Question 1

Investments in bonds intended to be sold before they reach maturity should be reported under the fair value method.

Accepted Answer

Investments in bonds intended to be sold before they reach maturity should be reported under the fair value method according to generally accepted accounting principles (GAAP). The fair value method involves reporting the investments at their current market value rather than their original cost.

Question 2

Investments other than held-to-maturity bond investments are reported on the balance sheet at fair value.

Accepted Answer

False

Question 3

A realized gain or loss is reported on the income statement when an investment account is adjusted to reflect changes in fair value.

Accepted Answer

False

Question 4

Held-to-maturity bond investments must be reported on the balance sheet at fair value.

Accepted Answer

Held-to-maturity bond investments are reported at amortized cost on the balance sheet, not at fair value. Fair value accounting is used for other types of investments, such as available-for-sale and trading securities.

Question 5

The equity method requires the recognition of investment revenue for dividends received.

Accepted Answer

The answer of The equity method requires the recognition of...

Question 6

The equity method is required to be used when an investor has the ability to exert significant influence over the affiliate.

Accepted Answer

The equity method is used when the investor has the ability to exert significant influence over the affiliate. This influence is generally presumed to exist when the investor owns 20-50% of the voting stock of the affiliate.

Question 7

The extent of influence and control over another company is a critical factor in determining the proper method of accounting for an investment in the common stock of another company.

Accepted Answer

The extent of influence and control determines whether an investment should be accounted for using the equity method or consolidation method.

Question 8

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its fair value reported in the prior period.

Accepted Answer

The answer of An unrealized holding loss is reported on...

Question 9

A company owning an investment for which it uses the equity method of accounting would record a reduction in the investment account for the proportionate share of the affiliate's reported net loss.

Accepted Answer

This is because under the equity method of accounting, the investment account is adjusted for the company's proportionate share of the affiliate's earnings and losses. Therefore, a net loss reported by the affiliate would result in a reduction of the investment account.

Question 10

Passive investments other than held-to-maturity investments are reported on the balance sheet at fair value.

Accepted Answer

Passive investments, such as available-for-sale investments and trading securities, are reported on the balance sheet at fair value. Held-to-maturity investments are an exception and are reported at amortized cost.

Question 11

An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its fair value reported in the prior period.

Accepted Answer

The answer of An unrealized holding gain is reported within...

Question 12

Use of the equity method is required for investments between 20 and 50% of a company's voting common stock regardless of the investor's ability to influence the affiliate.

Accepted Answer

The equity method is used when the investor has significant influence over the investee, typically indicated by ownership of 20% to 50% of the voting stock, but the ability to exercise significant influence is a key determinant, not just the percentage ownership.

Question 13

An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its fair value reported in the prior period.

Accepted Answer

The answer of An unrealized holding gain is reported on...

Question 14

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

Accepted Answer

According to accounting standards, in order to classify an investment as held-to-maturity, management must have both the intent and ability to hold the investment until maturity. If the intent or ability to hold the investment changes, the investment must be reclassified as available-for-sale or trading securities, and any unrealized gains or losses must be recognized in the income statement.

Question 15

A decline in the fair value of the available-for-sale portfolio reduces assets and net income.

Accepted Answer

The answer of A decline in the fair value of...

Question 16

A realized gain or loss is reported on the income statement when a trading security is sold.

Accepted Answer

A realized gain or loss is recognized when a trading security is sold, and it is reported on the income statement. Unrealized gains or losses are not recognized until the security is sold or otherwise disposed of.

Question 17

For all periods in which a security is held in the available-for-sale portfolio, the only income reported on the income statement is dividend revenue.

Accepted Answer

The answer of For all periods in which a security...

Question 18

Ocean Corporation owns 30% of Woods Corp. for which it paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid stockholders a $100,000 dividend, and the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

Accepted Answer

This statement is true. According to the equity method, the investment account is adjusted for the proportionate share of the investee's earnings or losses and any dividend distributions. Therefore, Ocean's investment account in Woods Corp. will decrease by its proportionate share of the dividend, which is $30,000 (30% of $100,000).

Question 19

An increase in the fair value of the trading securities portfolio increases both assets and net income.

Accepted Answer

An increase in the fair value of the trading securities portfolio would result in an increase in assets due to the increase in the value of the portfolio. This increase in value would also be recognized as a gain in net income, thereby increasing net income as well.

Question 20

The sale of a stock from the available-for-sale portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

Accepted Answer

This statement is true. The gain or loss on the sale of a stock from the available-for-sale portfolio is recorded on the income statement based on the difference between the stock's original cost and its selling price.

Quiz 14: Reporting and Interpreting Investments in Other Corporations