Test bank with answers for financial accounting 6e by libby chapter 06

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

True / False Questions
1. The extent of influence and control over another company is a critical factor in determining
the proper method of accounting for a long-term investment in the common stock of another
company.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

2. Investments in bonds intended to be sold before they reach maturity should be reported
under the market value method.
TRUE

AACSB Tag: Communications
Difficulty: Medium

L.O.: 1

3. If a bond is bought at par value, then interest revenue will be equal to the cash revenue.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

4. An investor who owns more than 50% of the outstanding bonds of another corporation has
"significant influence" over that corporation.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

12-1
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

5. Objectives of a long-term investment in the common stock of another corporation include
earning a return on idle cash or obtaining influence or control over the other corporation.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

6. When we sell an investment in available-for-sale securities, an entry needs to be recorded
to offset the allowance to value at market account against the net unrealized gains/losses
account prior to recording the removal of the investment account.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

7. Most businesses prefer to treat their investment in stock, when less than 20% of the voting
stock is owned, as trading securities since those unrealized gains and losses stay on the
balance sheet and do not disrupt reported net income.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 2

8. The equity method requires the recognition of investment revenue for dividends received.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

12-2
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

9. When using the term investments in associated or affiliated companies on a balance sheet,
it implies a company has significant influence by owning between 20 and 50 percent of the

voting stock of that company.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

10. Tiger Corporation owns 30% of Woods Corp. for which they paid $5.5 million. Woods
Corp. paid a $100,000 dividend. The investment in affiliated companies account will increase
by $30,000, which is Tiger's proportionate share of the dividend.
FALSE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

11. An investment accounted for under the equity method would record a reduction in the
investment account for their proportionate share of the investee's reported net loss.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

12. Any gains or losses on sale of investments as well as any unrealized gains or losses on
trading securities would have to be added back to or deducted from net income on the
statement of cash flows under the indirect method to remove the effects of investment
activities out of the operating activities section.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

12-3
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

13. In a 100% acquisition, the stockholders of the acquired company receive cash for their
shares of stock in the acquired company. The stockholders are no longer owners of either the
parent or the subsidiary.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 4

14. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million.
Allison's total assets at fair market value equaled $12.5 million and Allison had liabilities at
fair market value equal to $3.4 million. Madison Inc., will report goodwill of $0.9 million.
TRUE

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 4

15. When the acquiring company purchases 100% of the investee's stock, the investee's assets
and liabilities will be consolidated with those of the acquiring company at their book values.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

16. Subsequent to merger, any revenues and expenses of the subsidiary would be combined
with those of the parent company on the consolidated income statement.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

12-4
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

17. Return on assets (ROA) is computed by dividing net income by total assets at the end of
the year.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

18. A low return on assets (ROA) is generally viewed as favorable in terms of effective
management of invested capital.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy

L.O.: 5

19. Return on assets (ROA) is comprised of two separate ratios, profit margin and fixed asset
turnover.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

20. One of the important elimination entries when preparing consolidated statements is to
remove the investment in subsidiary account so it can be replaced with the investees' acquired
asset and liability accounts along with any acquired goodwill.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: Sup A

12-5
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

Multiple Choice Questions
21. Which of the following is the best description of investments in trading securities?
A. Investments in bonds that management intends to hold to maturity.
B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
C. Investments in more than fifty percent of the voting stock of another company.
D. Investments that grant the investor significant influence, but not control over the investee
company.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

22. Piano Company owns 55% of the voting common stock shares of Keys Corporation.
Which of the following is true?
A. The investment would be accounted for using the equity method.
B. The investment would be accounted for by consolidation.
C. The investment would be accounted for under the market value method.
D. The investment would be accounted for under the amortized cost method.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 1

23. Which of the following is the best description of investments in available-for-sale
securities?
A. Investments in bonds that management intends to hold to maturity.
B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
C. Investments in more than fifty percent of the voting stock of another company.
D. Investments in securities that are accounted for under the market value method other than
trading securities and held-to-maturity debt investments.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

12-6
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

24. Subsequent to acquisition, measurement of a long-term investment in another corporation
and the related investment revenue depends upon the extent to which the investing company
can exercise
A. significant control over the operating and financing policies of the other company.
B. significant influence or control over the operating and financing policies of the other
company.
C. significant influence or control over the operating policies of the other company.
D. significant influence or control over the financing policies of the other company.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

25. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2009. The bonds pay
dividends of 10%. Chang intends to hold these bonds to maturity. Which of the following
statements is false?
A. Since the bonds were issued at par value, the cash interest will be the same as interest
revenue.
B. The bonds will earn $75,000 of interest by December 31, 2009.
C. If sold before maturity, any gain or loss would be reported as an extraordinary item.
D. Since they were classified as held to maturity, the company would recognize no unrealized
gains or losses on the bonds over their lifetime.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 1

26. Significant influence over the operating and financing policies of another company may
be indicated by
A. participation on its board of directors.
B. participation in its policy-making process.
C. material transactions between the two companies.
D. All of the answers are correct.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

12-7
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

27. Global Company owns 30% of the outstanding voting stock of Local Corporation. Global
should use the following method to account for the investment
A. market value method.
B. equity method.
C. consolidated financial statement method.
D. Either the market value or equity method is acceptable.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

28. If a company purchased 15% of the outstanding voting shares of stock of another
company as a long-term investment in available-for-sale securities, the investor company
should use the following method:
A. consolidation.
B. equity.
C. market value.
D. payout.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

29. Use of the consolidated financial statement method of accounting for a long-term
investment in common stock of another company is required when the ownership of its voting
stock is
A. 20% or more.
B. less than 20%.
C. between 20% and 50%.

D. more than 50%.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

12-8
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

30. The equity method causes the investment account to approximate
A. original cost of the investment.
B. market value of the investment.
C. original cost of the investment minus any dividends received.
D. original cost of the investment plus a proportionate share of subsequent undistributed

earnings of the investee.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

31. Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato
Corporation as a long-term investment. Which of the following methods should be used by
Idaho Company in accounting for the investment?
A. Market value method.
B. Equity method.
C. Purchase method.
D. Because the stock is nonvoting, either the market value or the equity method is acceptable.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

12-9
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

32. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke
Corporation on January 1, 2009, at $40 per share as a long-term investment. The records of
Burke Corporation showed the following on December 31, 2009

Gilman Company should report the following on the December 31, 2009, balance sheet for its
investment in Burke Corporation.
A. $4,218,000.
B. $4,000,000.
C. $4,124,000.
D. $3,800,000.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 2

33. On January 1, 2009, Entertainment Company acquired 15% of the outstanding voting
stock of Rocker Company as a long-term investment in available-for-sale securities. On
December 31, 2009, Rocker Company reported net income of $1,500,000 and dividends
declared and paid of $250,000. For the year ended December 31, 2009, Entertainment
Company should report "Investment income" amounting to
A. $225,000.
B. $ 37,500.
C. $187,500.

D. zero.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

12-10
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

34. Which of the following statements is correct?
A. Any unrealized holding gain or loss on investments in trading securities is reported in the
income statement.
B. Any unrealized holding gain or loss on investments in available-for-sale securities is
reported in the income statement.

C. Investments in available-for-sale securities are reported in the income statement.
D. Any unrealized holding gain or loss on investments in trading securities or in available-forsale securities is reported in the income statement.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

35. Lyrical Company purchased equity securities for $500,000 and classified them as trading
securities on September 15, 2009. At December 31, 2009, the current market value of the
securities was $481,000. How should the investment be reported in the December 31, 2009
financial statements?
A. The investment in trading securities would be reported in the balance sheet at its $481,000
market value.
B. The investment in trading securities would be reported in the balance sheet at its $500,000
cost.
C. A realized holding loss on the trading securities of $19,000 would be reported on the
income statement.
D. The investment in trading securities would be reported in the balance sheet at its $481,000
market value and a realized holding loss on the trading securities of $19,000 would be
reported on the income statement.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

12-11
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

36. Libby Company purchased equity securities for $100,000 and classified them as availablefor-sale securities on September 15, 2009. At December 31, 2009, the current market value of
the securities was $105,000. How should the investment be reported in the December 31,
2009 financial statements?
A. The investment in available-for-sale securities would be reported in the balance sheet at its
$100,000 cost.
B. The investment in available for sale securities would be reported in the balance sheet at its
$105,000 market value.
C. An unrealized holding gain on available-for-sale securities of $5,000 would be reported in
the stockholders' equity section of the balance sheet.
D. The investment in available for sale securities would be reported in the balance sheet at its
$105,000 market value and an unrealized holding gain on available-for-sale securities of
$5,000 would be reported in the stockholders' equity section of the balance sheet.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

37. On January 1, 2009, Short Company purchased as an available-for-sale investment,
20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $ 1 par value
common stock at a cost of $50 per share. During November 2009, Daniel Corporation
declared and paid a cash dividend of $2 per share. At December 31, 2009, end of the
accounting period, Daniel Corporation's shares were selling at $48. At December 31, 2009,
the financial statements for Short Company should report the following amounts:

A.
B.
C.
D.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 2

12-12
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

38. Which of the following statements is true?
A. Investments in bonds are always passive investments.
B. Investments in stock can be passive investments if the investor owns less than 20% of the
voting stock.
C. Investments in stock that are classified as either trading securities or available-for-sale will
record unrealized gains or losses on the income statement under the market value method.
D. Investments in bonds are always passive investments and investments in stock can be
passive investments if the investor owns less than 20% of the voting stock.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

39. Which of the following statements is false?
A. Out of all the assets on the balance sheet, only passive investments in marketable securities
are reported using their market value.
B. Accountants can justify the use of the market value method because it is important to know
the cash value of these passive investments and because their market value is objectively
verifiable since they are actively traded.
C. Unrealized gains and losses recognized under the market value method are recorded in
stockholders' equity and do not affect net income.
D. Out of all the assets on the balance sheet, only passive investments in marketable securities
are reported using their market value and unrealized gains and losses recognized under the
market value method are recorded in stockholders' equity and do not affect net income.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

12-13
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

40. On July 1, 2009, as a long-term investment in available-for-sale securities, Wildlife
Supply Company purchased 6,000 shares of the preferred stock (nonvoting) of Nature
Company for $30 per share (18,000 shares outstanding). The records of Nature Company
reflect the following on December 31, 2009

The amount reported on the balance sheet by Wildlife Company for its investment at

December 31, 2009, would be
A. $160,000.
B. $162,000.
C. $182,000.
D. $200,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

41. On July 1, 2009, Surf Company purchased long-term investments in available-for-sale
securities as follows:
Blue Corporation common stock (par $5) 2,000 shares at $16 per share.
Black Company preferred stock (par $20) 1,500 shares at $30 per share.
The quoted market prices per share on December 31, 2009, were:
Blue Corporation stock, $15 per share
Black Company stock, $30 per share
Each of the long-term investments represents 10% of the total shares outstanding. The
combined carrying value of the long-term investments reported in the balance sheet of Surf
Company at December 31, 2009, should be
A. $77,000.
B. $73,500.
C. $71,500.
D. $75,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

12-14

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

42. When accounting for investments in trading securities, any decline in market value below
cost of the investments is reported on the
A. income statement as a realized loss.
B. income statement as an unrealized holding loss.
C. balance sheet as a realized loss.
D. balance sheet as an unrealized holding loss in the stockholders' equity section.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

43. The primary difference in accounting for available-for-sale investments in stock and

accounting for trading investments in stock is due to
A. measuring the market value of the long-term and short-term portfolios of stock.
B. computing the cost at acquisition.
C. where the unrealized holding loss or gain on investments is reported in the financial
statements.
D. accounting for realized gains and losses on sales of the investment shares.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

12-15
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

44. On July 1, 2009, Carter Company purchased trading securities as follows:
Dark Corporation common stock (par $1) 10,000 shares at $25 per share
Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share
The quoted market prices per share on December 31, 2009 were:
Dark Corporation stock, $27 per share.
Janvrin Corporation stock, $104 per share
Each of the investments represented 5% of the total shares outstanding. The carrying value
amount of the investments at December 31, 2009 should be
A. $478,000
B. $460,000
C. $458,000
D. $480,000

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

45. Which of the following is true about passive investments?
A. The investing company must own less than 20% of the voting stock in the investee.
B. These investments must be reported at market value on the balance sheet even though the
historical cost principal is violated.
C. The market value method requires realized gains and losses to be recognized on the income
statement.
D. The investing company must own less than 20% of the voting stock in the investee and
these investments must be reported at market value on the balance sheet even though the
historical cost principal is violated.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

12-16
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

46. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What method of accounting will Phillips use to account for this investment?
A. Amortized cost method.
B. Equity method.
C. Market value method.

D. Consolidation.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

47. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What effect will the dividend have on Phillips' books?
A. It would increase cash and increase investment revenue.
B. It would increase cash and decrease investment in associated companies.
C. It would increase cash and increase net unrealized gains/losses.
D. It would increase cash and increase the allowance to value at market account.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

12-17
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

48. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What value will be reflected on Phillips' balance sheet at December 31, 2009?
A. $42,000,000
B. $45,000,000
C. $46,800,000
D. $47,200,000

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

49. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On

December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What amount will be reflected on Phillips' income statement for the year in connection with
their investment in Martin?
A. $400,000 investment revenue.
B. $5.2 million investment revenue.
C. Zero
D. $400,000 investment revenue and $3.0 million comprehensive income

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

12-18
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

50. Passive investments require use of the market value method for reporting them on the
balance sheet. Which of the following statements is false?
A. The market value is a more relevant value since the intent in purchasing these investments
is to generate cash inflow when it is needed and market value best reflects the expected cash
inflow from the sale of the investments.
B. It is very easy to determine the market value of passive investments since their market
value is quoted daily on the stock exchanges on which they trade.
C. The market value method allows gains and losses to be recognized immediately on all
passive investments by deducting them on the income statement.
D. None of the other answers is false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

51. Which of the following statements is true?
A. Passive investments can be either short-term or long-term investments.
B. To qualify as a passive investment, the investor cannot own more than 25% of the voting
stock in the investee.
C. All unrealized gains and losses on passive investments must be reported on the income
statement for the year in which their fair market value rises or falls.
D. All of the answers are true.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

52. When the equity method is used in accounting for long-term investments in equity
securities, an increase or decrease in the investment should be recognized
A. when the investee company reports income.
B. when the investee company declares and pays a cash dividend.
C. when the investee company declares and pays (or issues) either a cash dividend or a stock
dividend.
D. on the basis of stock market fluctuations.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

12-19
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

53. Under the equity method, the investor's proportionate share of the income (or losses) of
the investee corporation impacts the
A. long-term investment account.
B. investment revenue account.
C. goodwill account.
D. long-term investment account and the equity in investee earnings account.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

54. Heartfelt Company owns a 40% interest in the voting common stock of Candle
Corporation as a long-term investment. For 2009, Candle Corporation reported net income of
$100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle
Corporation investment was $500,000 on January 1, 2009. Heartfelt should recognize income
from investee earnings for the year ended December 31, 2009 of
A. $200,000.
B. $40,000.
C. $36,000.
D. $57,750.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

55. On January 1, 2009, Palmer, Inc. bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000. The equity method of accounting for this investment is
used. At December 31, 2009, Arnold Corporation reported $30,000 net income and paid
$10,000 cash dividends. At December 31, 2009, the shares had a market value of $150,000.

This investment should be reported on the balance sheet of Palmer, Inc., on December 31,
2009, at
A. $150,000.
B. $158,000.
C. $145,000.
D. $148,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

12-20
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

56. On January 1, 2009, Calas Company acquired 40% of the outstanding voting stock of
Nick Company as a long-term investment. On December 31, 2009, Nick Company reported
net income of $10,000 and dividends declared and paid of $4,000. For the year ended
December 31, 2009, Calas Company should report "Income from investee earnings" of
A. $ 3,000.
B. $ 4,000.
C. $ 2,400.
D. $10,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

57. Which of the following statements is false?
A. When an investment in another company is purchased, it is a cash outflow under investing
activities.
B. When investment assets are sold, it is a cash inflow under investing activities.
C. Any gains or losses in connection with investment assets are reported as an inflow or
outflow of cash connected to operating activities.
D. None of the other answers is false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

58. Which of the following statements is false?
A. Dividends received from investment assets increase cash flow from investing activities.
B. Only realized gains and losses increase or decrease cash flow from operating activities.
Unrealized gains and losses have no effect on cash flow from operating activities.
C. Sale of investment assets is cash inflow from investing activities.

D. None of the other answers is false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

12-21
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

59. Lopez Corporation's 2009 statement of cash flows reported the following information.
Proceeds from disposals of investments were $161 million; purchases of investments were
$46 million, and depreciation and amortization of $5 million.
How much will be reported as net cash inflow or outflow from investing activities as a result
of these items for the year ended December 31, 2009?

A. Net cash outflow from investing activities $207 million.
B. Net cash outflow from investing activities $115 million.
C. Net cash inflow from investing activities $115 million.
D. Net cash inflow from investing activities $207 million.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

60. In 2009, Morelli, Inc. reported the following items in their statement of cash flows.
Purchases of property, plant, and equipment $1,336 million, proceeds from the sale of
marketable securities $13,079 million, and cash paid for investment acquisitions $115 million.
How much will be reported as cash inflow or outflow from investing activities related to these
items?
A. $11,628 million in net cash inflow.
B. $11,628 million in net cash outflow.
C. $14,530 million in net cash inflow.
D. $14,530 million in net cash outflow.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

12-22
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

61. Which of the following statements is true?
A. When the equity method is used to account for an investment in an investee, the reported
share of investee income must be added to net income on the statement of cash flows.
B. When the equity method is used to account for an investment in an investee, the cash
dividends received are cash inflow from investing activities.
C. Any realized or unrealized gains or losses that were reported on the income statement
under the market value method must be removed from net income in the operating activities
section of the statement of cash flows.
D. All of the statements are true.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

62. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On

December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What method of accounting will Photo finish use to account for this investment?
A. Amortized cost method.
B. Equity method.
C. Market value method.
D. Consolidation.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

12-23
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

63. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What effect will the dividend have on Photo Finish's books?
A. It would increase cash and increase investment revenue.
B. It would increase cash and decrease investment in associated companies.
C. It would increase cash and increase net unrealized gains/losses.
D. It would increase cash and increase the allowance to value at market account.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

64. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What value will be reflected on Photo Finish's balance sheet at December 31, 2009?
A. $20,000,000
B. $23,000,000
C. $23,600,000
D. $24,000,000

AACSB Tag: Analytic
L.O.: 3

12-24

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

65. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What amount will be reflected on Photo Finish's income statement for the year ended
December 31, 2009 in connection with their investment in Click It Corporation?
A. $400,000 investment revenue.
B. $3.6 million investment revenue.
C. Zero
D. $4.0 million equity in investee earnings.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

66. Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation
under the purchase method. Which of the following statements about the consolidated
statements is true?
A. The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed
at their fair market values on the date of acquisition.
B. Fun with Florals Corporation will use the equity method of accounting for this investment.
C. Fun with Florals Corporation will report Crafts to Go Corporation's revenues and expenses
on a consolidated income statement.
D. Fun with Florals will use the market value method of accounting for this investment.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

12-25
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e