Question 1

When the cost method is used to account for an investment, the carrying value of the investment is affected by

Accepted Answer

When the cost method is used to account for an investment, the carrying value of the investment is not affected by either the earnings or the dividends of the investee. The cost method records the investment at its original cost and does not adjust the carrying value for changes in the investee's earnings or dividends.

Question 2

Yankton Company began the year without an investment portfolio. During the year they purchased investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. The Yankton Company's financial statements for the current year should show

Accepted Answer

The Yankton Company's financial statements for the current year should show no loss on the income statement, available-for-sale securities of $11,000, and an unrealized loss of $2,000 as a stockholders' equity adjustment on the balance sheet. This is because the securities are classified as available-for-sale, which means that any unrealized gains or losses are recorded as a separate component of stockholders' equity until the security is sold. Therefore, the decrease in market value of $2,000 is an unrealized loss and should be recorded as a reduction in other comprehensive income within stockholders' equity. The cost of the securities, $13,000, should remain on the balance sheet as available-for-sale securities.

Question 3

In general, consolidated financial statements should be prepared

Accepted Answer

Consolidated financial statements should be prepared when a corporation owns more than 50% of the common stock of another company. This is because when a company has a controlling interest of more than 50% in another company, it has the ability to control and influence the financial and operating policies of the other company. Therefore, it is important to consolidate the financial information of both companies to provide a comprehensive view of the financial position and performance of the group as a whole.

Question 4

All of the following are disadvantages of fair value use except:

Accepted Answer

Fair values can be used on both balance sheet and income statement accounts. Therefore, option D is not a correct statement.

Question 5

Companies may report comprehensive income on each of the statements below except

Accepted Answer

The answer of Companies may report comprehensive income on each...

Question 6

If one company owns more than 50% of the common stock of another company

Accepted Answer

When one company owns more than 50% of the common stock of another company, a parent-subsidiary relationship exists. This means that the company that owns the stock (the parent) has significant control over the other company (the subsidiary) and can make important decisions for it. The cost method may be used to account for the investment, but this would depend on whether the parent has significant influence or control over the subsidiary. Liquidation of the subsidiary is not necessarily required in this situation. A partnership is not formed through stock ownership.

Question 7

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

Accepted Answer

The method used to account for investments in common stock is determined by the extent of an investor's influence over the operating and financial affairs of the investee. If the investor has significant influence over the investee, equity method accounting is used. If the investor does not have significant influence, the cost method is typically used. The amount paid for the stock, the nature of the acquisition, and past dividend payments do not determine the accounting method used.

Question 8

A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a dividend of $0.40 per share. The market value of the stock is $16 per share. The company's dividend yield is:

Accepted Answer

Dividend yield is calculated as the annual dividend per share divided by the current market value per share.

Annual dividend per share = $0.40
Market value per share = $16

Dividend yield = ($0.40/$16) x 100% = 2.5%

Question 9

Held-to-Maturity securities

Accepted Answer

Held-to-Maturity securities are primarily purchased to earn interest revenue and are reported at their amortized cost on the balance sheet date. They only include fixed-income investments such as bonds, and they are not subject to fair market value fluctuations like other investment securities. Therefore, options A and B are incorrect.

Question 10

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is:

Accepted Answer

The answer of Edison Corporation paid a dividend of $10...

Question 11

All of the following are factors contributing to the trend for regulators to adopt accounting principles using fair value concepts except:

Accepted Answer

The answer of All of the following are factors contributing...

Question 12

The company whose more than 50% stock is owned by the another company is called the

Accepted Answer

A company with more than 50% stock owned by another company is considered a subsidiary company. The controlling company has control over the subsidiary through its ownership of the majority of its stock. The investee company refers to a company that has received an investment from another company, but the ownership is typically less than 50%. Sibling company is not a commonly used term in business, and therefore not the best choice.

Question 13

The account Valuation Allowance for Trading Securities is found on the:

Accepted Answer

The Valuation Allowance for Trading Securities is an adjustment made to the asset account on the balance sheet. It reflects the decrease in value of a trading security held by a company, and is used to indicate the amount of loss expected on the security. Therefore, the option B - Balance sheet as an adjustment to the asset account - is the best choice.

Question 14

On January 1, 2014, Blanton Company's Valuation Allowance for Trading Investments account has a debit balance of $23,200. On December 31, 2014, the cost of the trading securities portfolio was $80,000. The fair value was $98,000. Which of the following would Blanton report on the income statement for 2014?

Accepted Answer

The answer of On January 1, 2014, Blanton Company's Valuation...

Question 15

Which of the following would be considered an "Other Comprehensive Income" item?

Accepted Answer

An unrealized loss on available-for-sale securities is a type of "Other Comprehensive Income" item that gets reported on the income statement but is not included in net income.

Question 16

The account Unrealized Gain (Loss) on Available-For-Sale Securities should be included in the

Accepted Answer

The answer of The account Unrealized Gain (Loss) on Available-For-Sale...

Question 17

Which of the following is not a part of comprehensive income?

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Cash flows from stock investments are considered as changes in equity resulting from investments by owners and thus not a part of comprehensive income.

Question 18

Yankton Company began the year without an investment portfolio. During the year they purchased investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. The Yankton Company's financial statements for the current year should show

Accepted Answer

The answer of Yankton Company began the year without an...

Question 19

The account Unrealized Gain (Loss) on Trading Securities should be included in the

Accepted Answer

The answer of The account Unrealized Gain (Loss) on Trading...

Question 20

An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale?

Accepted Answer

The total cost of 500 shares is $19,250, so the cost per share is $38.50 ($19,250/500). 
Selling 100 shares at $35 per share generates a total of $3,500 ($35 x 100). 
The cost of the 100 shares sold is 100 x $38.50 = $3,850. 
Therefore, the investor has a loss of $350 on the sale ($3,500 - $3,850).

Quiz 13: Investments and Fair Value Accounting