On January 1 of the current year, Barton Co.

paid $900,000 to purchase two-year, 8%,

$1,000,000 face value bonds that were issued by another publicly-traded corporation.
Barton plans to sell the bonds in the first quarter of the following year. The fair value of
the bonds at the end of the current year was $1,020,000. At what amount should Barton
report the bonds in its balance sheet at the end of the current year?
a. $900,000
b. $1,000,000
c. $950,000
d. $1,020,000
d
Consolidated financial statements are typically prepared when one company has a
controlling financial interest in another unless:
a. The two companies are in unrelated industries, such as manufacturing and real
estate.
b. The subsidiary is a finance company.
c. The fiscal year-ends of the two companies are more than three months apart.
d. The subsidiary is in bankruptcy.
d
Sun Co. is a wholly-owned subsidiary of Star Co. Both companies have separate
general ledgers, and prepare separate financial statements. Sun requires stand-alone
financial statements. Which of the following statements is correct?
a. Consolidated financial statements should only be prepared by Star and not by Sun.
b. After consolidation, the accounts of both Star and Sun should be changed to reflect
the consolidated totals for future ease in reporting.
c. Consolidated financial statements should be prepared for both Star and Sun.
d. After consolidation, the accounts of both Star and Sun should be combined together
into one general-ledger accounting system for future ease in reporting.
a
Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, Year
1. Plack received a stock dividend of 2,000 shares on April 30, Year 1, when the market
value per share was $35. Ty paid a cash dividend of $2 per share on December 15,
Year 1. In its Year 1 income statement, what amount should Plack report as dividend
income?
a. $90,000
b. $20,000
c. $24,000
d. $94,000
c
Pal Corp.'s Year 1 dividend income included only part of the dividend received from its
Ima Corp. investment. The balance of the dividend reduced Pal's carrying amount for its
Ima investment. This reflects that Pal accounts for its Ima investment by the:
a. Equity method, and its carrying amount exceeded the proportionate share of Ima's
market value.
b. Cost method, and only a portion of Ima's Year 1 dividends represent Pal's earnings
after Pal's acquisition.
c. Cost method, and its carrying amount exceeded the proportionate share of Ima's
market value.
d. Equity method, and Ima incurred a loss in Year 1.
b
An investor uses the cost method to account for an investment in common stock.
Dividends received this year exceeded the investor's share of investee's undistributed
earnings since the date of investment. The amount of dividend revenue that should be
reported in the investor's income statement for this year would be:
a. The portion of the dividends received this year that were in excess of the investor's
share of investee's undistributed earnings since the date of investment.
b. The total amount of dividends received this year.
c. The portion of the dividends received this year that were not in excess of the
investor's share of investee's undistributed earnings since the date of investment.
d. Zero.
c
Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, Year 1 for
$400,000. The carrying amount of Straw's net assets at the purchase date totaled
$900,000. Fair values equaled carrying amounts for all items except equipment, for
which fair values exceeded carrying amounts by $100,000. The equipment has a five-
year life. During Year 1, Straw reported net income of $150,000. What amount of
income from this investment should Puff report in its Year 1 income statement?
a. $60,000
b. $52,000
c. $56,000
d. $40,000
b
Band Co. uses the equity method to account for its investment in Guard, Inc. common
stock. How should Band record a 2% stock dividend received from Guard?
a. As dividend revenue at Guard's carrying value of the stock.
b. As a reduction in the total cost of Guard stock owned.
c. As a memorandum entry reducing the unit cost of all Guard stock owned.
d. As dividend revenue at the market value of the stock.
c
Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1.
Grant's 30% interest in South gave Grant the ability to exercise significant influence
over South's operating and financial policies. During Year 1, South earned $80,000 and
paid dividends of $50,000. South reported earnings of $100,000 for the six months
ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July
1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends
of $60,000 on October 1, Year 2.
Before income taxes, what amount should Grant include in its Year 1 income statement
as a result of the investment?
a. $50,000
b. $24,000
c. $80,000
d. $15,000
b
On January 2, Year 3, Well Co. purchased 10% of Rea, Inc.'s outstanding common
shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers
are a majority on Rea's board of directors. Rea reported net income of $500,000 for
Year 3 and paid dividends of $150,000. In its December 31, Year 3, balance sheet,
what amount should Well report as investment in Rea?
a. $400,000
b. $435,000
c. $450,000
d. $385,000
b
On January 1, Year 2, Point, Inc. purchased 10% of Iona Co.'s common stock. Point
purchased additional shares bringing its ownership up to 40% of Iona's common stock
outstanding on August 1, Year 2. During October, Year 2, Iona declared and paid a
cash dividend on all of its outstanding common stock. How much income from the Iona
investment should Point's Year 2 income statement report?
a. 40% of Iona's income for August 1 to December 31, Year 2 only.
b. Amount equal to dividends received from Iona.
c. 10% of Iona's income for January 1 to July 31, Year 2, plus 40% of Iona's income for
August 1 to December 31, Year 2.
d. 40% of Iona's Year 2 income.
c
On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000
outstanding shares of common stock for $20 per share. On December 15, Year 1, Eagle
paid $40,000 in dividends to its common stockholders. Eagle's net income for the year
ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its
Year 1 income statement, what amount of income from this investment should Denver
report?
a. $18,000
b. $36,000
c. $6,000
d. $12,000
a
Day Co. received dividends from its common stock investments during the year ended
December 31, Year 1, as follows:
•A stock dividend of 400 shares from Parr Corp. on July 25, Year 1, when the market
price of Parr's shares was $20 per share. Day owns less than 1% of Parr's common
stock.
•A cash dividend of $15,000 from Lark Corp. in which Day owns a 25% interest. A
majority of Lark's directors are also directors of Day.
What amount of dividend revenue should Day report in its Year 1 income statement?
a. $23,000
b. $0
c. $8,000
d. $15,000
b
An investor in common stock received dividends in excess of the investor's share of
investee's earnings subsequent to the date of the investment. How will the investor's
investment account be affected by those dividends under each of the following
accounting methods?
Cost method Equity method
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease
d