Question 1

Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Accepted Answer

As per the IAS 28 - Investments in Associates and Joint Ventures, an investor owning 20% or more of the voting power of an investee is presumed to have significant influence unless it can be clearly demonstrated that this is not the case. Therefore, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Question 2

When the cost method is used to account for an investment in stock, dividends received are accounted for as a reduction in the investment account.

Accepted Answer

False

Question 3

Dividends received on investments are accounted for in the same way under the cost and the equity method.

Accepted Answer

False

Question 4

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Accepted Answer

Under both the equity method and cost method, the initial acquisition of an investment in common stock is recorded by debiting the Stock Investments account for the cost of the purchase.

Question 5

The purchase of a company that is in the same industry, but involved in a different activity, is called a vertical acquisition.

Accepted Answer

The answer of The purchase of a company that is...

Question 6

The accounting for short-term debt investments and for long-term debt investments is similar.

Accepted Answer

The accounting for short-term debt investments and long-term debt investments involves the same basic steps, such as recording the initial purchase, accrual of interest, and eventual sale or maturity of the investment. However, there may be differences in the specific accounting treatments depending on the type of investment and its classification. For example, short-term investments may be classified as held-to-maturity or trading, while long-term investments may also be classified as available-for-sale.

Question 7

A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Accepted Answer

Some companies, especially financial institutions, hold investment securities as a means of generating additional income. Investment income can come in the form of dividends, interest, or gains from the sale of securities.

Question 8

Under the equity method the investor records a proportionate share of the investee's income in the year when it is earned.

Accepted Answer

Under the equity method, the investor records a proportionate share of the investee's income in the year when it is earned. This proportionate share is based on the investor's percentage ownership of the investee's common stock.

Question 9

Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

Accepted Answer

The statement is true. Under the equity method, the investment in common stock is initially recorded at cost and the investor's share of the investee's net income or loss is recorded annually, adjusting the Stock Investments account.

Question 10

Pension funds and mutual funds are corporations that regularly invest for strategic reasons.

Accepted Answer

The answer of Pension funds and mutual funds are corporations...

Question 11

In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

Accepted Answer

The historical cost of debt investments includes brokerage fees but not accrued interest. Accrued interest is considered a separate component and is not part of the initial cost basis of the investment.

Question 12

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Accepted Answer

Dividends received on stock investments are typically recorded as dividend income, not credited to the Stock Investments account.

Question 13

Corporations purchase investments in debt or equity securities generally for one of two reasons.

Accepted Answer

The answer of Corporations purchase investments in debt or equity...

Question 14

If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

Accepted Answer

According to the accounting standard ASC 323-10-15, if an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee. This presumption can be rebutted with evidence to the contrary.

Question 15

Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Accepted Answer

When using the cost method of accounting, dividends received are recorded as revenue and therefore require a credit to the Dividend Revenue account.

Question 16

In accordance with the historical cost principle, brokerage fees should be added to the cost of an investment.

Accepted Answer

According to the historical cost principle, all costs related to acquiring an investment should be included in the cost of the investment. Therefore, brokerage fees, as a cost associated with acquiring the investment, should be added to the cost.

Question 17

Debt investments are investments in government and corporation bonds.

Accepted Answer

Debt investments typically refer to investments in bonds issued by governments and corporations, which provide the investor with a fixed income stream and a return of principal at maturity.

Question 18

If the cost method is used to account for an investment in stock, the Stock Investments account is increased by the amount of dividends received during the period.

Accepted Answer

The answer of If the cost method is used to...

Question 19

When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

Accepted Answer

The answer of When investments in bonds are sold, any...

Question 20

When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

Accepted Answer

The answer of When investing excess cash for short periods...

Quiz 14: Time Value of Money