Question 1

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

Accepted Answer

This is correct according to the equity method of accounting for investments, where dividends received by the investee (Woods Corp. in this case) are recognized as a reduction of the investment account. Since Ocean Corporation owns 30% of Woods Corp., their proportionate share of the dividend is $30,000 ($100,000 x 30%) and their investment in Woods Corp. will decrease by this amount.

Question 2

Any unrealized gains or losses on trading securities would have to be added back to or deducted from net earnings on the statement of cash flows under the indirect method of determining cash flows from operating activities.

Accepted Answer

Unrealized gains or losses on trading securities are non-cash items that affect net income but do not reflect actual cash flows. Therefore, they would need to be added back to or deducted from net earnings to properly determine the cash flows from operating activities under the indirect method.

Question 3

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

Accepted Answer

Held-to-maturity bond investments are reported on the balance sheet at amortized cost, not fair value. Fair value reporting is required for available-for-sale and trading securities.

Question 4

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

Accepted Answer

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost. This loss reduces the net income and the overall value of the investment.

Question 5

Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated statement of earnings.

Accepted Answer

This is true because in a merger, the subsidiary becomes a part of the parent company and their financial statements are combined on the consolidated financial statements. This includes revenues, expenses, assets, and liabilities.

Question 6

The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process.

Accepted Answer

When a subsidiary is consolidated into a parent company's financial statements, the assets of the subsidiary are combined with the parent's assets, and their useful lives are taken into account for calculating depreciation and amortization expenses. This helps to reflect the true economic value of the consolidated entity. Therefore, the given statement is true.

Question 7

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, a held-to-maturity security is one that the company has the intent and ability to hold until maturity. Therefore, management must have the intent and ability to hold a bond investment until maturity for it to be classified as a held-to-maturity security.

Question 8

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

Accepted Answer

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

Question 9

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

Accepted Answer

Dividend revenue is the only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale. Unrealized gains or losses are not recognized until the stock is sold.

Question 10

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

Accepted Answer

Investments in bonds intended to be sold before maturity are considered trading securities and are reported at their fair value, so they should be reported under the market value method.

Question 11

Investments classified other than as held-to-maturity bond investments have to be reported on the balance sheet at fair value.

Accepted Answer

According to the accounting standard, investments classified other than as held-to-maturity bond investments (such as available-for-sale and trading securities) have to be reported on the balance sheet at fair value.

Question 12

When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

Accepted Answer

The answer of When the acquiring company purchases 100% of...

Question 13

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

When a stock is sold from the available-for-sale portfolio, the gain or loss on the income statement is based on the difference between the stock's original cost and its selling price. This is because available-for-sale securities are reported at fair value on the balance sheet, but unrealized gains and losses are reported in other comprehensive income until the securities are sold, at which point the gains or losses are recognized in net income.

Question 14

A realized gain or loss is reported on the income statement when a fair value adjustment is made.

Accepted Answer

The answer of A realized gain or loss is reported...

Question 15

Goodwill is reported on a consolidated statement of financial position only if it was acquired in the merger or acquisition.

Accepted Answer

Goodwill is only reported on a consolidated statement of financial position if it was acquired in the merger or acquisition as a result of the excess cost paid over the fair value of the net assets acquired. If there was no excess cost, or if goodwill has been impaired, it may not be included in the consolidated statement of financial position.

Question 16

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 17

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

Accepted Answer

The extent of influence and control over another company is a key factor in determining whether an investment in the common stock of that company should be accounted for using the equity method or the fair value method. If the investor has significant influence over the other company, then the equity method is generally used, whereas if the investor does not have significant influence, then the fair value method is typically used. Therefore, the extent of influence and control is a critical factor in determining the proper accounting method for a long-term investment in the common stock of another company.

Question 18

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

Accepted Answer

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

Question 19

An investment accounted for under the equity method is always reported on the statement of financial position fair value.

Accepted Answer

An investment accounted for under the equity method is reported at cost plus or minus any adjustments for the investor's share of the investee's net income or loss and any other changes in the investee's equity since the acquisition date. It is not reported at fair value on the statement of financial position.

Question 20

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

Accepted Answer

An increase in fair value of trading securities would result in a gain, which would increase both assets and net income.

Quiz 14: Reporting and Interpreting Investments in Other Corporations