Question 1

When debt securities are classified as held-to-maturity, fair-value changes are recognized in the balance sheet as unrealized gains or losses that affect owners' equity.

Accepted Answer

For debt securities classified as held-to-maturity, fair-value changes are not recognized in the balance sheet; instead, these securities are reported at amortized cost. Unrealized gains or losses do not affect the owners' equity for these securities.

Question 2

Realized gains and losses on passive investments classified as marketable equity securities are reported in a company's net income in the period that they are realized.

Accepted Answer

Realized gains and losses on passive investments classified as marketable equity securities are reported in a company's net income in the period they are realized, reflecting the actual financial impact of these transactions on the company's earnings for that period.

Question 3

Fair-value changes in available-for-sale debt securities are recognized in the income statement as unrealized gains or losses.

Accepted Answer

Fair-value changes in available-for-sale debt securities are recognized in other comprehensive income, not in the income statement, until they are sold or otherwise disposed of.

Question 4

Under the equity method, fair-value changes in the investee company's stock are not reflected in the investor's accounting records.

Accepted Answer

Under the equity method, the investor recognizes its share of the investee's profits or losses, and any changes in the fair value of the investee's stock are not recorded in the investor's accounting records. The focus is on the investor's share of earnings, not market value changes.

Question 5

Regardless of the legal agreements, technology licensing, and the like between two companies, significant influence is determined by ownership of a sufficient percentage of outstanding common stock. This is called the significance influence test.

Accepted Answer

Significant influence is not solely determined by ownership percentage; it can also be established through other factors like board representation, participation in policy-making, and material transactions.

Question 6

Under the equity method, the investment account is recorded at fair value but only if fair value exceeds original cost.

Accepted Answer

Under the equity method, the investment account is initially recorded at cost and subsequently adjusted for the investor's share of the investee's profits or losses and dividends received, not fair value.

Question 7

Dividends received from an investee company are reported as investment income by the investor company when the investor does not control the investee.

Accepted Answer

The answer of Dividends received from an investee company are...

Question 8

Goodwill is recorded when the fair value of the assets acquired in a business acquisition exceeds the net book value of those same assets.

Accepted Answer

Goodwill is recorded when the purchase price of a business exceeds the fair value of its identifiable net assets at the time of acquisition.

Question 9

Equity carve-outs make it easier to evaluate the individual business units of a conglomerate.

Accepted Answer

Equity carve-outs involve the creation of independent companies through the sale or distribution of new shares of an existing part of the parent company, thereby allowing for separate financial statements and clearer operational performance evaluation of the individual business units.

Question 10

Pro rata distributions associated with split-offs, can result in the company reporting gains or losses on the carve out.

Accepted Answer

The answer of Pro rata distributions associated with split-offs, can...

Question 11

Which of the following statements does not accurately describe the fair-value method of accounting?

Accepted Answer

The answer of Which of the following statements does not...

Question 12

When the fair value of a company's portfolio of passive investments in marketable equity securities exceeds its book value, the difference should be:

Accepted Answer

When the fair value of a company's portfolio of passive investments in marketable equity securities exceeds its book value, the difference should be added to the investment account. This is because the increase in fair value represents an unrealized gain on the investment, which should be reflected in the company's financial statements.

Question 13

On its 2016 form 10-K, Bank of America Corporation reports marketable debt securities of $277,399 million. The footnotes disclose that these securities have an amortized cost of $279,307 million.
Which of the following is true?

Accepted Answer

The answer of On its 2016 form 10-K, Bank of...

Question 14

Following is a portion of the investments footnote from Redfield Inc.'s 2017 annual report.
 What amount does Redfield report for its passive investments in marketable equity securities on it 2017 balance sheet?

Accepted Answer

The answer of Following is a portion of the investments...

Question 15

Which of the following statements is not true of the fair-value method of accounting for marketable securities?

Accepted Answer

Dividends received from investments accounted for using the fair-value method are typically treated as income, not as a return of the capital invested. This is because the fair-value method involves adjusting the investment to its current market value, with changes in value recognized in earnings or other comprehensive income, depending on the classification of the securities.

Question 16

Following is a portion of the investments footnote from Allstate's 2016 10-K.
 What amount does Allstate report for available-for-sale securities on its 2016 balance sheet?

Accepted Answer

The answer of Following is a portion of the investments...

Question 17

In footnotes to its 2016 annual report, Bancfirst Corp. reported that held-to-maturity debt securities with an amortized cost of $4,365 thousand had an estimated fair value of $4,403 thousand.
The balance sheet reported:

Accepted Answer

Held-to-maturity assets are reported on the balance sheet at their amortized cost, not their fair value.

Question 18

Waterton Corporation reported that short-term investments in debt securities consisted of the following (in millions):
 Which of the following is true?

Accepted Answer

The answer of Waterton Corporation reported that short-term investments in...

Question 19

Montevideo Corp. holds a 15% equity investment in Hutchinson Inc. Minneap Investments holds 35% of Hutchinson Inc. stock. On May 1, 2017, Hutchinson Inc. declares and pays dividends to its stockholders. How will the dividend affect each company's balance sheet account: Hutchinson Inc. investment?
 E) None of the above

Accepted Answer

The answer of Montevideo Corp. holds a 15% equity investment...

Question 20

Rochester Corp. holds a 15% equity investment in LaCrosse Inc. Reedsburg Investments holds 45% of LaCrosse's stock. On October 1, 2017, LaCrosse declares and pays dividends to its stockholders. How will the dividend affect each company's net income for the year?
 E) There is not enough information to determine the effect.

Accepted Answer

The answer of Rochester Corp. holds a 15% equity investment...

Quiz 9: Intercorporate Investments