QUESTION 1

Jay Company purchased Delta Company stock for $40,000in the current year. The security is classified as available for sale. The market value at the end of the current year is $49,000. Jay expects it to be $55,000 within the first week of the new year.  How much gain will be reported on the income statement for the current year?

$0

$9,000

$15,000

$6,000
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QUESTION 2

Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2010 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2011, and $65 on December 31, 2012. During 2013, Hawk sold all of its Diamond stock at $70 per share. In its 2013 income statement, Hawk would report: 

A gain of $150,000

A gain of $50,000.

A gain of $200,000.

A gain of $300,000.
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QUESTION 3

In regard to the equity method of accounting for investments, which of the following is false?

Dividends should be recorded as a decrease to the investment account.

The investee's net income should be recorded as an increase to the investment account.

The investee's net income is adjusted to reflect revenue and expenses associated with the difference between the book and fair value and the investee's net assets on the date the investment was made.

All are true.
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QUESTION 4

On January 2, 2012, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2012 and 2013, were $10,000 and $50,000, respectively. During 2013, Ranger declared and paid a dividend of $60,000. There were no dividends in 2012. On December 31, 2012, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2013 income statement as income from this investment? 

$26,000

$7,200

$20,000

$27,200
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QUESTION 5

Nichols Enterprises has an investment in 25,000 shares of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott shares are publicly traded on the New York Stock Exchange, and The Wall Street Journal quotes a price for those shares of $10 a share, but Nichols believes the market has not appreciated the full value of the Elliott shares and that a more accurate price is $12 a share. Nichols should carry the Elliott investment on its balance sheet at: 

$300,000

$250,000

Either $250,000 or $300,000 are acceptable.

$$275,000 (the midpoint between $250,000 and $300,000).
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QUESTION 6

On Jan 1 Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the fair value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for the year, and paid $600,000 dividends to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of: 

$3,160,000

$3,400,000

$4,000,000

$3,400,000

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QUESTION 7

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:

Would record dividends received from Son Company as investment revenue.

Would increase its investment count when Son Company declares diividends.

Would record 40% of the net income of Son Company as investment income each year.

None of the above.
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