Multiple Choice

1. Poster Inc. owns 35 percent of Elliott Corporation. During the calendar year 2003, Elliott had net earnings of $300,000 and paid dividends of $36,000. Poster mistakenly accounted for the investment in Elliott using the cost method rather than the equity method of accounting. What effect would this have on the investment account and net income, respectively?

A. Understate, overstate
B. Overstate, understate
C. Overstate, overstate
D. Understate, understate

2. Marino Corporation purchased the following portfolio of trading securities during 2008 and reported the following balances at December 31, 2008. No sales occurred during 2008. All declines are considered to be temporary.

Security Cost Market Value at 12/31/08
X $ 80,000 $ 82,000
Y 140,000 132,000
Z 32,000 28,000

The only transaction in 2009 was the sale of security Z for $34,000 on December 31, 2009. The market values for the other securities at December 31, 2009 were the same as at December 31, 2008. Marino's entry to record the sale of security Z would include

A. a credit of $2,000 to Realized Gain on Sale of Trading Securities.
B. a debit of $2,000 to Realized Gain on Sale of Trading Securities.
C. a $2,000 debit to Market Adjustment-Trading Securities.
D. a $4,000 debit to Market Adjustment-Trading Securities.

3. At the beginning of the year, a company had a debit balance in the account Market Adjustment-Trading Securities. During the year the company didn't buy or sell any trading securities, but at the end of the year the related market adjustment account had a credit balance. This change indicates

A. a loss on the income statement was recognized.
B. a gain on the income statement was recognized.
C. the value of the investment account increased.
D. the value of the investment account decreased.

4. When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as

A. a deduction from the investment account.
B. dividend revenue.
C. an addition to the investor's share of the investee's profit.
D. a deduction from the investor's share of the investee's profit.

For each situation listed in questions 5-8, indicate by letter the appropriate financial statement element being discussed.
5. The net assets of an entity

A. Investment by owners C. Owners' equity
B. Distributions to owners D. Revenues

6. An increase in net assets through the issuance of stock

A. Investment by owners C. Owners' equity
B. Distributions to owners D. Revenues

7. The payment of a dividend

A. Investment by owners C. Owners' equity
B. Distributions to owners D. Revenues

8. Items offering future value to an entity

A. Investment by owners C. Owners' equity
B. Distributions to owners D. Revenues

9. Edwards Company began business in February of 2007. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2007, balance sheet, Edwards appropriately reported a $4,000 credit balance in its Market Adjustment- Trading Securities account. There was no change during 2008 in the composition of Edward's portfolio of trading securities. Pertinent data are as follows:

Security Cost Market Value December 31, 2008

A $120,000 $126,000
B 90,000 80,000
C 160,000 157,000
$370,000 $363,000

What amount of loss on these securities should be included in Edward's income statement for the year ended December 31, 2008?

A. $0 C. $7,000
B. $3,000 D. $11,000

10. On January 1, 2008, Capitech Corporation acquired Logirun, Inc. as a long-term investment
for $250,000 (a 30 percent common stock interest in Logirun). On that date, Logirun had net assets with a book value and current market value of $800,000. During 2008, Logirun reported net income of $90,000 and declared and paid cash dividends of $20,000. What is the maximum amount of income that Capitech should report from this investment for 2008?

A. $6,000 C. $26,750
B. $21,000 D. $27,000

For each situation listed in questions 11-12, indicate by letter the appropriate accounting assumption being discussed.

11. When preparing the financial statements for MacNeil & Sons, the accountant included certain personal assets of MacNeil and his sons in preparing the statements.

A. Stable monetary units C. Going concern
B. Specific economic entity D. Arm's-length transactions

12. The operations of Uintah Savings and Loan are being evaluated by the federal government.
During their investigations, government officials have determined that numerous loans made by top management were unwise and have seriously endangered the future of the savings and loan.

A. Stable monetary units C. Going concern
B. Specific economic entity D. Arm's-length transactions

13. On October 1, Dennis Company purchased $200,000 face value 12 percent bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700.

At what amount should this acquisition of bonds be recorded?
A. $196,000 C. $202,000
B. $196,700 D. $202,700

For each situation listed in questions 14-17, indicate by letter the appropriate qualitative characteristic or accounting concept applied.

14. All payments out of petty cash are debited to miscellaneous expense.

A. Materiality C. Economic entity
B. Representational faithfulness D. Historical cost

15. Periodic payments of $1,500 per month for services of H. Hay, who is the sole proprietor of the company, are reported as withdrawals.

A. Materiality C. Economic entity
B. Representational faithfulness D. Historical cost

16. Investments in equity securities are initially recorded at cost.

A. Materiality C. Economic entity
B. Representational faithfulness D. Historical cost

17. A note describing the company's possible liability in a lawsuit is included with the financial
statements even though no formal liability exists at the balance sheet date.

A. Materiality C. Economic entity
B. Representational faithfulness D. Historical cost

18. In March of 2007, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for
$450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2007. Moon changed the classification of these shares to trading securities in June of 2008 when the market value of this investment in McMahon's stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2008?

A. $0 C. $105,000
B. $45,000 D. $150,000

19. Walsh, Inc. began business on January 1, 2007, and at December 31, 2007, Walsh had the following investment portfolios of equity securities:

Trading Available-For-Sale
Aggregate cost $150,000 $225,000
Aggregate market value 120,000 185,000

None of the declines is judged to be other than temporary. Unrealized losses at December 31, 2007, should be recorded with corresponding charges against

Income Stockholders' Equity
A. $70,000 $0
B. $40,000 $30,000
C. $30,000 $40,000
D. $0 $70,000

20. Martin Co. purchased the following portfolio of trading securities during 2007 and reported
the following balances at December 31, 2007. No sales occurred during 2007. All declines are considered to be temporary.

Security Cost Market Value at 12/31/2007
X $ 80,000 $ 82,000
Y 140,000 132,000
Z 32,000 28,000

The carrying value of the portfolio at December 31, 2007, on Martin Co.'s balance sheet would be

A. $222,000. C. $242,000.
B. $240,000. D. $252,000