(Multiple choice)
1. Company X owns 40 percent of Company Y and exercises significant influence over the management of Company Y. Therefore, Company X uses what method of accounting for reporting its ownership of stock in Company Y?
a. The amortized cost method.
b. The equity method.
c. The fair value method.
d. Consolidation of the financial statements of companies X and Y.

2. Company W purchases 10 percent of Company Z and Company W intends to hold the stock for at least five years. At the end of the current year, how would Company W’s investment in Company Z be reported on Company W’s December 31 (year-end) balance sheet?
a. At the December 31 fair value in the long-term assets section.
b. At original cost in the current assets section.
c. At the December 31 fair value in the current assets section.
d. At original cost in the long-term assets section.

3. Dividends received from stock that is reported as a security available for sale in the long-term assets section of the balance sheet are reported as which of the following?
a. An increase to cash and a decrease to the investment in stock account.
b. An increase to cash and an increase to revenue.
c. An increase to cash and an unrealized gain on the income statement.
d. An increase to cash and an unrealized gain on the balance sheet.

4. Realized gains and losses are recorded on the income statement for which of the following transactions in trading securities and available-for-sale securities?
a. When adjusting a trading security to its fair value.
b. Only when recording the sale of a trading security.
c. When adjusting an available-for-sale security to its fair value.
d. When recording the sale of either a trading security or an available-for-sale security.

5. When recording dividends received from a stock investment accounted for using the equity method, which of the following statements is true?
a. Total assets are increased and net income is increased.
b. Total assets are increased and total stockholders’ equity is increased.
c. Total assets and total stockholders’ equity do not change.
d. Total assets are decreased and total stockholders’ equity is decreased.

6. When using the equity method of accounting, when is revenue recorded on the books of the investor company?
a. When a dividend is received from the affiliate.
b. When the fair value of the affiliate stock increases.
c. When the affiliate company reports net income.
d. Both (a) and (c).

7. Bott Company acquired 500 shares of stock of Barus Company at $50 per share as a long-term investment. This represents 10 percent of the outstanding voting shares of Barus. During the year, Barus paid stockholders $2 per share in dividends. At year-end, Barus reported net income of $40,000. Barus’s stock price at the end of the year was $53 per share. For Bott Company, the amount of investments reported on the balance sheet at year-end and the amount reported on the income statement for the year are:
Balance Sheet Income Statement
a. $26,500 $1,000
b. $25,000 $1,000
c. $28,000 $4,000
d. $26,500 $4,000

8. Bott Company acquired 500 shares of stock of Barus Company at $50 per share as a long-term investment. This represents 40 percent of the outstanding voting shares of Barus. During the year, Barus paid stockholders $2 per share in dividends. At year-end, Barus reported net income of $40,000. Barus’s stock price at the end of the year was $53 per share. For Bott Company, the amount of investments reported on the balance sheet at year-end and the amount reported on the income statement for the year are:
Balance Sheet Income Statement
a. $26,500 $ 1,000
b. $26,000 $ 0
c. $40,000 $16,000
d. $26,500 $16,000

9. Which of the following is true regarding the economic return from investing ratio?
a. This ratio is used to evaluate how efficiently a company manages its total assets.
b. This ratio is used to evaluate the efficiency of a company given the capital contributed by owners.
c. This ratio is used to evaluate the financing strategy of a company.
d. This ratio is used to evaluate the performance of a company’s investment portfolio.

10. Lamichael Company purchased 100 percent of the outstanding voting shares of Darrell Corporation in the open market for $200,000 cash and Darrell was merged into Lamichael Company. On the date of acquisition, the fair value of Darrell Corporation’s property and equipment was $310,000 and the fair value of its long-term debt was $150,000. Darrell has no other assets or liabilities. What amount of goodwill would Lamichael record related to the purchase of Darrell Corporation?
a. No goodwill should be recorded by Lamichael.
b. $260,000
c. $110,000
d. $40,000