Question_CHAP10_7DEC

Question # 00004939 Posted By: smartwriter Updated on: 12/08/2013 01:32 PM Due on: 12/31/2013
Subject Business Topic General Business Tutorials:
Question
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1. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays a dividend
d. Earnings are reported by the investee in its financial statements
2. Pence Corporation, which accounts for its investments in the common stock of Walsh Company
by the equity method, should ordinarily record a dividend received from Walsh as
a. An addition to the carrying value of the investment
b. Dividend revenue
c. A reduction of the carrying value of the investment
d. Revenue from affiliate
3. On January 15, 2002, a corporation was granted a patent on a product. On January 2, 2010,
to protect its patent, the corporation purchased a patent on a competing product the originally
was issued on January 10, 2008. Because of its unique plant, the corporation does not feel the
competing patent can be used in producing a product. The cost of the competing patent should be
a. Amortized over a maximum period of 17 years
b. Amortized over a maximum period of 13 years
c. Amortized over a maximum period of 9 years
d. Expensed in 2010
4. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s common
stock for $80,000 on January 2, 2008. During 2009, Queen Company declared dividends of
$8,000 and reported earnings for the year of $20,000.
If Pacer Company uses the equity method of accounting for its investment in Queen Company,
its Investment in Queen Company account at December 31, 2009 should be
a. $100, 000
b. $88,000
c. $83,600
d. $80,000
5. Refer to the facts in problem (4). If Pacer Company uses the lower of cost or market method of
accounting for its investment in Queen Company, and the value of its investment hasn’t changed,
its Investment in Queen Company account on December 31, 2009, should be
a. $100, 000
b. $88,000
c. $80,000
d. $73,600
6. A large, publicly held company developed and registered a trademark during 2010. The cost of
developing and registering the trademark should be accounted for by
a. Charging it to an asset account that should not be amortized
b. Expensing it as incurred
c. Amortizing it over 25 years if in accordance with management’s evaluation
d. Amortizing it over its useful life or 17 years, whichever is shorter
7. Goodwill should be written off
a. As soon as possible against retrained earnings
b. When there is evidence that its carrying value has been impaired
c. By systematic charges against retained earnings over the period benefited, but not more
than 40 years
d. By systematic charges to expense over the period benefited, but not more than 40 years
8. A net unrealized loss on a company’s long-term portfolio of available for sale securities should
be reflected in the current financial statements as
a. An extraordinary item shown as a direct reduction from retained earnings
b. A current loss resulting from holding marketable equity securities
c. A footnote or parenthetical disclosure only
d. A component of other comprehensive income
9. Changes in the fair value of a long-term available for sale equity securities portfolio should be
reported as a component of
a. Other comprehensive income
b. Noncurrent assets
c. Noncurrent liabilities
d. Net income
10. Cash dividends declared out of current earnings are distributed to an investor. How will the
investor’s investment account be affected by those dividends under each of the following
accounting methods?
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
11. An activity that would be expensed currently as research and development costs is the
a. Testing in search for or evaluation of product or process alternatives
b. Adaptation of an existing capability to a particular requirement or customer’s need as a part
of continuing commercial activity
c. Legal work in connection with patent applications or litigation, and the sale or licensing of
patents
d. Engineering follow-through in an early phase of commercial production
Fair Value Method Equity Method
12. Should the following fees associated with the registration of an internally developed patent be
capitalized?
Legal fees fees
a. Yes Yes
b. Yes No
c. No Yes
d. No No
13. Which of the following assets acquired in 2010 are amortizable?
Goodwill Trademarks
a. No No
b. No Yes
c. Yes No
d. Yes No
14. A purchased patent has a remaining life of 15 years. It should be
a. Expensed in the year of acquisition
b. Amortized over 15 years regardless of its useful life
c. Amortized over its useful life if less than 15 years
d. Amortized over 40 years
15. Which of the following amounts incurred in connection with a trademark should be capitalized?
Cost of a tration
Successful defense fees
a. Yes No
b. Yes Yes
c. No Yes
d. No No
16. Zink Company owns 32% of Ace Company's outstanding voting stock. Zink Company normally
should account for its investment in Ace Company using the
a. Fair value method.
b. Cost method.
c. Consolidation procedure.
d. Equity method.
1. An investor purchased a bond as a long-term investment on January 1. Annual interest was
received on December 31. The investor’s interest income for the year would be lowest if the bond
was purchased at
a. A discount
b. A premium
c. Par
d. Face value
19. The theoretical justification for expensing research and development (R&D) cost as it is incurred
is based on which of the following arguments?
a. R&D costs provide no future benefits, thus it does not meet the definition of an asset
b. R&D costs are incurred to generate current period revenue, thus the matching concept
requires that it be expensed as incurred.
c. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it
does not meet the definition of an asset.
d. Since R&D costs have been incurred during the current period, they meet the definition of an
expense.
20. When a patent is successfully defended in court, the cost of the lawsuit
a. Should be expensed as incurred because it is a period cost.
b. Should be added to the cost of the patent and depreciated over the remaining useful life of the
patent.
c. Should be added to the cost of the patent which is then expensed as a period cost.
d. Has already been expensed so there is no further action to take.
21. Goodwill is an intangible asset
a. That has a definite life and its cost should be amortized over its useful life.
b. That is recorded when the company has projected earnings in excess of earnings expected for
an investment in a similar company in the same industry.
c. That is reviewed for impairment when circumstances indicate that impairment may have
occurred.
d. That is reviewed annually to determine whether impairment has occurred.
22. A trading security is measured at fair value on the balance sheet date and reported as
a. A current asset, and changes in fair value are reported in earnings as unrealized gains and
losses.
b. A current asset, and changes in fair value are reported in earnings as realized gains and
losses.
c. Either a current or noncurrent asset depending on whether they meet the definition of a
current asset.
d. A current asset, and changes in fair value are reported in accumulated other comprehensive
income as unrealized gains and losses.
23. Current accounting for an available-for-sale (AFS) security is consistent with
a. The financial capital maintenance concept of income because AFS security unrealized gains
and losses are reported in earnings.
b. The financial capital maintenance concept of income because AFS security unrealized gains
and losses are reports in other comprehensive income.
c. The physical capital maintenance concept of income because AFS security unrealized gains
and losses are reported in earnings.
d. The physical capital maintenance concept of income because AFS security unrealized gains
and losses are reported in other comprehensive income.
24. The physical capital maintenance concept of income would require that an investment in the
common stock of another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be
reported in earnings.
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be
reported in earnings.
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in
earnings.
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in
other comprehensive income.
25. The economic concept of income would require that an investment in the common stock of
another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in
reported in earnings.
reported in earnings.
earnings.
other comprehensive income.
26. Under the fair value option, an investment in the common stock of another entity will be
a. Reported as a current asset
b. Reported as a noncurrent asset
c. Reported as either a current or noncurrent asset depending on managerial intent.
d. Reported as a current asset only if it was not previously reported as an equity method
investment.
27. When a company reports goodwill in its balance sheet, we know that
a. It was internally generated because the company has earnings in excess of those of other
b. The company purchased it.
c. The company will be reporting amortization expense for the goodwill.
d. The company will not be reporting an impairment loss for the goodwill.
companies in the industry.
Essay
1. How are income and balance sheet values determined under the equity method?
2. Discuss accounting for equity securities under the cost method.
3. Discuss accounting for equity securities under the SFAS No. 115 now contained at FASB ASC
320.
4. Summarize the accounting requirements for investments in equity securities. That is, what
methods are available and when is each method appropriate?
5. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at
FASB ASC 825-10.
6. Discuss accounting for investments in debt securities.
7. What is an intangible asset? How is the cost of an intangible asset amortized?
.
8. What is goodwill? How is goodwill written off under the provisions of SFAS No. 142 now FASB
ASC 350?
9. Define research and development. How are research and development costs recorded
10. How does IAS No 39 define fair value?
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Tutorials for this Question
  1. Tutorial # 00004730 Posted By: smartwriter Posted on: 12/08/2013 01:34 PM
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    securities subject to the SFAS No. 115provisions are reported at ...
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