on the sale of $244,000.
Answer: C
Diff: 2
LO: 8-3
32
32) Davis Company purchased 30% of the outstanding shares of Ocean Corporation on January 1 at a cost
of $580,000. Ocean Corporation reported net income of $95,000 and paid total dividends of $25,000 for the
year. At the end of the year, Ocean shares had a current market value of $590,000. After all necessary
adjusting entries are made for the year, the balance in Davis Company's Long-Term Investment account
will be:
A) $601,000.
B) $580,000.
C) $675,000.
D) $650,000.
Answer: A
Diff: 2
LO: 8-3
33) On January 1, 2012, Cashew Corporation purchased 70,000 of the 210,000 shares of outstanding stock
of Peanut Company for $550,000. Net income reported by Peanut Company for 2012 was $450,000.
Dividends paid by Peanut Company during 2012 were $150,000. The long-term investment will appear on
Cashew Corporation's December 31, 2012 balance sheet in the amount of:
A) $650,000.
B) $450,000.
C) $850,000.
D) $700,000.
Answer: A
Diff: 2
LO: 8-3
34) On January 1, 2012, Rex Corporation purchased 35% of the outstanding stock of Alamo Corporation
for $500,000. Net income reported by Alamo for 2012 was $150,000. Dividends paid by Alamo during 2012
were $40,000. The amount of investment revenue that Rex should recognize for 2012 is:
A) $150,000.
B) $52,500.
C) $38,500.
D) $110,000.
Answer: B
Diff: 2
LO: 8-3
33
35) Kelsey Company owns 30% interest in the stock of David Corporation. During the year, David pays
$25,000 in dividends, and reports $100,000 in net income. Kelsey Company's investment in David will
increase by:
A) $25,000.
B) $30,000.
C) $24,000.
D) $22,500.
Answer: D
Diff: 2
LO: 8-3
36) On January 1, 2012, Gardner Corporation purchased 25% of the common stock outstanding of Lance
Coporation for $250,000. During 2012, Lance Corporation reported net income of $80,000 and paid cash
dividends of $40,000. The balance of the Long-Term Investment account at December 31, 2012 is:
A) $250,000.
B) $290,000.
C) $330,000.
D) $260,000.
Answer: D
Diff: 2
LO: 8-3
37) Milton Company owns 30% interest in the stock of Darcy Corporation. During the year, Darcy pays
$20,000 in dividends to Milton, and reports $100,000 in net income. Milton Company's investment in
Darcy will increase Milton's net income by:
A) $15,000.
B) $30,000.
C) $24,000.
D) $6,000.
Answer: B
Diff: 2
LO: 8-3
34
38) Nantucket Company owns a 30% interest in the stock of Franklin Corporation. During the year,
Nantucket debited the Investment account for $22,500 and credited the account for $15,000. Based on this
information, Franklin must have paid dividends of:
A) $7,000.
B) $15,000.
C) $25,000.
D) $50,000.
Answer: D
Diff: 2
LO: 8-3
39) If a company acquires a 40% common stock interest in another company:
A) the equity method is usually applicable.
B) all influence is classified as controlling.
C) the market value method is usually applicable.
D) significant influence over the activities of the investee do not exist.
Answer: A
Diff: 1
LO: 8-3

1) The consolidation method of accounting is appropriate when an investor controls an investee by
ownership of more than 50% of the investee's common stock.
Answer: TRUE
Diff: 1
LO: 8-4
2) Consolidated financial statements are prepared in place of the financial statements for the parent and
subsidiary companies.
Answer: FALSE
Diff: 1
LO: 8-4
35
3) A year-end elimination entry is required to remove the subsidiary company's equity from the books of
the parent company.
Answer: TRUE
Diff: 1
LO: 8-4
4) A noncontrolling (minority) interest arises when a parent company must pay more to acquire a
subsidiary company than the market value of the subsidiary's net assets.
Answer: FALSE
Diff: 1
LO: 8-4
5) Elimination entries are required in order for the consolidated financial statements to not include both
the parent company's investment in the subsidiary and the subsidiary company's equity.
Answer: TRUE
Diff: 2
LO: 8-4
6) A company that owns less than 20% of another company's stock may not use the consolidation method
of accounting
Answer: TRUE
Diff: 1
LO: 8-4
7) The consolidated financial statements carry the name of the parent company and the subsidiary
company.
Answer: FALSE
Diff: 1
LO: 8-4
36
8) Goodwill arises when a parent company must pay more to acquire a subsidiary company than the cost
of the subsidiary's net assets.
Answer: FALSE
Diff: 1
LO: 8-4
9) When a U.S. Company owns a foreign company, a foreign-currency translation adjustment is made
before consolidation entries are prepared.
Answer: TRUE
Diff: 1
LO: 8-4
10) If a U.S. company sells merchandise to a German company, the German company may settle the
transaction in Euros.
Answer: TRUE
Diff: 1
LO: 8-4
11) An increase in foreign currency value relative to the U.S. dollar between the date of purchase and date
of payment will create an exchange gain.
Answer: FALSE
Diff: 1
LO: 8-4
12) When rates of return are high in a stable economy, international investors buy stocks and bonds of
that country. This activity increases the country's exchange rate.
Answer: TRUE
Diff: 2
LO: 8-4
37
13) When the exchange rate of nation A's currency rises relative to another nation's currency, the currency
of nation A is said to have strengthened.
Answer: TRUE
Diff: 1
LO: 8-4
14) A U.S. Company sells to a French company. The French company will pay in Euros. If the euro
strengthens before the U.S. Company collects, the U.S. Company will have a foreign-currency transaction
loss.
Answer: FALSE
Diff: 1
LO: 8-4
AICPA Bus Persp: Strategic/Critical Thinking, International/Global
15) If a U.S. Company has a foreign subsidiary, the financial statements of the subsidiary are not
consolidated with the parent company's financial statements.
Answer: FALSE
Diff: 1
LO: 8-4
16) U.S. GAAP and foreign accounting principles may not always be the same.
Answer: TRUE
Diff: 1
LO: 8-4
17) Goodwill occurs when a parent company:
A) pays less to acquire a subsidiary company than the market value of the subsidiary's net assets.
B) pays less to acquire a subsidiary company than the book value of the subsidiary's net assets.
C) pays more to acquire a subsidiary company than the market value of the subsidiary's net assets.
D) pays more to acquire a subsidiary company than the book value of the subsidiary's net assets.
Answer: C
Diff: 2
LO: 8-4
38
18) Consolidated financial statements are prepared when a company owns ________ of the common stock
of another company.
A) less than 20%
B) between 20% and 50%
C) less than 50%
D) more than 50%
Answer: D
Diff: 1
LO: 8-4
19) A company that owns more than 50% of the common stock of another company is known as the:
A) parent company.
B) subsidiary company.
C) charge company.
D) dominating company.
Answer: A
Diff: 1
LO: 8-4
20) The company whose more than 50% of the stock is owned by a parent company is called the:
A) controlled company.
B) subsidiary company.
C) sibling company.
D) minority interest.
Answer: B
Diff: 1
LO: 8-4
21) A noncontrolling (minority) interest arises when:
A) a parent company excludes the subsidiary company from the consolidated financial statements.
B) a parent company owns less than 100% of the stock of a subsidiary.
C) a subsidiary company is not included in the consolidated financial statements.
D) a subsidiary company represents less than 20% of the value of the consolidated company.
Answer: B
Diff: 2
LO: 8-4
39

22) If one company owns more than 50% of the common stock of another company:
A) the equity method should be used to account for the investment.
B) a partnership exists.
C) a parent-subsidiary relationship exists.
D) the company whose stock is owned must be liquidated.
Answer: C
Diff: 1
LO: 8-4
23) When a company owns more than 50% of the common stock of another company:
A) substantial financial statements are prepared.
B) consolidated financial statements are prepared.
C) controlling financial statements are prepared.
D) minority financial statements are prepared.
Answer: B
Diff: 1
LO: 8-4
24) Consolidated financial statements present all of the following EXCEPT the:
A) individual assets and liabilities of the parent company.
B) cash of the subsidiary company.
C) total revenues and expenses of the subsidiary company.
D) stockholders' equity accounts of the subsidiary company.
Answer: D
Diff: 1
LO: 8-4
25) When a parent-subsidiary relationship exists, the consolidated statements include:
A) the balance sheet, income statement and the statement of cash flows.
B) only the balance sheet.
C) only the income statement.
D) only the balance sheet and the income statement.
Answer: A
Diff: 1
LO: 8-4
40

26) Which of the following is the correct matching concerning the appropriate accounting for long-term
stock investments?
A)
% of Investor Ownership
Accounting Method
Less than 20%
Minority Interest Method
B)
Between 20% and 50%
Accounting Method
Market Value Method
C)
More than 50%
Accounting Method
Consolidation Method
D)
Between 20% and 50%
Accounting Method
Consolidation Method
Answer: C
Diff: 1
LO: 8-4
27) A consolidated balance sheet shows:
A) combined long-term assets, long-term liabilities and stockholders' equity for the parent and subsidiary.
B) combined assets and liabilities for the parent and the subsidiary, but stockholders' equity for solely the
parent .
C) combined assets, liabilities and stockholders' equity for the parent and subsidiary.
D) combined assets and stockholders' equity for the parent and the subsidiary, but liabilities for solely the
parent.
Answer: B
Diff: 1
LO: 8-4
41
28) On a worksheet for a consolidated entity balance sheet, the elimination entry requires:
A) a credit to stockholders' equity accounts of the subsidiary.
B) a credit to the Cash account of the subsidiary.
C) a credit to Investment in Subsidiary.
D) a debit to Investment in Subsidiary.
Answer: C
Diff: 1
LO: 8-4
29) Big Time Company owns all of the stock of Peterson Corporation and 80% of the stock of Tysen
Corporation. Big Time Company earned net income of $750,000; Peterson earned $250,000; and Tysen
earned $175,000. Big Time Company's consolidated income statement would report net income of:
A) $1,000,000.
B) $1,250,000.
C) $1,140,000.
D) $1,050,000.
Answer: C
Diff: 2
LO: 8-4
30) Dole Company, the subsidiary company, borrowed $80,000 from Anderson Company, the parent
company, on a note payable during the year. Before the consolidation entries were made, the balances in
Anderson Company's Notes Receivable and Notes Payable accounts were $180,000 and $275,000,
respectively. A consolidated balance sheet shows:
A) Notes Receivable of $180,000 and Notes Payable of $275,000.
B) Notes Receivable of $260,000 and Notes Payable of $275,000.
C) Notes Receivable of $260,000 and Notes Payable of $355,000.
D) Notes Receivable of $100,000 and Notes Payable of $275,000.
Answer: D
Diff: 2
LO: 8-4
42
31) Dessert Corporation acquired 100% of the common stock of Tart Company for $270,000. On the date of
acquisition, Tart Company's stockholders' equity consisted of: Common Stock, $100,000; Retained
Earnings, $170,000. The elimination entries to be made on a worksheet to prepare a consolidated balance
sheet would include a:
A) debit to Common Stock Tart $100,000
B) debit to Investment in Tart $270,000
C) debit to Common Stock Dessert $100,000
D) debit to Retained Earnings-Dessert $170,000.
Answer: A
Diff: 2
LO: 8-4
32) A consolidated income statement will show:
A) only the parent's net income.
B) only the income from partially owned subsidiaries.
C) the parent's net income plus the parent's share of the subsidiary's net income.
D) the parent's net income plus the subsidiary's net income.
Answer: C
Diff: 1
LO: 8-4
33) The balancing figure that brings the dollar amount of the total liabilities and stockholders' equity of
the foreign subsidiary into agreement with the dollar amount of its total assets is the:
A) equity adjustment.
B) foreign-currency exchange rate.
C) foreign-currency translation adjustment.
D) foreign consolidation adjustment.
Answer: C
Diff: 2
LO: 8-4
43

1) Sales of available-for-sale investments are reported as investing activities on the Consolidated
Statement of Cash Flows.
Answer: TRUE
Diff: 1
LO: 8-5
2) The purchases of available-for-sale investments would appear on a statement of cash flows in:
A) the financing activities section.
B) the operating 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
Diff: 1
LO: 8-5
3) The purchase of a held-to-maturity investment would appear on a statement of cash flows as a
A) cash outflow in the financing activities section.
B) cash outflow in the investing activities section.
C) cash outflow in the operating activities section.
D) cash inflow in the investing activities section.
Answer: B
Diff: 1
LO: 8-5
4) On the statement of cash flows, the cash received when selling the investment in another company is
reported as a(n)
A) investing outflow.
B) investing inflow.
C) financing outflow.
D) financing inflow.
Answer: B
Diff: 1
LO: 8-5
44
5) On the statement of cash flows, the cash paid to purchase available-for-sale investments 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
Diff: 1
LO: 8-5
6) On the statement of cash flows, the cash received from selling available-for-sale investments is shown
as a(n):
Answer: C
Diff: 1
LO: 8-5
7) On the statement of cash flows, the cash paid to purchase available-for-sale investments is shown as
a(n):
Answer: D
Diff: 1
LO: 8-5
8) On the statement of cash flows, the cash paid for 40% of a corporation to be accounted for under the
equity method is shown as a(n):
Answer: D
Diff: 1
LO: 8-5
45
9) The sale of a held-to-maturity investments are shown on the statement of cash flows as:
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
Diff: 1
LO: 8-5
10) The sale of common stock is shown on the statement of cash flows as:
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: A
Diff: 2
LO: 8-5

1) On the maturity date of the bond, the bondholder will receive the bond's present value.
Answer: FALSE
Diff: 2
LO: 8-6
2) Compound interest is computed on the principal and any interest earned that has not been paid or
received.
Answer: TRUE
Diff: 2
LO: 8-6
46
3) The future value of a single amount is the value at a future date of a given amount invested now.
Answer: TRUE
Diff: 2
LO: 8-6
4) The process of determining the present value is called discounting because the present value is more
than the future value.
Answer: FALSE
Diff: 2
LO: 8-6
5) In computing the present value of an annuity, it is not necessary to know the number of discount
periods.
Answer: FALSE
Diff: 2
LO: 8-6
6) The present value of a bond is a function of the payment amount and the discount rate.
Answer: FALSE
Diff: 2
LO: 8-6
7) When the discount rate is equal to the contractual rate, the present value of the bonds will equal the
bonds face value.
Answer: TRUE
Diff: 2
LO: 8-6
47
8) Present value is the value now of a given amount to be paid or received in the future, assuming
compound interest.
Answer: TRUE
Diff: 2
LO: 8-6
9) Interest is the difference between the amount borrowed and the principal.
Answer: FALSE
Diff: 2
LO: 8-6
10) Interest is the cost of using money.
Answer: TRUE
Diff: 2
LO: 8-6
11) The term time value of money refers to the fact that money earns interest over time.
Answer: TRUE
Diff: 2
LO: 8-6
12) The principal is the amount borrowed or invested.
Answer: TRUE
Diff: 2
LO: 8-6
48
13) Compound interest is the return on principal:

A) only.
B) for one or more periods.
C) plus interest or two or more periods.
D) for one period.
Answer: C
Diff: 2
LO: 8-6
14) All of the following are necessary to compute the future value of a single amount except the:
A) interest rate.
B) number of periods.
C) principal.
D) maturity value.
Answer: D
Diff: 2
LO: 8-6
15) The future value of 1 will always be:
A) equal to 1.
B) greater than 1.
C) less than 1.
D) equal to the interest rate.
Answer: B
Diff: 2
LO: 8-6
16) The future value of an annuity factor for 2 periods is equal to:
A) 1 plus the interest rate.
B) 2 plus the interest rate.
C) 2 minus the interest rate.
D) 2.
Answer: B
Diff: 2
LO: 8-6
49
17) Which of the following is not necessary to know in computing the future value of an annuity?
A) Amount of the initial payment
B) Interest rate
C) Length of time between investment and payment
D) Year the payments begin
Answer: D
Diff: 2
LO: 8-6
18) In present value calculations, the process of determining the present value is called:
A) allocating.
B) pricing.
C) negotiating.
D) discounting.
Answer: D
Diff: 2
LO: 8-6
19) Present value is based on:
A) the market value at the present time.
B) the length of time until the amount is received.
C) the future value of the investment.
D) the difference between the effective interest rate and the face interest rate.
Answer: B
Diff: 2
LO: 8-6
20) If the single amount of $5,000 is to be received in 3 years and discounted at 6%, its present value is:
A) $4,200.
B) $4,450.
C) $5,000.
D) $5,300.
Answer: A
Diff: 2
LO: 8-6
50
21) Which of the following discount rates will produce the smallest present value?
A) 8%.
B) 10%.
C) 6%.
D) 4%.
Answer: B
Diff: 2
LO: 8-6
22) The present value of $100,000 to be received in 5 years will be smaller if the discount rate is:
A) increased.
B) decreased.
C) not changed.
D) equal to the stated rate of interest.
Answer: A
Diff: 2
LO: 8-6
23) Anderson Company has purchased equipment that requires annual payments of $20,000 to be paid at
the end of each of the next 6 years. The discount rate is 12%. What amount will be used to record the
equipment?
A) $120,000
B) $82,220
C) $110,515
D) $77,100
Answer: B
Diff: 2
LO: 8-6
51

Chapter 8 Accounting

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Chapter 8 Accounting

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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 8 Long-Term Investments & the Time Value of Money

6) An investment is a held-to-maturity investment if it is management's intent to sell the investment.

AICPA Functional: Measurement

AICPA Functional: Measurement

8.2 Learning Objective 8-2

AICPA Functional: Measurement

10) For a stock dividend, the investor records dividend revenue.

15) The Allowance to Adjust Investment to Market is a companion to Interest Receivable.

AICPA Functional: Measurement

AICPA Functional: Measurement

43) Other comprehensive income:

8.3 Learning Objective 8-3

8.4 Learning Objective 8-4

AICPA Functional: Measurement

AICPA Bus Persp: Strategic/Critical Thinking

8.5 Learning Objective 8-5

8.6 Learning Objective 8-6

13) Compound interest is the return on principal:

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