Multiple Choice
Identify the choice that best completes the statement or answers the
question.
|
|
|
1.
|
If an investor owns less than 20% of the common shares of another corporation as
a long-term investment,
a. | the equity method of accounting for the investment should be
employed. | b. | no dividends can be expected. | c. | it is presumed that the investor has relatively
little influence on the investee. | d. | it is presumed that the investor has
significant influence on the investee. |
|
|
|
2.
|
If the cost method is used to account for a long-term investment in common
shares, dividends received should be
a. | credited to the Equity Investment account. | b. | credited to the
Dividend Revenue account. | c. | debited to the Equity Investment
account. | d. | recorded only when 20% or more of the shares are
owned. |
|
|
|
3.
|
When an investor owns between 20% and 50% of the common shares of a corporation,
it is generally presumed that the investor
a. | has insignificant influence on the investee and that the cost method should be used
to account for the investment. | b. | should apply the cost method in accounting for
the investment. | c. | will prepare consolidated financial statements. | d. | has significant
influence on the investee and that the equity method should be used to account for the
investment. |
|
|
|
4.
|
Under the equity method of accounting for long-term investments in common
shares, when a dividend is received from the investee company,
a. | the Dividend Revenue account is credited. | b. | the Equity
Investment account is increased. | c. | the Equity Investment account is
decreased. | d. | no entry is necessary. |
|
|
|
5.
|
Which of the following would not be considered a motive for making an equity
investment in another corporation?
a. | Appreciation in the market value of the equity investment | b. | Use of the
investment for expanding its own operations | c. | Use of the investment to diversify its own
operations | d. | An increase in the amount of interest revenue from the equity
investment |
|
|
|
6.
|
If an equity investment is sold at a gain, the gain
a. | is reported as operating revenue. | b. | is reported under a special section,
"Discontinued investments," on the income statement. | c. | is reported in the
Other Revenue and Gain section of the income statement. | d. | contributes to gross
profit on the income statement. |
|
|
|
7.
|
If the equity method is being used, cash dividends received
a. | are credited to Dividend Revenue. | b. | require no entry because investee net income
has already been recorded at the proper proportion on the investor's books. | c. | are credited to the
Equity Investment account. | d. | are credited to an Interest Revenue
account. |
|
|
|
8.
|
Under the equity method, the Equity Investment account is debitted when
the
a. | investee reports net income. | b. | investee reports a net
loss. | c. | investment is originally acquired. | d. | investee reports net income and when the
investment is originally acquired. |
|
|
|
9.
|
A company that owns more than 50% of the common shares of another company is
known as the
a. | charge company. | b. | subsidiary company. | c. | parent
company. | d. | management company. |
|
|
|
10.
|
A company may purchase a non-controlling interest in another company in a
related industry to
a. | establish a presence and exercise some influence over customers or
suppliers. | b. | enter a new industry without the costs and risks of starting from
scratch. | c. | receive dividend income. | d. | all of the
above. |
|