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Financial Accounting, 13e (Thomas/Tietz) Appendix E: Investments Learning Objective E-1 1) To be classified as a current asset, an investment must either be liquid or the investor must intend to use it to pay a current liability. Answer: FALSE Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) One reason a company invests in securities of other companies is because they may have a long-term strategic plan. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

3) GAAP rules for investments differ based on whether an investment is composed of equity securities or debt securities. Answer: TRUE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

4) Equity securities are investments in bonds or notes payable. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5) If an investor owns 25% of the voting stock of an investee, the investor has controlling influence. Answer: FALSE Diff: 1 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

6) Investments with insignificant influence: A) are reported at amortized cost on the balance sheet. B) are more liquid than cash. C) are reported at historical cost on the balance sheet. D) are reported using the fair value method on the balance sheet. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

7) Investments with insignificant influence are reported on the: A) income statement using fair value method. B) balance sheet at cost. C) balance sheet using fair value method. D) income statement at cost. Answer: C Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

8) To be classified as a current asset, an investment must meet which of the following criteria: A) the investment must be liquid. B) the investor must intend to either convert the investment to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability. C) the investment must be easily convertible to cash. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

9) Marathon Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Marathon Corporation is the ________ and Mini Company is the ________. A) investee; investor B) investor; investee C) parent company; subsidiary company D) controlling company; noncontrolling company Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is reported on the balance sheet as: A) a current asset. B) a long-term asset. C) stockholders' equity. D) a cash equivalent. Answer: A Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

11) Long-term investments include: A) stocks and bonds that are not liquid or readily convertible to cash. B) securities that the investor expects to hold longer than one year or operating cycle, whichever is longer. C) securities reported in the non-current asset section of the balance sheet. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: D Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) Mason Corporation owns 1,500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: C Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Mason Corporation owns 500 shares of Mini Company's common stock. Mini Company has 2,000 shares of common stock outstanding. Mason Corporation is considered to have: A) insignificant influence. B) significant influence. C) controlling influence. D) noncontrolling influence. Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective E-2 1) Unrealized gains and losses on equity securities when the investor has insignificant influence are reported on the income statement. Answer: TRUE Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) Cash dividends received on stock investments with less than 20% ownership of the investee should be credited to the Equity-Method Investment account. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Investments in equity securities (stock) can be classified as either current or long-term assets depending on the company's ability and intent to hold or sell them. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

4) GAAP requires equity securities (stocks) that comprise an insignificant influence in other companies to be recorded using the fair value method—regardless of whether they are classified as current or longterm assets. Answer: TRUE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5) Fair (market) value is the amount the owner of a security paid for it. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) An unrealized gain on an equity security when the investor has insignificant influence: A) is recorded when an investment is sold for more than its cost. B) is recorded when an investment is sold for less than its cost. C) is recorded when the fair market value of the investment is more than its cost, but it has not been sold. D) is recorded when the fair market value of the investment is less than its cost, but it has not been sold. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) A company's investment with insignificant influence has a fair market value which exceeds its cost. When recording the year-end adjustment, the: A) Investment in Equity Securities account will be credited. B) Unrealized Gain on Equity Securities account will be credited. C) Unrealized Loss on Equity Securities account will be debited. D) Unrealized Loss on Equity Securities account will be credited. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Unrealized gains on equity securities when the investor has insignificant influence are reported on the: A) statement of cash flows as investing activities. B) balance sheet as an element of other comprehensive income. C) statement of cash flows as financing activities. D) income statement as Other Income. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

9) Investments in equity securities with insignificant influence were purchased for $400,000, and had a fair value of $410,000 at the end of the year. The adjusting entry to record this difference includes a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Unrealized Loss on Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) Michael Company's investment in equity securities with insignificant influence had a fair value of $34,200 at the end of the prior year. Management decided to sell the investment. The investment was purchased for $30,300. If Michael Company sold this investment for $47,400, Michael will have a(n): A) Gain on Sale of Equity Securities for $17,100. B) Gain on Sale of Equity Securities for $13,200. C) Unrealized Loss on Equity Securities of $13,200. D) Unrealized Gain on Equity Securities of $17,100. Answer: B Explanation: $47,400 - $34,200 = $13,200 gain Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) When a company receives a cash dividend from equity securities with insignificant influence, the journal entry is: A) debit to Investment in Equity Securities and credit Cash. B) debit to Cash and credit to Dividend Revenue. C) debit to Dividend Revenue and credit to Cash. D) debit to Cash and credit to Investment in Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

12) The Investment in Equity Securities account when the investor has insignificant influence is reported on the: A) income statement using the equity method. B) income statement using the fair value method. C) balance sheet using the equity method. D) balance sheet using the fair value method. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

13) At the beginning of the year, an investment in equity securities with insignificant influence was purchased for $400,000, and it has a fair value of $420,000 at the end of the year. The year-end journal entry will have a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Gain on Sale of Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

14) 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) the investor has a controlling interest in the investee. 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: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) For accounting purposes, the method used to account for long-term investments in common stock is determined by: A) the size of the investor. B) the size of the investor when compared to the size of the investee. C) vote by the Board of Directors of the investor. D) the investor's percentage ownership of the investee's stock. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) 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 equity method. B) the consolidation method. C) the fair value method. D) the lower of cost or market method. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) The fair value method of accounting for long-term investments in stock should be used when the: A) investor owns less than 20% of the outstanding stock of the investee. B) investor has significant influence over the investee's operating decisions and policies. C) investor has little or no influence on the investee. D) A and C. Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) An investor receives a cash dividend from an investment with 3% ownership and insignificant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Interest Revenue C) a debit to Cash and credit to Equity-Method Investment D) a debit to Cash and credit to Interest Receivable Answer: A Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) Jones Corporation purchases $600,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. What is the journal entry on December 31, 2024 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 B) a debit to Unrealized Loss on Equity Securities for $50,000 and a credit to Investment in Equity Securities for $50,000 C) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Loss on Equity Securities $50,000 D) a debit to Investment in Equity Securities for $50,000 and a credit to Unrealized Gain on Equity Securities $50,000 Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) On January 1, 2022, Max Company purchased 1,000 shares of Engel common stock at $41 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $45 per share. On February 1, 2023, the Engel's stock is sold for $50 per share. What is the journal entry on December 31, 2022 for the unrealized loss or gain on the equity securities? A) a debit to Unrealized Gain on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 B) a debit to Unrealized Loss on Equity Securities for $4,000 and a credit to Investment in Equity Securities for $4,000 C) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Loss on Equity Securities $4,000 D) a debit to Investment in Equity Securities for $4,000 and a credit to Unrealized Gain on Equity Securities $4,000 Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) On January 1, 2022, Max Company purchased 6,000 shares of Engel common stock at $49 per share. Max owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Engel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Engel's stock is $54 per share. On February 1, 2023, the Engel's stock is sold for $59 per share. What is the journal entry on February 1, 2023 for the sale of the stock? A) a debit to cash for $354,000; credit to Investment in Equity Securities for $324,000 and credit to Gain on Sale of Equity Securities for $30,000. B) a debit to cash for $354,000; credit to Investment in Equity Securities for $294,000 and credit to Gain on Sale of Equity Securities for $60,000. C) a debit to cash for $294,000 and debit to Loss on Sale of Equity Securities for $60,000; credit to Investment in Equity Securities for $354,000. D) a debit to cash for $354,000; credit to Investment in Equity Securities for $354,000. Answer: A Explanation: Date Accounts Debit Credit 2023 2/1 Cash (6,000 × $59 = $354,000) 354,000 Investment in Equity Securities (6,000 × $54) 324,000 Gain on Sale of Equity Securities 30,000 Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) Smith Corporation purchases $620,000 of TMI Corporation's stock on October 18, 2024 at cost. Smith owns less than 2% of TMI's outstanding shares, and thus has insignificant influence. On December 1, 2024, Smith Corporation received a cash dividend of $12,000 on the TMI Corporation's stock. On December 31, 2024, Smith Corporation's investment in TMI Corporation has a fair value of $600,000. Required: Prepare the necessary journal entries. Explanations are not required. Date

Accounts

Answer: Date Oct. 18, 2024

Dec. 1, 2024

Debit

Accounts Investment in Equity Securities Cash

Credit

Debit Credit 620,000 620,000

Cash

12,000 Dividend Revenue

Dec. 31, 2024

12,000

Unrealized Loss on Equity Securities Investment in Equity Securities

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20,000 20,000

23) Jones Corporation purchases $500,000 of Basic Corporation's stock on October 1, 2024 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2024 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2024, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. Required: Prepare the necessary journal entries. Explanations are not required. Date

Accounts

Answer: Date Oct. 1, 2024

Dec. 1, 2024

Debit

Accounts Investment in Equity Securities Cash

Credit

Debit Credit 500,000 500,000

Cash

15,000 Dividend Revenue

Dec. 31, 2024

15,000

Unrealized Loss on Equity Securities Investment in Equity Securities

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

50,000 50,000

24) On January 1, 2022, Innocente Company purchased 1,000 shares of Entel common stock at $40 per share. Innocente owns 3% of the outstanding shares with insignificant influence. On June 1, 2022, Entel declares and distributes a cash dividend of $0.50 per share. On December 31, 2022, the market price of Entel's stock is $44 per share. On February 1, 2023, the Entel's stock is sold for $48 per share. Prepare the journal entries on: 1. January 1, 2022 2. June 1, 2022 3. December 31, 2022 4. February 1, 2023 Explanations are not required. Answer: Date Accounts 2022 1/1 Investment in Equity Securities Cash (1,000 × $40 = $40,000) 6/1

2022 12/31

2023 2/1

Debit

Credit

40,000 40,000

Cash (1,000 × $0.5) Dividend Revenue

500 500

Investment in Equity Securities Unrealized Gain on Equity Securities (1,000 × ($44 - $40))

4,000

Cash (1,000 × $48 = $48,000) Investment in Equity Securities Gain on Sale of Equity Securities

48,000

4,000

44,000 4,000

Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective E-3 1) When an investor owns 35% of the stock of another business, cash dividends received from the investee company are recorded by decreasing the Equity-method Investment account. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2) The equity method is used to account for stock investments in which the investor company owns less than 20% of the outstanding stock of the investee. Answer: FALSE Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Investments accounted for by the equity method are recorded initially at cost. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) If an investor owns between 20% and 50% of an investee's voting stock, it is assumed that the investor has significant influence over the investee. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Under the equity method, when the investee reports net income, the Equity-method Investment account increases. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Under the equity method, the investor applies his percentage of ownership in recording his share of the investee's net income, but not dividends. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Cash dividends received on stock investments with more than 20% ownership of the investee, but less than 50% ownership, should be credited to the Equity-method Investment Revenue account. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) An investor receives a cash dividend from an investment with 48% ownership and significant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Equity-Method Investment C) a debit to Equity-Method Investment and a credit to Dividend Revenue D) a memorandum entry only Answer: B Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) When an investor owns between 20% and 50% of the outstanding stock of another company, the ________ method is used to account for the stock investment. A) fair value B) equity C) consolidated D) available-for-sale Answer: B Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) An investor who may significantly influence the business activities of the investee should report the investment using the: A) fair value method. B) consolidated method. C) equity method. D) available-for-sale method. Answer: C Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Under the equity method, the Equity-method 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: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) A company that owns 40% of the common stock of another business recognizes revenue from the investment when: A) the investor 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: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) Wolverine Corporation owns 27% of Buckeye Corporation. Net income for Buckeye for the year is $230,000. The journal entry prepared by Wolverine Corporation is: A) debit Equity-method Investment for $62,100 and credit Cash for $62,100. B) debit Equity-method Investment for $62,100 and credit Equity-Method Investment Revenue for $62,100. C) debit Cash for $62,100 and credit Equity-method Investment for $62,100. D) debit Equity-method Investment for $230,000 and credit Equity-method Investment Revenue for $230,000. Answer: B Explanation: 27% × $230,000 = $62,100 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) If an investor company owns 35% of the common stock of another business, the investor: A) receives 35% of the investee's net income in cash. B) reports the Equity-method Investment Revenue on the balance sheet. C) records dividends received as investment revenue. D) increases its Equity-method Investment account for 35% of net income reported by the investee company. Answer: D Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) 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 Equity-method Investment account is increased. B) the Dividend Revenue account is increased. C) the investor's Equity-method Investment account is decreased. D) no entry is necessary. Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) 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 debit to Equity-method Investment and a credit to Equity-method Investment Revenue. B) a debit to Cash and a credit to Dividend Revenue. C) a debit to Dividend Receivable and a credit to Dividend Revenue. D) a debit to Cash and a credit to Equity-method Investment. Answer: D Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) Acme Company owns 23% of Superior Company. Superior Company declared and paid $34,000 cash dividends for the year. Acme Company's journal entry to record the dividends includes a: A) credit to Equity-method Investment for $7,820. B) credit to Equity-method Investment for $34,000. C) credit to Dividend Revenue for $7,820. D) credit to Dividend Revenue for $34,000. Answer: A Explanation: $34,000 × 23% = $7,820 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) Under the equity method, if the investee company has a net loss, the investor company will ________ for its share of the net loss. A) debit the Equity-method Investment account B) credit the Unrealized Loss on Equity-method Investment account C) credit the Equity-method Investment account D) debit the Unrealized Loss on Equity-method Investment account Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) On January 1, 2023, Barry Corporation paid $800,000 for 100,000 shares of Oak Company's common stock, which represents 50% of Oak's outstanding common stock. For the year ending December 31, 2023, Oak reported net income of $210,000 and declared and paid cash dividends of $50,000. Barry should report the investment in Oak Company on its balance sheet at December 31, 2023 at: A) $800,000. B) $720,000. C) $825,000. D) $880,000. Answer: D Explanation: $800,000 + ($210,000 × 50%) - ($50,000 × 50%) = $880,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Daniel Company purchased 27% of the outstanding shares of Clooney Corporation on January 1 at a cost of $630,000. Clooney Corporation reported net income of $98,000 and declared and paid total dividends of $20,000 for the year. At the end of the year, Clooney shares had a current fair value of $623,000. After all necessary adjusting entries are made for the year, the balance in Daniel Company's Equity-method Investment account will be: A) $623,000. B) $651,060. C) $708,000. D) $701,000. Answer: B Explanation: $630,000 + ($98,000 × 27%) - ($20,000 × 27%) = $651,060 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) On January 1 of the current year, Conner Corporation purchased 100,000 of the 400,000 shares of outstanding stock of JJ Company for $640,000. Net income reported by JJ Company for the year was $590,000. Dividends declared and paid by JJ Company during the year were $180,000. The Equitymethod Investment will be reported on Conner Corporation's December 31 balance sheet for the current year in the amount of: A) $640,000. B) $685,000. C) $742,500. D) $832,500. Answer: C Explanation: $640,000 + ($590,000 × 0.25) - ($180,000 × 0.25) = $742,500 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

22) On January 1, of the current year, Rod Corporation purchased 30% of the outstanding stock of Alamo Corporation for $470,000. Net income reported by Alamo for the year was $200,000. Dividends declared and paid by Alamo during the year were $44,000. The amount of investment revenue that Rod should recognize for the current year is: A) $13,200. B) $46,800. C) $60,000. D) $73,200. Answer: C Explanation: $200,000 × 30% = $60,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) On January 1 of the current year, Gardner Corporation purchased 20% of the common stock outstanding of Lance Corporation for $270,000. During the year, Lance Corporation reported net income of $60,000 and declared and paid cash dividends of $41,000. The balance of the Equity-method Investment account at December 31 for the current year, is: A) $270,000. B) $273,800. C) $282,000. D) $290,200. Answer: B Explanation: $270,000 + ($60,000 × 20%) - ($41,000 × 20%) = $273,800 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) Milton Company owns a 29% interest in the stock of Darcy Corporation. During the year, Darcy declares and pays $15,000 in dividends to Milton, and reports $90,000 in net income. Milton Company will report Equity-method Investment Revenue of: A) $4,350. B) $21,750. C) $26,100. D) $30,450. Answer: C Explanation: $90,000 × 29% = $26,100 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) An investor owns 22% of the outstanding common stock of Stokes Corporation. Stokes Corporation declares and pays a $130,000 dividend. Which journal entry should the investor prepare? A) debit Equity-method Investment for $28,600 and credit Cash for $28,600 B) debit Cash for $28,600 and credit Equity-method Investment for $28,600 C) debit Cash for $28,600 and credit Dividend Revenue for $28,600 D) debit Dividend Receivable for $28,600 and credit Dividend Revenue for $28,600 Answer: B Explanation: $130,000 × 22% = $28,600 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) An investor owns 25% of the outstanding common stock of Leshan Company. Leshan Company reports net income of $100,000 for the current year. Which journal entry should the investor prepare? A) debit Cash for $25,000 and credit Equity-method Investment Revenue for $25,000 B) debit Cash for $25,000 and credit Equity-method Investment for $25,000 C) debit Equity-method Investment for $25,000 and credit Equity-method Investment Revenue for $25,000 D) debit Equity-method Investment Revenue for $25,000 and credit Equity-method Investment for $25,000 Answer: C Explanation: $100,000 × 25% = $25,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) On January 1, 2023, Walker Company pays $10 million for 40% of the voting stock of a supplier, Dorglass, Inc. On December 1, 2023, Dorglass declared and paid cash dividends of $100,000. For the year ending December 31, 2023, Dorglass also reported net income of $1,000,000. At December 31, 2023, the fair value of 40% of Dorglass's stock was $9 million. On January 1, 2024, all the Dorglass stock was sold for $9 million. Required: Prepare journal entries on the following dates: 1. January 1, 2023 2. December 1, 2023 3. December 31, 2023 4. January 1, 2024 Explanations are not required. Answer: Date Accounts 1/1/2023 Equity-method Investment Cash 12/1/2023

12/31/2023

1/1/2024

Debit Credit 10,000,000 10,000,000

Cash ($100,000 × 40%) Equity-method Investment

40,000

Equity-method Investment Equity-method Investment Revenue ($1,000,000 × 40%)

400,000

Cash Loss on Sale of Equity-method Investment Equity-method Investment ($10,000,000 + $400,000 - $40,000)

9,000,000 1,360,000

40,000

400,000

Diff: 3 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10,360,000

28) On January 1, 2023, Weber Company pays $5 million for 30% of the voting stock of a supplier, Dixon, Inc. On December 1, 2023, Dixon declared and paid cash dividends of $10,000. For the year ending December 31, 2023, Dixon also reported net income of $500,000. At December 31, 2023, the fair value of 30% of Dixon's stock was $6 million. On January 1, 2024, all the Dixon stock was sold for $6 million. Required: Prepare journal entries on the following dates: 1. January 1, 2023 2. December 1, 2023 3. December 31, 2023 4. January 1, 2024 Explanations are not required. Answer: Date Accounts 1/1/2023 Equity-method Investment Cash 12/1/2023

12/31/2023

1/1/2024

Debit Credit 5,000,000 5,000,000

Cash ($10,000 × 30%) Equity-method Investment

3,000 3,000

Equity-method Investment Equity-method Investment Revenue ($500,000 × 30%) Cash

150,000 150,000

6,000,000

Gain on Sale of Equity-method Investment Equity-method Investment ($5,000,000 + $150,000 - $3,000) Diff: 3 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

853,000 5,147,000

Learning Objective E-4 1) The consolidation accounting method is appropriate when an investor controls an investee by ownership of more than 50% of the investee's voting stock. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2) Consolidated financial statements combine the financial statements of the parent company and its subsidiaries. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

3) After consolidating the financial statements of a parent company and its subsidiaries, the financial statements for the consolidated entity carry the name of the parent company. Answer: TRUE Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) A controlling interest enables the investor to elect a majority of the members of the investee's board of directors, and thus control the investee's policies. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) When consolidating the financial statements of a parent company and its subsidiary, the assets of the subsidiary are added to the assets of the parent company. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) A noncontrolling interest arises in all consolidations, regardless of the parent's level of ownership. Answer: FALSE Diff: 1 LO: E-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Consolidated financial statements are prepared when a company owns ________ of the common stock of another company. A) between 20% and 50% B) 50% or more C) more than 50% D) more than 90% Answer: C Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Consolidated financial statements are prepared for the: A) balance sheet and income statement only. B) statement of cash flows and statement of stockholders' equity only. C) balance sheet, income statement and statement of cash flows only. D) balance sheet, income statement, statement of cash flows and statement of stockholders' equity. Answer: D Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

9) Consolidated financial statements: A) are prepared if the parent owns more than 20% of the investee's voting stock. B) do not include a consolidated statement of cash flows because investors need to understand the separate cash flows of the parent and each individual subsidiary. C) allow investors to gain a better perspective on total operations than they could by examining the reports of the parent and each individual subsidiary. D) do not identify the amount of noncontrolling interest in subsidiaries' stock because investors do not focus on that information. Answer: C Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

Learning Objective E-5 1) Investments in debt securities may be divided into held-to-maturity securities, trading securities, and available-for-sale securities. Answer: TRUE Diff: 2 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

2) Both trading and available-for-sale investments in debt securities are accounted for using the fair value method in a way that is similar to how investments in equity securities with insignificant influence are accounted for. Answer: TRUE Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

3) The amortized cost method determines the carrying value of held-to-maturity debt investments. Answer: TRUE Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

4) An investment in bonds is categorized as a held-to-maturity investment if management intends to sell the investment before its maturity date. Answer: FALSE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) The face interest rate of a bond determines the cash amount of interest the debtor company is expected to pay annually or semiannually. Answer: TRUE Diff: 1 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) The market prices of bonds fluctuate inversely with market interest rates. Answer: TRUE Diff: 1 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) A quoted bond price of 103 means that the bonds were sold at a discount. Answer: FALSE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) At maturity, the carrying amount of a bond should be equal to its face value. Answer: TRUE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) Debt investments that are expected to be sold within the next year, with the intent of generating profits on the sale, are called: A) held-to-maturity debt investments. B) trading debt securities. C) available-for-sale debt securities. D) equity-method investments. Answer: B Diff: 2 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) All investments in debt securities NOT classified as trading securities or held-to-maturity securities are classified as: A) debt securities. B) equity securities. C) marketable securities. D) available-for-sale securities. Answer: D Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) Matthew Company purchases held-to-maturity bonds for $12,000 cash. The journal entry to record this transaction will include a: A) debit to the Held-to-Maturity Investment in Bonds account and a credit to Cash. B) debit to Cash and a credit to the Held-to-Maturity Investment in Bonds account. C) debit to the Long-term Investment account and a credit to Cash. D) debit to the Unrealized Loss on Held-to-Maturity Investment in Bonds account and a credit to Cash. Answer: A Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) When a company receives interest revenue from a held-to maturity bond, the journal entry includes: A) a debit to Interest Revenue and credit to Cash. B) a debit to Dividend Revenue and credit to Cash. C) a debit to Cash and credit to Dividend Revenue. D) a debit to Cash and credit to Interest Revenue. Answer: D Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) On January 1, 2023, Dodge Company purchases $96,000, 7% bonds at a price of 89.9 and a maturity date of January 1, 2033. Dodge Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Dodge Company has a calendar year end. The entry to record the purchase of the bond investment on January 1, 2023, is: A) debit Held-to-Maturity Investment in Bonds for $96,000 and credit Cash for $96,000. B) debit Held-to-Maturity Investment in Bonds for $86,304 and credit Cash for $86,304. C) debit Cash for $96,000 and credit Bonds Payable for $96,000. D) debit Cash for $86,304 and credit Investment in Bonds for $86,304. Answer: B Explanation: $96,000 ×

= $86,304

Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) On January 1, 2023, Dooley Company purchases $84,000, 8% bonds at a price of 84.8 and a maturity date of January 1, 2033. Dooley Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Dooley Company has a calendar year end. The entry for the receipt of interest on July 1, 2023 is: A) debit Cash for $3,360 and credit Interest Revenue for $3,360. B) debit Cash for $6,720 and credit Interest Revenue for $6,720. C) debit Investment in Bonds for $3,360 and credit Interest Revenue for $3,360. D) debit Investment in Bonds for $6,720 and credit Interest Revenue for $6,720. Answer: A Explanation: $84,000 × 8% × 0.5 = $3,360 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) On January 1, 2023, Corbin Company purchases $190,000, 6% bonds at a price of 98 and a maturity date of January 1, 2033. Corbin Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Corbin Company has a calendar year end and uses the straight-line amortization method for discounts and premiums. The entry to amortize the bond discount or premium on July 1, 2023 is: A) debit Held-to-Maturity Investment in Bonds for $190 and credit Interest Receivable for $190. B) debit Cash for $380 and credit Interest Revenue for $380. C) debit Held-to-Maturity Investment in Bonds for $190 and credit Interest Revenue for $190. D) debit Held-to-Maturity Investment in Bonds for $380 and credit Interest Revenue for $380. Answer: C Explanation: (100 - 98)% × $190,000 = $3,800 discount / 20 periods = $190 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) On January 1, 2023, Benson Company purchases $132,000, 4% bonds at a price of 95 and a maturity date of January 1, 2028. Benson Company plans to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Benson Company has a calendar year and uses the straight-line amortization method for discounts and premiums. The adjusting entry to amortize the discount on December 31, 2023 is: A) debit Cash $660 and credit Interest Revenue $660. B) debit Cash $5,280 and credit Interest Revenue $5,280. C) debit Held-to-Maturity Investment in Bonds for $660 and credit Interest Revenue $3,300. D) debit to Interest Receivable $5,280 and credit Interest Revenue $5,280. Answer: C Explanation: ((100 - 95)/100) × $132,000 = $6,600 discount ÷ 10 interest payments = $660 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) On January 1, 2023, Brooklyn Company purchases $98,000, 8% bonds at a price of 94 and a maturity date of January 1, 2033. Brooklyn Company intends to hold the bonds until maturity and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Brooklyn Company has a calendar year and uses the straight-line amortization method for discounts and premiums. The adjusting entry to amortize the bond discount or premium on December 31, 2023 is: A) debit Interest Receivable $3,920 and credit Interest Revenue $3,920. B) debit Interest Receivable $7,840 and credit Interest Revenue $7,840. C) debit Held-to-Maturity Investment in Bonds $294 and credit Interest Revenue $294. D) debit Held-to-Maturity Investment in Bonds $588 and credit Interest Revenue $588. Answer: C Explanation: Discount: ((100 - 94)/100) × $98,000 = $5,880 discount Amortization of discount: $5,880 ÷ 20 interest payments = $294 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) On January 1, 2022, Winston Company purchased 8% bonds with a face value of $62,000 for par. Winston Company intends to hold the bonds until maturity and has the ability to do so. Interest is payable semiannually on July 1 and January 1. The company's fiscal year ends on December 31. The journal entry on July 1, 2022 is: A) debit Cash $4,960 and credit Interest Revenue $4,960. B) debit Cash $2,480 and credit Interest Revenue for $2,480. C) debit Cash $2,480 and credit Interest Receivable for $2,480. D) debit Cash $4,960 and credit Interest Receivable for $4,960. Answer: B Explanation: $62,000 × 8% × 1/2 = $2,480 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) On January 1, 2022, Winston Company purchased 7% bonds with a face value of $78,000 for par. Winston Company intends to hold the bonds until maturity and has the ability to do so. Interest is payable semiannually on July 1 and January 1. The company's fiscal year ends on December 31. The company uses the straight-line amortization method for discounts and premiums. The journal entry on December 31, 2022 is: A) debit Interest Receivable for $5,460 and credit Held-to-Maturity Investment in Bonds $5,460. B) debit Cash for $2,730 and credit Interest Revenue for $2,730. C) debit Interest Receivable for $2,730 and credit Interest Revenue for $2,730. D) debit Interest Receivable for $2,730 and credit Held-to-Maturity Investment in Bonds $2,730. Answer: C Explanation: $78,000 × 7% × 1/2 = $2,730 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Held-to-maturity investments in bonds are initially reported at ________ on the purchase date. On a subsequent balance sheet date, the bonds are reported at ________. A) cost; fair value. B) amortized cost; fair value. C) cost; amortized cost. D) cost; lower of cost or market. Answer: C Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

21) On January 1, 2023, Carmody Corporation purchased 4% bonds with a face value of $74,000 for $76,000. Carmody Corporation intends to hold the bonds until the maturity date and has the ability to do so. Interest is paid semiannually on January 1 and July 1. The company uses the straight-line amortization method for discounts and premiums. The journal entry on January 1, 2023 is: A) debit Held-to-Maturity Investment in Bonds for $74,000, debit Premium on Bonds for $2,000 and credit Cash for $76,000. B) debit Held-to-Maturity Investment in Bonds for $76,000 and credit Cash for $76,000. C) debit Investment in Bonds for $76,000 and credit Interest Revenue for $76,000. D) debit Investment in Bonds for $74,000, debit Premium on Bonds for $2,000 and credit Interest Revenue $76,000. Answer: B Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) On January 1, 2023, Exclusive Company purchases $10,000 of 6% bonds in Smiley Company at a price of 95. Exclusive Company intends to hold the bonds until the maturity date on January 1, 2033, and has the ability to do so. The interest dates are January 1 and July 1. Exclusive Company amortizes any discount or premium using the straight-line method. The fiscal year end of Exclusive Company is December 31. Required: Prepare the journal entries on: 1. January 1, 2023 2. July 1, 2023 3. December 31, 2023 4. January 1, 2024 Explanations are not required. Date

Accounts

Debit

Credit

Answer: Date 1/1/2023

7/1/2023

12/31/2023

1/1/2024

Accounts Held-to-Maturity Investment in Bonds (10,000 × .95) Cash

Debit Credit 9,500 9,500

Cash($10,000 × 3%) Interest Revenue

300

Held-to-Maturity Investment in Bonds Interest Revenue ($10,000 × 0.05 × 1/20)

Interest Receivable Interest Revenue

300

Held-to-Maturity Investment in Bonds Interest Revenue

Cash

300

Interest Receivable

300

Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Financial Accounting, 13e (Thomas/Tietz) Appendix F: Time Value of Money Learning Objective F-1 1) The present value of a single amount in the future can be determined using a present value of $1 table. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2) The process of determining the present value of a sum of money is called discounting because the present value of a sum of money is MORE than the future value of a sum of money. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Ordinary annuity investments provide multiple receipts of an unequal amount at fixed year-end intervals over the investment's duration. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) When the market interest rate is equal to the face interest rate on bonds, the present value of the bonds will be less than the bond's face value at the date of sale of the bonds. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Most business decision makers solve present-value problems with Excel because the present-value tables are limited to the interest rates in the columns and the number of periods in the rows. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) The difference between the future value of an investment and the original investment is the amount of interest revenue that will be earned. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Interest, the cost of using money, is recorded as interest revenue by the borrower. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) The term time value of money refers to the fact that money earns interest over time. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) Most businesses ignore compound interest when calculating interest on debt or investments. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) The term future value means the sum of money that an investment will be "worth" at a specified time in the future, assuming a certain interest rate. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Whether making investments or borrowing money, we don't need to recognize the interest we receive or pay. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) Interest is the cost of using money. Answer: TRUE

Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) The time value of money plays a key role in measuring the value of certain long-term investments as well as long-term debt. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Compound interest is the only interest you earn on your principal amount. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) The term present value means today's value of a future payment or a series of future payments, assuming that those payments include interest at the current market rate. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) An ordinary annuity is an investment that provides multiple receipts of an equal amount at fixed year-end intervals over the investment's duration. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) The present value of a bond—its market price—is the present value of the future principal amount at maturity plus the present value of the future stated interest payments. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) The principal, when investing in a bond, is a single amount to be received by the investor and paid by the debtor at maturity. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) The interest paid on a bond is NOT an annuity because it occurs periodically. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) All of the following are necessary to compute the future value of a single amount EXCEPT the: A) interest rate. B) length of time between investment and future payment or receipt. C) amount of initial payment or receipt. D) maturity value. Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) To calculate the future value of an investment, you need ________ inputs. A) 2 B) 3 C) 4 D) 5 Answer: B Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) The future value of an investment that pays interest will always be: A) equal to the investment. B) greater than the investment. C) less than the investment. D) equal to the interest rate. Answer: B Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) In present value calculations, the process of determining the present value of a single sum of money is called: A) allocating. B) pricing. C) negotiating. D) discounting. Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) A single amount of $5,100 is to be received in 3 years. If the single amount is discounted at 10% for 3 periods, the present value is ________. The present value of $1 for 3 periods at 10% is 0.751. The present value of an ordinary annuity of $1 for 3 periods at 10% is 2.487. (Round your final answer to the nearest dollar.) A) $3,830 B) $4,590 C) $5,100 D) $12,684 Answer: A Explanation: $5,100 × 0.751 = $3,830 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) A single amount of $6,100 is to be received in 4 years. If the single amount is discounted at 10% for 4 periods, the present value is ________. The present value of $1 for 4 periods at 10% is 0.683. The present value of an ordinary annuity of $1 for 4 periods at 10% is 3.170. (Round your final answer to the nearest dollar.) A) $4,166 B) $5,124 C) $6,100 D) $19,337 Answer: A Explanation: $6,100 × 0.683 = $4,166 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) A single amount of $10,400 is to be received in 3 years. If the single amount is discounted at 10% for 3 periods, the present value is ________. The present value of $1 for 3 periods at 10% is 0.751. The present value of an ordinary annuity of $1 for 3 periods at 10% is 2.487. (Round your final answer to the nearest dollar.) A) $8,237 B) $10,400 C) $7,810 D) $25,865 Answer: C Explanation: $10,400 × 0.751 = $7,810 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) Which of the following discount rates will produce the smallest present value of a single sum of money? A) 4% B) 6% C) 7% D) 9% Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

28) Cooper Company has purchased equipment that requires annual payments of $22,000 to be paid at the end of each of the next 6 years. The discount rate is 14%. The present value of $1 for six periods at 14% is 0.456. The present value of an ordinary annuity of $1 for six periods at 14% is 3.889. What amount will be assigned to the equipment at the purchase date? (Round your final answer to the nearest dollar.) A) $5,657 B) $85,558 C) $95,590 D) $10,032 Answer: B Explanation: $22,000 × 3.889 = $85,558 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) On January 1, 2022, bonds with a face value of $88,000 were sold. The bonds mature on January 1, 2032. The face interest rate is 8%. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 12%. What is the market price of the bonds on January 1, 2022? The present value of $1 for 20 periods at 6% is 0.312. The present value of an ordinary annuity of $1 for 20 periods at 6% is 11.470. The present value of $1 for 20 periods at 4% is 0.456. The present value of an ordinary annuity of $1 for 20 periods at 4% is 13.59. (Round your final answer to the nearest dollar.) A) $67,830 B) $91,520 C) $87,965 D) $88,000 Answer: A Explanation: ($88,000 × 0.312) + ($88,000 × 4% × 11.470) = $67,830 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) On January 1, 2022, bonds with a face value of $117,000 were sold. The bonds mature on January 1, 2032. The face interest rate is 12% annually. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10% annually. What is the market price of the bonds on January 1, 2022? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 10 periods at 10% is 0.386. The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145. (Round your final answer to the nearest dollar.) A) $131,592 B) $88,300 C) $117,000 D) $124,020 Answer: A Explanation: ($99,000 × 0.377) + ($99,000 × 5% × 12.462) = $99,010 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) Which of the following statements regarding the concept of present value is INCORRECT? A) Compound interest is not only interest earned on the principal amount but also the interest received on the interest already earned. B) Ordinary annuity investments provide multiple receipts of an equal amount at fixed year-end intervals over the investment's duration. C) When using the Present Value of Ordinary Annuity of $1 table, multiply the factor times the amount that will be received at the end of each year times the number of years the amount will be received, to yield the present value of an investment. D) The present value of a bond is the present value of the principal amount at maturity plus the present value of the stated interest payments. Answer: C Diff: 2 LO: F-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

32) What is the future value of a single $4,700 investment today that pays interest of 8% compounded annually for the next 3 years? (Round all intermediary calculations and final calculations to the nearest whole dollar.) A) $5,921 B) $5,076 C) $5,482 D) $4,700 Answer: A Explanation: $4,700 × (1 + 0.08) = $5,076 $5,076 × (1 + 0.08) = $5,482 $5,482 × (1 + 0.08) = $5,921 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

33) You are calculating the present value of $10,000 that you will receive five years from now. Which table will you use to calculate the present value of that $10,000? A) Present Value of $1 table B) Future Value of $1 table C) Present Value of Ordinary Annuity of $1 table D) Future Value of Ordinary Annuity of $1 table Answer: A Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

34) You are calculating the present value of $15,000 that you will receive at the end of every year for the next ten years. Which table will you use to obtain the present value of those $15,000 payments you will be receiving? A) Present Value of $1 table B) Future Value of $1 table C) Present Value of Ordinary Annuity of $1 table D) Future Value of Ordinary Annuity of $1 table Answer: C Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

35) You have received a settlement offer from an automobile manufacturer due to mechanical problems with your automobile. The manufacturer will pay you $46,000 in one lump sum five years from now. You can earn 5% on your investments. The present value of $1 for 5 periods at 5% is 0.784. The present value of an ordinary annuity of $1 for 5 periods at 5% is 4.329. The present value of the manufacturer's settlement offer is closest to: A) $33,810. B) $46,000. C) $36,064. D) $199,134. Answer: C Explanation: $46,000 × 0.784 = $36,064 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) You have won $1,100,000 in a lottery. Your winnings will be paid to you in equal annual year-end installments of $220,000 over 5 years. You estimate that you can earn 10% on your investments. The present value of $1 for 5 periods at 10% is 0.621. The present value of an ordinary annuity of $1 for 5 periods at 10% is 3.791. The present value of your $1,100,000 winnings would be closest to: A) $834,020. B) $136,620. C) $683,100. D) $1,100,000. Answer: A Explanation: $220,000 × 3.791 = $834,020 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

37) Smith Financing leases cars to car rental companies. Smith has just signed a 5-year lease agreement that requires annual year-end lease payments of $490,000. The present value of $1 for 5 periods at 6% is 0.747. The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212. What is the present value of the lease when the lease commences using a 6% interest rate? A) $2,063,880 B) $2,450,000 C) $2,266,250 D) $1,656,200 Answer: A Explanation: $490,000 × 4.212 = $2,063,880 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

38) You have received a settlement offer from a restaurant for your medical expenses due to food poisoning. The restaurant will pay you $180,000 in one lump sum two years from now. You can earn 5% on your investments. The present value of $1 for 2 periods at 5% is 0.907. The present value of an ordinary annuity of $1 for 2 periods at 5% is 1.859. The present value of the settlement offer is closest to: A) $360,000. B) $180,000. C) $334,620. D) $163,260. Answer: D Explanation: $180,000 × 0.907 = $163,260 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

39) You have won $4,000,000 in a lottery. Your winnings will be paid to you in equal annual year-end installments of $400,000 over 10 years. You estimate that you can earn 10% on your investments. The present value of $1 for 10 periods at 10% is 0.386. The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145. The present value of your $4,000,000 winnings would be closest to: A) $4,000,000. B) $2,458,000. C) $2,708,000. D) $3,500,000. Answer: B Explanation: $400,000 × 6.145 = $2,458,000 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

40) Tanko Financing leases phones to various companies for business use. Tanko has just signed a 2-year lease agreement that requires annual year-end lease payments of $200,000. The present value of $1 for 2 periods at 4% is 0.925. The present value of an ordinary annuity of $1 for 2 periods at 4% is 1.886. What is the present value of the lease when the lease commences using a 4% interest rate? A) $400,000 B) $200,000 C) $377,200 D) $185,000 Answer: C Explanation: $200,000 × 1.886 = $377,200 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

41) The present value of $11,000 at the end of 6 years at 7% interest is (use the following present value of $1 table): Periods 1 2 3 4 5 6 7

5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711

5.5% 0.948 0.898 0.852 0.807 0.765 0.725 0.687

6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665

7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623

8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583

A) $6,853 B) $7,755 C) $7,326 D) $7,843 Answer: C Explanation: $11,000 × 0.666 = $7,326

Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

42) Which of the following is NOT needed to compute the present value of an investment? A) The length of time between the investment and future receipt. B) The amount of the receipt. C) The rate of inflation. D) The interest rate. Answer: C Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

43) The present value of a $17,000 payment at the end of each year for 4 years at 5.5% interest is (use the following present value of ordinary annuity of $1 table): Periods 1 2 3 4 5 6 7

5% 0.952 1.859 2.723 3.546 4.329 5.076 5.786

5.5% 0.948 1.846 2.698 3.505 4.270 4.995 5.683

6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582

7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389

8% 0.926 1.783 2.877 3.312 3.993 4.623 5.206

A) $72,590. B) $45,866. C) $59,585. D) $68,833. Answer: C Explanation: $17,000 × 3.505 = $59,585

Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

44) Use Excel to determine the present value of $25,000 at the end of 2 years at 5% interest. Interest is payable annually. A) $24,910 B) $21,596 C) $23,810 D) $22,676 Answer: D Explanation: Use the Excel formula = PV(0.05,2,0,25000,0) = $22,676 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

45) Use Excel to determine the present value of bonds with a face value of $24,000, a stated interest rate of 5%, a market rate of 3%, and a maturity date three years in the future. Interest is paid semiannually. A) $25,367 B) $21,949 C) $21,963 D) $25,357 Answer: A Explanation: Use the Excel formula =PV(0.015,6,-600,-24000) = $25,367 Market interest rate is 3% / 2 = 0.015 Interest payment = $24,000 × (5% / 2) = $600 Number of payments = 3 years × 2 per year = 6 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

46) On January 1, 2022, bonds with a face value of $100,000 were sold. The bonds mature on January 1, 2032. The face interest rate is 6%. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10%. What is the market price of the bonds on January 1, 2022? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 20 periods at 3% is 0.554. The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.877. (Please show all work and round your final answer to the nearest dollar.) Answer: PV of principal: ($100,000 × 0.377) = $37,700 PV of stated (cash) interest: ($100,000 × 3% × 12.462) = $37,386 PV (market price) of bonds: = $75,086 Diff: 3 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

47) The present value of a $25,000 payment at the end of each year for 5 years at 7% interest is (use the following present value of ordinary annuity of $1 table): Periods 1 2 3 4 5 6 7

5% .952 1.859 2.723 3.546 4.329 5.076 5.786

5.5% .948 1.846 2.698 3.505 4.270 4.995 5.683

6% .943 1.833 2.673 3.465 4.212 4.917 5.582

7% .935 1.808 2.624 3.387 4.100 47.67 5.389

Answer: $25,000 × 4.100 = $102,500

Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8% .926 1.783 2.877 3.312 3.993 4.623 5.206

Financial Accounting, 13e (Thomas/Tietz) Chapter 1 The Financial Statements Learning Objective 1-1 1) Accounting is an information system that measures business activities. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

2) Bookkeeping is a mechanical part of accounting. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

3) Accounting is often called the language of business. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

4) Accounting produces financial statements, which report information about a business. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

5) The accounting process begins and ends with people making decisions. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) Accounting information is used by investors and creditors, but not by regulatory bodies. Answer: FALSE Explanation: It is used by individuals, investors, creditors, nonprofits, and regulatory bodies. Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Industry Sector, Legal/Regulatory AICPA Functional: Measurement, Reporting

7) Since Habitat for Humanity is not concerned about making a profit, the entity does not need to use accounting information. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Industry Sector, Legal/Regulatory AICPA Functional: Measurement, Reporting

8) The business records of a sole proprietorship should include the proprietor's personal finances. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

9) A partnership is a taxpaying entity. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) Stockholders have no personal obligation for the corporation's debts. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) Accounting: A) measures business activities. B) processes data into reports and communicates the data to decision makers. C) is often called the language of business. D) is all of the above. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

12) A disadvantage of general partnerships is: A) double taxation of distributed profits. B) the partnership's assets are commingled with each partner's personal assets. C) only individuals can be partners. D) each partner may conduct business in the name of the entity and make agreements that legally bind all partners. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) Which of the following statements is TRUE for a limited liability company? A) Members have unlimited liability for the debts of the business. B) Members have limited liability for debts only up to the extent of their investment in the LLC. C) The owners have unlimited liability for the debts of the business. D) Members are not taxed like members of a partnership. Answer: B Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

14) Which of the following statements is TRUE for a limited liability partnership? A) All partners have limited liability for the debts of the partnership. B) All the partners are considered to be limited partners. C) The general partner has unlimited liability for the debts of the partnership. D) The limited partners have unlimited liability for the debts of the partnership. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

15) Which of the following statements is TRUE for a proprietorship? A) Legally, a proprietorship is separate from the proprietor. B) For accounting purposes, a proprietorship is separate from the proprietor. C) The business records include the proprietor's personal finances. D) All statements are correct. Answer: B Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) Federal income taxes are paid by the ________ in a limited liability company. A) company B) limited partners only C) general partners only D) members Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

17) Which of the following statements is TRUE for a limited liability partnership? A) The partnership pays no federal income taxes. B) Only the limited partners pay federal income taxes on their shares of the partnership's profits. C) Only the general partner pays federal income taxes on his or her share of the partnership's profits. D) Only the members pay federal income taxes on their shares of the partnership's profits. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

18) Which statement is TRUE about partnerships? A) A partnership is a taxpaying entity. B) General partnerships have mutual agency and limited liability. C) Individuals, corporations, partnerships, or other types of entities can be partners. D) A written partnership contract must exist. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

19) Which of the following have unlimited liability for a company's debts? A) owners of a corporation B) members of a limited liability company C) limited partners in a limited liability partnership D) general partner in a limited liability partnership Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

20) Which of the following entities pay federal income taxes? A) limited liability partnership B) general partnership C) limited liability company D) corporation Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

21) The two types of accounting are: A) profit and nonprofit. B) financial and managerial. C) internal and external. D) bookkeeping and decision-oriented. Answer: B

Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

22) Decision makers who use accounting information include: A) creditors. B) the Internal Revenue Service. C) the Securities and Exchange Commission. D) all of the above. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) Which type of business organization is larger in terms of assets, income, and number of employees? A) proprietorship B) partnership C) limited-liability company D) corporation Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

24) The owner of a ________ is personally liable for all the business's debts. A) proprietorship B) corporation C) limited-liability company D) All of the above are correct. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

25) Which of the following is a TRUE statement about the characteristics of partnerships? A) In a limited liability partnership, all partners have limited liability for the partnership's debts. B) General partners in a general partnership have mutual agency and limited liability for the partnership's debts. C) Income and losses of the partnership "flow through" to the partners. D) The partnership agreement must be in writing. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

26) Owners of an LLC are called: A) partners. B) proprietors. C) members. D) stockholders. Answer: C

Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

27) Advantages of a corporation include: A) difficulty in raising large sums of capital. B) double taxation of distributed profits. C) limited liability of the stockholders for the corporation's debts. D) each stockholder can conduct business in the name of the corporation. Answer: C Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

28) Shareholders of a corporation: A) have limited liability for the corporation's debts. B) can only be individuals. C) have a personal obligation for the corporation's debts. D) receive dividends from the corporation without having to pay tax on the distribution. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

29) An important factor to consider when determining how to organize a business is that: A) members of an LLC have unlimited liability and are taxed like members of a partnership. B) for accounting purposes, a proprietorship is a distinct entity, separate from the proprietor. C) partnerships are subject to double taxation. D) a corporation is not legally distinct from its owners. Answer: B Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

30) Accounting can be defined as: Answer: Accounting is the information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers. Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

31) Five ways a business can be organized include: Answer: Proprietorship, General Partnership, Limited-Liability Company, Limited-Liability Partnership, and Corporation Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

32) List and describe the decision makers who use accounting. Answer: i) Individuals. People like you manage their personal bank accounts, decide whether to rent an apartment or buy a house, and calculate the monthly income and expenditures of their businesses. Accounting provides the information people need to make these decisions. ii) Investors and creditors. Investors and creditors provide the money to finance The Walt Disney Company. Investors want to know how much income they can expect to earn on an investment. Creditors want to know when and how the company is going to pay them back. These decisions also require accounting information. iii) Regulatory bodies. All kinds of regulatory bodies use accounting information. For example, the Internal Revenue Service (IRS) and various state and local governments require businesses, individuals, and other types of organizations to pay income, property, excise, and other taxes. The Securities and Exchange Commission (SEC) requires companies with publicly traded stock to provide it with many kinds of periodic financial reports. All of these reports contain accounting information. iv) Nonprofit organizations. Churches, hospitals, and charities such as Habitat for Humanity and the Red Cross base many of their operating decisions on accounting data. These nonprofit organizations also have to file periodic financial reports with the IRS and state governments, even though they will owe no income taxes. Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Learning Objective 1-2 1) Generally accepted accounting principles (GAAP) are the accounting guidelines formulated by the Securities and Exchange Commission. Answer: FALSE Explanation: The Financial Accounting Standards Board (FASB) formulates the standards for U.S. GAAP. Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

2) The SEC establishes International Financial Reporting Standards. Answer: FALSE Explanation: The International Accounting Standards Board (IASB) sets IFRS (International Financial Reporting Standards). Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

3) The fundamental qualitative characteristics of accounting information are relevance and reliability. Answer: FALSE Explanation: Relevance and faithful representation. Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

4) Another name for the continuity assumption is the going-concern assumption. Answer: TRUE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

5) The historical cost principle is not used widely in the United States to value assets. Answer: FALSE Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) Accounting is moving in the direction of reporting more and more assets and liabilities at their fair values. Answer: TRUE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

7) Relevance is one of the four enhancing qualitative characteristics. Answer: FALSE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) Which of the following characteristics does NOT apply to verifiability? A) completeness B) reliability C) accuracy D) faithful representation Answer: D Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

9) Enhancing qualitative characteristics of accounting information do NOT include: A) comparability. B) verifiability. C) timeliness. D) materiality. Answer: D Explanation: The fourth one is understandability. Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

10) The conceptual foundation of accounting does NOT include: A) accounting objectives. B) fundamental qualitative characteristics. C) enhancing qualitative characteristics. D) decision making. Answer: D Explanation: The fourth one is constraint. Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

11) Information must be sufficiently transparent so that it makes sense to reasonably informed users of the financial statements, such as creditors. This qualitative characteristic of information is called: A) verifiability. B) faithful representative. C) relevant. D) understandability. Answer: D Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

12) The fair value of a plant asset is equal to: A) the amount the business could sell the asset for. B) the amount of cash paid plus the dollar value of noncash consideration given in exchange for the plant asset at acquisition. C) the amount of cash paid plus the loan taken out to finance the purchase of the plant asset. D) the amount a company can receive for the asset when sold in order to go out of business. Answer: A Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) In 1990, Johnson Company purchased a building for $200,000. In 2022, a real estate professional says the building has a fair value of $1,900,000. In 2022, a similar building down the street recently sold for $900,000. What value, before consideration of accumulated depreciation, is reported for the building on the balance sheet at December 31, 2022? A) $200,000 B) $1,050,000 C) $900,000 D) $1,900,000 Answer: A Explanation: The building is reported at the actual cost on the date of purchase of $200,000. Diff: 1 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

14) Which statement is FALSE? A) International Financial Reporting Standards are used by most countries around the world. B) U.S. Generally Accepted Accounting Principles are used by many countries around the world. C) The most commonly used accounting practices are essentially the same under both U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. D) For many years, U.S. Generally Accepted Accounting Principles were considered to be the strongest single set of accounting standards in the world. Answer: B Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

15) In order to compare the financial statements of Toyota Corporation to the financial statements of General Motors, it would be preferable to use: A) U.S. Generally Accepted Accounting Principles for General Motors and International Financial Reporting Standards for Toyota. B) U.S. Generally Accepted Accounting Principles for both companies. C) International Financial Reporting Standards for both companies. D) U.S. Generally Accepted Accounting Principles for Toyota Corporation and International Financial Reporting Standards for General Motors. Answer: C Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

16) The International Accounting Standards Board is responsible for establishing: A) the code of professional conduct for accountants. B) an international Securities and Exchange Commission. C) U. S. Generally Accepted Accounting Principles. D) International Financial Reporting Standards. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

17) Which of the following statements is FALSE? A) The application of U.S. GAAP for public companies in the Unites States has been overseen by SEC. B) The advantage of a uniform set of global accounting standards is that financial statements from a U.S. company will be comparable to those of a foreign company. C) In the long run, a uniform set of global accounting standards should significantly reduce the costs of doing business globally. D) IFRS has been adapted in the United States. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

18) To be useful, accounting information must have the fundamental qualitative characteristics of: A) comparability and relevance. B) relevance and faithful representation. C) materiality and understandability. D) faithful representation and timeliness. Answer: B Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

19) All of the following are true statements about the entity assumption EXCEPT for: A) a sharp boundary is drawn around each entity. B) the transactions of the business cannot be combined with the transactions of the owner. C) business operations cannot be divided into segments. D) the entity is any organization that stands apart as a separate economic unit. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

20) Verifiability means that the accounting information: A) is timely and understandable. B) is understandable. C) must be capable of being checked for accuracy, completeness and reliability. D) is material and relevant. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

21) The accounting assumption that states that the business, rather than its owners, is the reporting unit is the: A) entity assumption. B) going concern assumption. C) stable-monetary-unit assumption. D) historical cost assumption. Answer: A Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

22) The stable-monetary-unit assumption: A) ensures that accounting records and statements are based on the most reliable data available. B) requires all countries to record transactions in U.S. dollars. C) maintains that each organization or section of an organization stands apart from other organizations and individuals. D) enables accountants to ignore the effect of inflation on the accounting records. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

23) Historical cost: A) is used in the U.S. to value all business assets. B) is equal to the amount of cash paid minus the dollar value of all noncash considerations also given in the exchange. C) is a verifiable measure that is relatively free from bias. D) is the amount that the business could sell an asset for. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

24) The principle stating that assets acquired by the business should be recorded at their actual cost on the date of purchase is: A) historical cost. B) objectivity. C) reliability. D) stable-monetary-unit. Answer: A Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

25) The relevant measure of the value of the assets of a company that is going out of business is the: A) liquidating value. B) inflation-adjusted book value. C) historical cost. D) carrying value. Answer: A Diff: 1 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

26) The CEO of Clarkson Company owns a vacation home in Hawaii. Clarkson Company owns a factory in Detroit where it is headquartered. Which of these properties is considered to be asset(s) of the business? A) only the vacation home in Hawaii B) only the factory in Detroit C) both the vacation home in Hawaii and the factory in Detroit D) neither the vacation home in Hawaii nor the factory in Detroit Answer: B Diff: 2 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting

27) A construction company paid $81,000 cash for land used in the business. At the time of purchase, the land had a list price of $88,000. When the balance sheet was prepared, the fair value of the land was $84,000. At what amount should the land be reported on the balance sheet of the company? A) $81,000 B) $84,000 C) $84,500 D) $88,000 Answer: A Explanation: Based on the historical cost principle, the land should be reported at its cost of $81,000. Diff: 2 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

28) If a company prepares its financial statements three years after the end of its accounting period, it has violated the qualitative characteristic of: A) understandability. B) timeliness. C) verifiability. D) materiality. Answer: B Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting