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Financial and Managerial Accounting The Cornerstones of Business Decisions International Edition 2nd Edition by Jay Rich . Dan Heitger - Test Bank£20.49
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1. Securities issued by a corporation as a form of ownership in the business, such as common stock and
preferred stock, are called equity securities.
ANS: T PTS: 1 DIF: Easy OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
2. The equity method of accounting is used if the investor owns between 20-50% of another company
and the investor is able to exert influence over the other company.
ANS: T PTS: 1 DIF: Easy OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
3. A debt security exists when another entity owes the security holder some combination of interest and
principal.
ANS: T PTS: 1 DIF: Easy OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
4. If the investor owns over 50 percent of the outstanding common stock, the investor is deemed to have
control over the operating and financial policies of the investee.
ANS: T PTS: 1 DIF: Easy OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
5. Held-to-maturity securities are equity and debt investments that management intends to sell in the
future, but not necessarily in the near term.
ANS: F PTS: 1 DIF: Moderate OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
6. The fair value method should be used to account for stock investments of less than 20 percent of the
outstanding shares.
ANS: T PTS: 1 DIF: Moderate OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
7. An advantage of the equity method over the fair value method is that it prevents an investor from
manipulating its own income by exerting influence over the amount and timing of investee dividends.
ANS: T PTS: 1 DIF: Moderate OBJ: A2-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
8. If the investor holds enough common stock to control the investee (50 percent or more common stock
ownership), then the two corporations are no longer separate accounting entities and therefore they no
longer may maintain separate accounting records.
ANS: F PTS: 1 DIF: Challenging OBJ: A2-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
9. If the parent owns 90 percent of the subsidiary’s stock, then 90 percent of the subsidiary’s assets and
liabilities are included in the consolidated balance sheet.
ANS: F PTS: 1 DIF: Challenging OBJ: A2-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
10. If the investor holds 50 percent or more of the investee’s outstanding common stock, then the investor
is referred to as the parent and the investee is called the subsidiary.
ANS: T PTS: 1 DIF: Easy OBJ: A2-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
11. Any transaction or set of transactions that brings together two or more previously separate entities to
form a single accounting entity is called a business combination.
ANS: T PTS: 1 DIF: Moderate OBJ: A2-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
12. The excess of acquisition cost over the current value of the investee’s identifiable net assets, referred to
as goodwill, may not be recorded by the investor under current generally accepted accounting
principles.
ANS: F PTS: 1 DIF: Moderate OBJ: A2-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
, 13. A purchased company must be recorded at the value of the cash and other consideration given by the
acquiring company.
ANS: T PTS: 1 DIF: Easy OBJ: A2-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
14. If the acquisition cost exceeds the current value of the net assets (assets minus liabilities) acquired, the
investor must also be purchasing an intangible asset arising from attributes that are not separable from
the business—such as customer satisfaction, product quality, skilled employees, and business location.
ANS: T PTS: 1 DIF: Easy OBJ: A2-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
15. Minority (or noncontrolling) interest is disclosed when the parent owns more than 50 percent, but less
than 100 percent of the outstanding common stock.
ANS: T PTS: 1 DIF: Moderate OBJ: A2-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-21-Corporate Investments
Accounting
COMPLETION
1. When an investor is able to exert significant influence over another company, the
____________________ method of accounting is used for the investment.
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