Deck 28: Accounting for Investments

Question 1

A controlling investment is defined as ownership of more than 50 percent of the stock of another company.

Answer 1

True

Question 2

Unrealized gains and losses on trading securities appear on the income statement.

Answer 2

True

Question 3

It is not possible for one company to influence the operating policies of another company unless it owns more than a 50 percent interest in that company.

Answer 3

False

Question 4

Detailed information about a company's investments is never disclosed in the notes to the financial statements.

Question 5

Investments with a maturity of less than ninety days are generally classified as cash equivalents.

Question 6

Another term for short-term investments is marketable securities.

Question 7

An ownership interest of greater than 50 percent is required for an investor to have accounting control over an investee.

Question 8

For available-for-sale securities,an unrealized loss on long-term investments appears as part of other comprehensive income (loss)in the company's financial statements.

Question 9

Insider trading is considered unethical,but it is not illegal in the United States.

Question 10

Held-to-maturity securities are always debt securities,and never equity securities.

Question 11

Available-for-sale securities may only be classified as short-term investments.

Question 12

A noninfluential and noncontrolling investment is defined as ownership of less than 25 percent of the stock of another company.

Question 13

Investments are valued on the balance sheet at the original purchase price,even if the price has changed since the date of purchase.

Question 14

An influential but noncontrolling investment is defined as ownership of between 20 to 50 percent of the stock of another company.

Question 15

Unless there is evidence to the contrary,an investor owning 35 percent of the stock of an investee is assumed to have significant influence.

Question 16

An individual can be prosecuted by the SEC for insider trading whether or not that individual is employed by the company involved.

Question 17

As long as an investment can be sold within a short period of time,it must be classified as a current asset.

Question 18

Gains and losses on the sale of investments appear as adjustments within the financing activities section of the statement of cash flows.

Question 19

Trading securities are valued on the balance sheet at market value.

Question 20

Unrealized gains and losses on available-for-sale securities are reported on the balance sheet.

Question 21

With few exceptions,all subsidiaries in which the parent company owns a controlling interest (more than 50 percent)must be consolidated with the parent company for financial reporting purposes.

Question 22

Under the equity method of accounting for a stock investment,a proportionate share of the investee's income is recorded on the investor's records.

Question 23

When the equity method is used to account for an investment in stock,the investor will report its share of the investee's annual earnings as income in proportion to how much the investee distributes in the form of dividends.

Question 24

Using the cost-adjusted-to-market method of accounting for a long-term investment in stock,the journal entry to record the receipt of dividends involves a debit to Dividend Income.

Question 25

It is possible that an investor with less than a 50 percent ownership interest may qualify for accounting recognition of control and appropriately prepare consolidated financial statements.

Question 26

When the cost-adjusted-to-market method is used to account for an investment in stock,dividends received are accounted for as an increase to dividend income.

Question 27

When the equity method is used to account for an investment in stock,dividends received by the investor decrease the investment account.

Question 28

The Allowance to Adjust Long-Term Investments to Market and the Unrealized Loss on Long-Term Investments are reciprocal accounts,each with the same dollar balance.

Question 29

Unrealized Loss (Gain)on Short-Term Investments is a contra-asset account that will appear on the balance sheet.

Question 30

The equity method usually is the most appropriate method for accounting for investments of more than a 20 percent interest of another company's stock.

Question 31

The Allowance to Adjust Long-Term Investments to Market account appears in the assets section of the balance sheet.

Question 32

Dividends received on investments are accounted for in the same way under the cost-adjusted-to-market and the equity methods.

Question 33

When a company holds U.S.Treasury bills,it debits Interest Income and credits Short-Term Investments at the end of the accounting period (assuming it is prior to the T-bills' maturity).

Question 34

When the market value of available-for-sale securities exceeds cost,an unrealized loss appears in stockholders' equity as an addition.

Question 35

The account Allowance to Adjust Short-Term Investments to Market appears as a contra-asset on the balance sheet.

Question 36

An increase or decrease in the fair value of a company's total trading portfolio is included in net income in the period in which the increase or decrease occurs.

Question 37

Trading securities appear as current assets on the balance sheet at their historical cost regardless of subsequent increases or decreases in market value.

Question 38

The cost-adjusted-to-market method of accounting for investments allows for a departure from cost when the market value of the investment falls below or rises above cost.

Question 39

Trading securities are always short-term investments.

Question 40

If a long-term investment suffers a permanent decline in value,a loss only has to be recorded if the investment is sold.

Question 41

All of the following are conditions that could affect the valuation of investments on the balance sheet except

A)changes in the general purchasing power of the dollar.
B)changes in the operations of investee companies.
C)changes in the market value or fair value of the investments.
D)changes caused by the passage of time.

Question 42

Which of the following categories of investments can be both debt and equity securities?

A)Available-for-sale securities
B)Trading securities
C)Held-to-maturity securities
D)Both available-for-sale and trading securities

Question 43

Which is the only type of investment that is always classified as short-term?

A)Trading securities
B)Held-to-maturity securities
C)Available-for-sale securities
D)Equity securities

Question 44

When bonds are purchased between interest dates,the buyer must pay (in addition to the bonds' cost)the amount of interest that has accrued since the last interest payment date.

Question 45

Which type of investment,if any,could be classified as short- or long-term,as well as debt or equity?

A)Available-for-sale securities
B)Trading securities
C)Held-to-maturity securities
D)None of these are correct.

Question 46

All of the following are indications of significant influence over another company except

A)exchange of managerial personnel.
B)representation on the board of directors.
C)technological dependency between the two companies.
D)ownership of all of the other company's debt securities.

Question 47

All the interest income on U.S.Treasury bills is recorded at maturity.

Question 48

The purchase and sale of debt and equity securities would appear in which section of the statement of cash flows?

A)Operating activities
B)Investing activities
C)Financing activities
D)Noncash investing and financing activities

Question 49

Short-term available-for-sale securities are valued on the balance sheet at

A)market value.
B)cost,adjusted for the effects of interest.
C)cost.
D)lower of cost or market.

Question 50

The ability of an investing company to affect the operating and financial policies of another company,even though the investor holds less than 50 percent of the voting stock,is known as

A)significant influence.
B)control.
C)minority interest.
D)noninfluential control.

Question 51

In the United States,insider trading is considered

A)unethical,but not illegal.
B)neither unethical nor illegal.
C)both unethical and illegal.
D)illegal,but not unethical.

Question 52

Which of the following is not a category of investments?

A)Held-to-maturity securities
B)Trading securities
C)Collateral securities
D)Available-for-sale securities

Question 53

Held-to-maturity securities that will mature within one year are classified as short-term investments and valued on the balance sheet at fair value.

Question 54

Most long-term bond investments are classified as held-to-maturity securities.

Question 55

A controlling investment is defined as owning what percent of the stock of another company?

A)More than 50 percent
B)100 percent
C)More than 75 percent
D)75 percent

Question 56

U.S.Treasury bills are considered equity securities.

Question 57

Held-to-maturity securities are valued on the balance sheet at cost adjusted for the effects of interest.

Question 58

Long-term bond investments that are classified as available-for-sale must be valued on the balance sheet at fair value.

Question 59

Which of the following categories of investments can be debt but not equity securities?

A)Trading securities
B)Held-to-maturity securities
C)Available-for-sale securities
D)Both trading and available-for-sale securities

Question 60

Significant influence is defined as owning what percent of the stock of another company?

A)15 to 60 percent
B)More than 50 percent
C)20 to 50 percent
D)75 percent

Question 61

Under the cost-adjusted-to-market method of accounting for an investment,

A)Dividend Income is credited when dividends are received.
B)the investment account is credited when dividends are received.
C)the investment account is credited when the investee reports a net income.
D)Investment Income is credited when the invested reports a net income.

Question 62

Kirk Corporation owns 25 percent of the voting stock of Allen Corporation and accounts for the investment using the equity method.Allen reports a net loss of $40,000.Kirk Corporation's entry to record its share of loss is:

A)Cash 10,000 Investment in Allen Corporation 10,000
B)Loss on Investments 40,000 Investment in Allen Corporation 40,000
C)Loss,Allen Corporation Investment 10,000 Investment in Allen Corporation 10,000
D)Cash 10,000 Loss,Allen Corporation Investment 10,000

Question 63

For available-for-sale equity securities,the Allowance to Adjust Long-Term Investments to Market account should be reported as a(n)

A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss)

Question 64

When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by

A)declines in the market value of the stock.
B)the earnings and dividends of the investee.
C)an excess of market price over cost.
D)neither the earnings nor the dividends of the investee.

Question 65

Singletary Corporation owns a 40 percent interest in the stock of Fleming Corporation.During 2014,Fleming pays $50,000 in dividends to Singletary and reports $214,000 in net income.Singletary Corporation's investment in Fleming will increase Singletary's income before income taxes by

A)$35,600.
B)$65,600.
C)$85,600.
D)$105,600.

Question 66

The year-end adjusting entry to reflect an increase in the value of trading securities includes a

A)credit to Unrealized Gain on Short-Term Investments.
B)credit to Short-Term Investments.
C)credit to Allowance to Adjust Short-Term Investments to Market.
D)credit to Realized Gain on Investments.

Question 67

All of the following are ways one corporation could affect the operating and financial policies of another corporation except

A)analysis of data regarding profitability.
B)material transactions between the companies.
C)representation on the board of directors.
D)exchange of managerial personnel.

Question 68

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:

A)Allowance to Adjust Short-Term Investments to Market 9,000 Unrealized Gain on Short-Term Investments 9,000
B)Unrealized Loss on Short-Term Investments 9,000 Allowance to Adjust Short-Term Investments to Market 9,000
C)Allowance to Adjust Short-Term Investments to Market 9,000 Short-Term Investments 9,000
D)Realized Gain on Investments 9,000 Short-Term Investments 9,000

Question 69

The cost-adjusted-to-market method of accounting for investments is used when the investment is

A)controlling.
B)influential and noncontrolling.
C)noninfluential and controlling.
D)noninfluential and noncontrolling.

Question 70

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a

A)regular account in the stockholders' equity section of the balance sheet.
B)contra account to Long-Term Investments.
C)note to the financial statements.
D)current asset.

Question 71

Tomlin Enterprises has a credit balance of $80,000 in its Allowance to Adjust Long-Term Investments to Market account before adjustment.Its investment portfolio has a total cost of $500,000 and a market value of $450,000.The year-end adjustment entry that would be recorded in the books of Tomlin Enterprises is:

A)Long-Term Investments 30,000 Allowance to Adjust Long-Term Investments to Market 30,000
B)Allowance to Adjust Long-Term Investments to Market 30,000 Unrealized Loss on Long-Term Investments 30,000
C)Allowance to Adjust Long-Term Investments to Market 50,000 Long-Term Investments 50,000
D)Unrealized Loss on Long-Term Investments 50,000 Long-Term Investments 50,000

Question 72

Which of the following statements is true about investments categorized as trading securities?

A)They are valued on the balance sheet at cost.
B)They can consist of debt,but not equity,securities.
C)They are purchased to be held to maturity.
D)Changes in market value are reflected in net income.

Question 73

When the cost-adjusted-to-market method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is directly affected by

A)the dividend distributions of the investee.
B)the earnings and dividend distributions of the investee.
C)the earnings of the investee.
D)neither the earnings nor the dividends of the investee.

Question 74

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)

A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss).

Question 75

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the balance of the Short-Term Investments account appearing on the balance sheet will be

A)$9,000
B)$52,000
C)$61,000
D)none of these

Question 76

Stock categorized as trading securities is purchased for $72,000.At year end,when the market value of the stock is $63,000,the adjusting entry that would be recorded is:

A)Allowance to Adjust Short-Term Investments to Market 9,000 Unrealized Loss on Investments 9,000
B)Unrealized Loss on Short-Term Investments 9,000 Allowance to Adjust Short-Term Investments to Market 9,000
C)Allowance to Adjust Short-Term Investments to Market 9,000 Short-Term Investments 9,000
D)Realized Loss on Investments 9,000 Short-Term Investments 9,000

Question 77

Trading securities are valued on the balance sheet at

A)lower of cost or market.
B)cost.
C)market value.
D)cost,adjusted for the effects of interest.

Question 78

At year-end,a company's trading portfolio appears as follows: The adjusting entry will include

A)a debit to Allowance to Adjust Short-Term Investments to Market of $50.
B)a credit to Allowance to Adjust Short-Term Investments to Market of $50.
C)a debit to Unrealized Loss on Short-Term Investments of $100.
D)none of these,since no adjusting entry is necessary.

Question 79

Barkely Corporation has invested in the stock of two other corporations,Hayes Corporation and Motz Corporation.Barkely does not own a controlling interest or exercise significant influence over either corporation.Barkely's accountant is preparing financial statements and has compiled the following information: What should be the balance in the Allowance to Adjust Long-Term Investments to Market account,based on the above information?

A)$2,000 credit
B)$4,000 debit
C)$4,000 credit
D)$2,000 debit

Question 80

The equity method generally should be used to account for an investment in stock when the level of ownership is

A)between 20 and 50 percent.
B)10 percent or more.
C)less than 20 percent.
D)between 10 and 40 percent.