3.For each transaction numbered 1 through 4 below, identify which effect (a
through
f) the transaction is most likely to cause. You may use each letter more than once or not at all.
Effects
|
a. Increase in current ratio and earnings per share
|
b. Decrease in current ratio and earnings per share
|
c. Does NOT change the current ratio; increases earnings per share
|
d. Increases the current ratio; does NOT change earnings per share
|
e. Does not change the current ratio or earnings per share
|
f. Can’t determine the effect
|
|
_____ 1. The cost method is used for an investment in long-term equity securities, and the investee company declares a cash dividend.
_____ 2. The equity method is used for an investment in long-term equity securities and the investee company declares a cash dividend.
_____ 3. The cost method is used for an investment in long-term equity securities and the investee company recognizes net income.
_____ 4. The equity method is used for an investment in long-term equity securities and the investee company recognizes net income.
Each transaction listed in 1 through 4 below relates to a long-term investment is equity securities. Select the letters of the accounting effects (a
through
h) and place them in the space provided. Transactions may have more than one answer.
Accounting Terms
|
a. Increase assets
|
b. Increase shareholders’ equity (Contributed Capital)
|
c. Increase shareholders’ equity (Retained Earnings)
|
d. Decrease liabilities
|
e. Decrease shareholders’ equity (Retained Earnings)
|
f.Decrease assets
|
g. Increase liabilities
|
h. The event is not communicated on financial statements.
|
_____ 1. Using the equity method the market price of the investment increases above its cost.
_____ 2. Using the cost method the market price of the investment increases above its cost.
_____ 3. Using the equity method, the investee company recognizes a net loss for the year.
_____ 4. An investment in a 40%-owned subsidiary is sold for more than its carrying value.