Question 1

Under the cost-adjusted-to-market method of accounting for an investment,
A)Dividend Income is credited when dividends are received.
B)the investment account is credited when dividends are received.
C)the investment account is credited when the investee reports a net income.
D)Investment Income is credited when the invested reports a net income.

Accepted Answer

Under the cost-adjusted-to-market method of accounting for an investment, dividend income is credited when dividends are received. This method requires the investor to adjust the investment account to reflect the fair value of the investment at the end of each accounting period. However, only dividend income is recognized when received, not unrealized gains or losses due to changes in the fair value of the investment.

Question 2

Kirk Corporation owns 25 percent of the voting stock of Allen Corporation and accounts for the investment using the equity method.Allen reports a net loss of $40,000.Kirk Corporation's entry to record its share of loss is:
A)
B)
C)
D)

Accepted Answer

The answer of Kirk Corporation owns 25 percent of the...

Question 3

For available-for-sale equity securities,the Allowance to Adjust Long-Term Investments to Market account should be reported as a(n)
A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss)

Accepted Answer

The answer of For available-for-sale equity securities,the Allowance to Adjust...

Question 4

When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by
A)declines in the market value of the stock.
B)the earnings and dividends of the investee.
C)an excess of market price over cost.
D)neither the earnings nor the dividends of the investee.

Accepted Answer

The equity method requires the investor to recognize their share of the earnings or losses of the investee in their income statement, and adjust the carrying value of the investment accordingly. Additionally, any dividends received from the investee are also recognized as income and reduce the carrying value of the investment. The market value of the stock may affect the investor's decision to hold or sell the investment, but it does not directly impact the carrying value of the investment under the equity method.

Question 5

Singletary Corporation owns a 40 percent interest in the stock of Fleming Corporation.During 2014,Fleming pays $50,000 in dividends to Singletary and reports $214,000 in net income.Singletary Corporation's investment in Fleming will increase Singletary's income before income taxes by
A)$35,600.
B)$65,600.
C)$85,600.
D)$105,600.

Accepted Answer

The answer of Singletary Corporation owns a 40 percent interest...

Question 6

The year-end adjusting entry to reflect an increase in the value of trading securities includes a
A)credit to Unrealized Gain on Short-Term Investments.
B)credit to Short-Term Investments.
C)credit to Allowance to Adjust Short-Term Investments to Market.
D)credit to Realized Gain on Investments.

Accepted Answer

When the value of the trading securities increases, the unrealized gain is recognized in the financial statements through an adjusting entry, which includes a credit to Unrealized Gain on Short-Term Investments. This reflects the increase in the value of the investments, but since they have not been sold yet, the gains are unrealized. The other choices are not appropriate for reflecting an increase in the value of trading securities.

Question 7

All of the following are ways one corporation could affect the operating and financial policies of another corporation except
A)analysis of data regarding profitability.
B)material transactions between the companies.
C)representation on the board of directors.
D)exchange of managerial personnel.

Accepted Answer

Analysis of data regarding profitability may inform one corporation's decision-making, but it does not directly affect another corporation's operating and financial policies. The other choices, material transactions between companies, representation on the board of directors, and exchange of managerial personnel, all have the potential to impact the policies of another corporation.

Question 8

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:
A)
B)
C)
D)

Accepted Answer

Since the market value of the trading security is higher than its original cost, an unrealized gain has been realized. To adjust for this gain, we need to increase the market value of the investment on the balance sheet.

The adjusting entry would be:

Allowance to Adjust Short-Term Investments to Market 9,000
Unrealized Gain on Short-Term Investments 9,000

Option A is the best choice because it correctly reflects the increase in market value of the trading security and the corresponding unrealized gain. Option B and C are incorrect because they do not reflect the increase in value of the trading security. Option D is incorrect because the gain is unrealized and should not be recorded as a realized gain until the security is sold.

Question 9

The cost-adjusted-to-market method of accounting for investments is used when the investment is
A)controlling.
B)influential and noncontrolling.
C)noninfluential and controlling.
D)noninfluential and noncontrolling.

Accepted Answer

The cost-adjusted-to-market method of accounting for investments is used for noninfluential and noncontrolling investments. This method involves adjusting the cost of the investment to its fair market value and recognizing any unrealized gains or losses in the investor's income statement. Therefore, the correct option is D, noninfluential and noncontrolling.

Question 10

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a
A)regular account in the stockholders' equity section of the balance sheet.
B)contra account to Long-Term Investments.
C)note to the financial statements.
D)current asset.

Accepted Answer

A credit balance in the account Allowance to Adjust Long-Term Investments to Market indicates that the market value of the long-term investments is currently higher than their book value. As a result, the allowance account acts as a contra account to Long-Term Investments, which has a debit balance. This adjustment is reported in the balance sheet as a reduction in the value of long-term investments, thereby reflecting their market value.

Question 11

Tomlin Enterprises has a credit balance of $80,000 in its Allowance to Adjust Long-Term Investments to Market account before adjustment.Its investment portfolio has a total cost of $500,000 and a market value of $450,000.The year-end adjustment entry that would be recorded in the books of Tomlin Enterprises is:
A)
B)
C)
D)

Accepted Answer

The adjustment entry should be made for the difference between the cost and market value of the investments. Therefore, we need to debit the Allowance to Adjust Long-Term Investments to Market account and credit the Unrealized Loss on Investments account. The amount of the adjustment should be the difference between the cost and market value of the investments, which is $500,000 - $450,000 = $50,000.

The entry to adjust the Allowance to Adjust Long-Term Investments to Market account would be:

Debit Allowance to Adjust Long-Term Investments to Market: $50,000
Credit Unrealized Loss on Investments: $50,000

After this adjustment, the balance in the Allowance to Adjust Long-Term Investments to Market account would be $80,000 - $50,000 = $30,000 (a credit balance, which means that there is still a net unrealized gain on the investments).

Question 12

Which of the following statements is true about investments categorized as trading securities?
A)They are valued on the balance sheet at cost.
B)They can consist of debt,but not equity,securities.
C)They are purchased to be held to maturity.
D)Changes in market value are reflected in net income.

Accepted Answer

Trading securities are investments held with the intention of selling them in the near term to generate profits from short-term price fluctuations. Changes in market value for trading securities are reflected in net income as gains or losses in the income statement. Option A is incorrect because trading securities are not valued at cost, but at fair market value. Option B is incorrect because trading securities can consist of both debt and equity securities. Option C is incorrect because trading securities are not purchased to be held to maturity.

Question 13

When the cost-adjusted-to-market method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is directly affected by
A)the dividend distributions of the investee.
B)the earnings and dividend distributions of the investee.
C)the earnings of the investee.
D)neither the earnings nor the dividends of the investee.

Accepted Answer

The cost-adjusted-to-market method (also known as the fair value method) for accounting for long-term investments in the stock of another company involves adjusting the carrying value of the investment to reflect its fair market value at each reporting date. This adjustment is made regardless of the investee's earnings or dividend distributions, which means the carrying value is affected by market conditions rather than the investee's financial performance or dividend policies.

Question 14

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)
A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss).

Accepted Answer

Unrealized losses on available-for-sale equity securities are recognized as other comprehensive income (loss) and reported as a separate component of shareholders' equity on the balance sheet. They are not recognized as realized losses on the income statement until the securities are sold.

Question 15

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the balance of the Short-Term Investments account appearing on the balance sheet will be
A)$9,000
B)$52,000
C)$61,000
D)none of these

Accepted Answer

The answer of Stock categorized as trading securities is purchased...

Question 16

Stock categorized as trading securities is purchased for $72,000.At year end,when the market value of the stock is $63,000,the adjusting entry that would be recorded is:
A)
B)
C)
D)

Accepted Answer

The adjusting entry for trading securities is to record the unrealized holding gains or losses on the income statement. Since the market value of the stock decreased from $72,000 to $63,000, there is an unrealized loss of $9,000 ($72,000 - $63,000). Therefore, the adjusting entry would be a debit to the Unrealized Loss on Trading Securities account for $9,000 and a credit to the Trading Securities account for $9,000. Choice B is the only option that includes these accounts with the correct amounts.

Question 17

Trading securities are valued on the balance sheet at
A)lower of cost or market.
B)cost.
C)market value.
D)cost,adjusted for the effects of interest.

Accepted Answer

Trading securities are valued on the balance sheet at their current market value. This approach reflects the fair value of the securities at the balance sheet date, allowing for the recognition of unrealized gains or losses in the financial statements.

Question 18

At year-end,a company's trading portfolio appears as follows:  The adjusting entry will include
A)a debit to Allowance to Adjust Short-Term Investments to Market of $50.
B)a credit to Allowance to Adjust Short-Term Investments to Market of $50.
C)a debit to Unrealized Loss on Short-Term Investments of $100.
D)none of these,since no adjusting entry is necessary.

Accepted Answer

The answer of At year-end,a company's trading portfolio appears as...

Question 19

Barkely Corporation has invested in the stock of two other corporations,Hayes Corporation and Motz Corporation.Barkely does not own a controlling interest or exercise significant influence over either corporation.Barkely's accountant is preparing financial statements and has compiled the following information:  What should be the balance in the Allowance to Adjust Long-Term Investments to Market account,based on the above information?
A)$2,000 credit
B)$4,000 debit
C)$4,000 credit
D)$2,000 debit

Accepted Answer

The answer of Barkely Corporation has invested in the stock...

Question 20

The equity method generally should be used to account for an investment in stock when the level of ownership is
A)between 20 and 50 percent.
B)10 percent or more.
C)less than 20 percent.
D)between 10 and 40 percent.

Accepted Answer

According to GAAP, the equity method should be used when the level of ownership is between 20 and 50 percent as this indicates significant influence over the investee's operations. When the level of ownership is less than 20 percent, the investment is recorded using the fair value method, and when the level of ownership is 50 percent or more, the investment is consolidated. Therefore, option A is the best choice.

Quiz 28: Accounting for Investments

Under the cost-adjusted-to-market method of accounting for an investment,

Kirk Corporation owns 25 percent of the voting stock of Allen Corporation and accounts for the investment using the equity method.Allen reports a net loss of $40,000.Kirk Corporation's entry to record its share of loss is:

For available-for-sale equity securities,the Allowance to Adjust Long-Term Investments to Market account should be reported as a(n)

When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by

Singletary Corporation owns a 40 percent interest in the stock of Fleming Corporation.During 2014,Fleming pays $50,000 in dividends to Singletary and reports $214,000 in net income.Singletary Corporation's investment in Fleming will increase Singletary's income before income taxes by

The year-end adjusting entry to reflect an increase in the value of trading securities includes a

All of the following are ways one corporation could affect the operating and financial policies of another corporation except

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:

The cost-adjusted-to-market method of accounting for investments is used when the investment is

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a

Which of the following statements is true about investments categorized as trading securities?

When the cost-adjusted-to-market method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is directly affected by

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the balance of the Short-Term Investments account appearing on the balance sheet will be

Stock categorized as trading securities is purchased for $72,000.At year end,when the market value of the stock is $63,000,the adjusting entry that would be recorded is:

Trading securities are valued on the balance sheet at

At year-end,a company's trading portfolio appears as follows: The adjusting entry will include

The equity method generally should be used to account for an investment in stock when the level of ownership is