Question 1

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

Accepted Answer

The equity method is required to be used when an investor has the ability to exert significant influence over the investee, regardless of the ownership level.

Question 2

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

Management must demonstrate the intent and ability in order to use the held-to-maturity classification.

Question 3

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

Accepted Answer

They are reported on the balance sheet at amortized cost or fair value if the election is made.

Question 4

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

Accepted Answer

Dividend receipts result in a decrease in the investment account when the equity method is used.

Question 5

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 unrealized holding gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet, not the income statement.

Question 6

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

Accepted Answer

They are reported on the balance sheet at fair value.

Question 7

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

Accepted Answer

Fair value adjustments create unrealized holding gains or losses.

Question 8

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

Accepted Answer

The equity method is required to be used only when an investor has the ability to exert significant influence over the investee, a 20 to 50% investment doesn't guarantee significant influence.

Question 9

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

Accepted Answer

Gains and losses are realized and reported on the income statement when the investment is sold.

Question 10

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

The unrealized holding gains and losses pertaining to the trading security portfolio are reported on the income statement.

Question 11

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 percentage of ownership has significant influence on the method chosen to account for the investment.

Question 12

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

Gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet prior to the time of sale; dividend revenue is the only income source for the available-for-sale portfolio while it is being held.

Question 13

If a bond is bought at a discount,then interest revenue will be less than the cash payment.

Accepted Answer

Amortizing investment bond discount increases interest revenue relative to the cash payment.

Question 14

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

Gains and losses pertaining to the available-for-sale portfolio are reported on the income statement at the time of sale and are based on the difference between the selling price and original cost.

Question 15

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

Accepted Answer

Gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet, not the income statement.

Question 16

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

Accepted Answer

The unrealized holding gains and losses pertaining to the trading security portfolio are reported on the income statement, not the balance sheet.

Question 17

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

Dividend receipts result in a decrease in the investment account when the equity method is used.

Question 18

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

Accepted Answer

Trading security portfolio gains increase the investment account and net income; trading security portfolio gains are reported on the income statement.

Question 19

If a bond is bought at a premium,the amortized book value of the bond investment will decrease as the bond matures.

Accepted Answer

Amortizing investment bond premium reduces the book value of the bond investment.

Question 20

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

Accepted Answer

Bonds intended to be sold are reported on the balance sheet at market value.

Quiz 12: Reporting and Interpreting Investments in Other Corporations

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

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.

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

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

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

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

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

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

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

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

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.

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

If a bond is bought at a discount,then interest revenue will be less than the cash payment.

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.

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

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

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.

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

If a bond is bought at a premium,the amortized book value of the bond investment will decrease as the bond matures.

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