Question 1. Under the equity method of accounting for investments, an inv

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 Registration
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

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