Question 1

An investment in common stock acquired during the year at a cost of $50,000 has a market value at year end of $50,290. The adjusting entry requires a credit to Allowance to Adjust Investment to Market for $290.

Accepted Answer

The answer of An investment in common stock acquired during...

Question 2

For a stock dividend, the investor records dividend revenue.

Accepted Answer

In a stock dividend, the investor receives additional shares instead of cash, so there is no dividend revenue recorded. Instead, the cost basis of the shares is adjusted.

Question 3

If 15% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is:

Accepted Answer

When an investor holds less than 20% of the investee's voting stock, the investment is typically accounted for using the available-for-sale method, reflecting the investment at fair market value.

Question 4

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the sale of the stock would include a:

Accepted Answer

The sale of the stock would be recorded by crediting Long-Term Investment for the original cost of $51,000 (3,000 shares x $17 per share).

Question 5

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

Accepted Answer

Dividends received on stock investments of less than 20% should be credited to Dividend Income, not the Investment account, as the investment is typically accounted for using the cost method.

Question 6

The Allowance to Adjust Investments account is a Long-Term Asset account.

Accepted Answer

The Allowance to Adjust Investments account is considered a long-term asset account because it represents the difference between the original cost of an investment and its current fair market value. This allowance is created to adjust the book value of the investment to reflect its market value, and it is reported as a long-term asset in the balance sheet.

Question 7

GAAP requires companies to adjust their available-for-sale-securities to market value as of the balance sheet date.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) requires companies to adjust their available-for-sale securities to market value as of the balance sheet date in order to accurately reflect their fair value on the financial statements. This adjustment is typically recorded as an unrealized gain or loss on the income statement and a corresponding adjustment to the carrying value of the securities on the balance sheet.

Question 8

If an investor owns less than 20% of the common stock of another company as a long-term investment:

Accepted Answer

When an investor owns less than 20% of the common stock of another company as a long-term investment, it is usually considered a passive investment, and the investor usually has little or no influence on the investee. Therefore, the equity method of accounting is not required, and dividends may or may not be received depending on the investee's performance.

Question 9

On purchase date, Available-for-sale investments in stock are recorded at:

Accepted Answer

Available-for-sale investments in stock are initially recorded at their cost on the purchase date.

Question 10

Unrealized gains and losses result from changes in the investments fair value.

Accepted Answer

Unrealized gains and losses are the gains or losses that result from changes in the fair value of an investment that has not yet been sold. These gains or losses are only realized when the investment is sold.

Question 11

Realized gains on the sale of available-for-sale securities cannot be used to compute net income.

Accepted Answer

Realized gains on the sale of available-for-sale securities are included in net income as they represent actual profits from transactions.

Question 12

For accounting purposes, the method used to account for long-term investments in common stock is determined by:

Accepted Answer

The method used to account for long-term investments in common stock is determined by the extent of an investor's influence on the investee's operating decisions and policies. This is because an investor with significant influence over an investee must use the equity method of accounting, while an investor with no or minimal influence must use the fair value method. The amount paid for the stock, past dividends, and whether a dividend declared is cash or stock are not factors in determining the accounting method for long-term investments in common stock.

Question 13

The available-for-sale method (market value method) of accounting for long-term investments in stock should be used when the:

Accepted Answer

The available-for-sale method should be used when the investor has little or no influence on the investee, as it reflects a passive investment in the stock. If the investor owns more than 50% of the investee's stock, the consolidation method should be used. If the investor has significant influence over the investee's operating decisions and policies, the equity method should be used. If the investor is a parent company, the consolidation method should also be used.

Question 14

On the balance sheet, Available-for-sale investments in stock are reported at:

Accepted Answer

Available-for-sale investments in stock are reported at their current market value on the balance sheet. This is because these investments are held for trading purposes and their value is likely to fluctuate in the market. As a result, the company must report these investments at their fair value to provide investors with an accurate picture of the company's financial position.

Question 15

The Allowance to Adjust Investment to Market is a companion to Interest Receivable.

Accepted Answer

The Allowance to Adjust Investment to Market is related to investments, not interest receivable. It is used to adjust the book value of investments to their market value.

Question 16

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the purchase of the Hudson stock would include a:

Accepted Answer

The purchase of 3,000 shares at $17 per share results in a total investment of $51,000, which should be recorded as a debit to Long-Term Investment.

Question 17

The Allowance to Adjust Investment to Market account will always have a debit balance.

Accepted Answer

The Allowance to Adjust Investment to Market account can have a debit or a credit balance depending on whether the market value of the investment is higher or lower than the original cost. If the market value is higher, the account will have a credit balance, and if the market value is lower, it will have a debit balance. The purpose of this account is to adjust the value of the investment on the balance sheet to reflect its current market value.

Question 18

An investee should report available-for-sale securities that might be sold in the next 12 months as a short-term investment.

Accepted Answer

According to GAAP, available-for-sale securities that might be sold in the next 12 months should be reported as a short-term investment.

Question 19

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the receipt of the dividends would include a:

Accepted Answer

The answer of Perdue Company had the following transactions pertaining...

Question 20

For accounting purposes, receipt of a stock dividend is handled the same as a receipt of a cash dividend.

Accepted Answer

A stock dividend increases the number of shares owned but does not provide cash, whereas a cash dividend provides a cash payment to the shareholder.

Quiz 8: Long-Term Investments the Time Value of Money