Question 1

When the equity method is used to account for an investment in stock,the investor will report its share of the investee's annual earnings as income in proportion to how much the investee distributes in the form of dividends.

Accepted Answer

When the equity method is used, the investor reports its share of the investee's annual earnings as income in proportion to its ownership percentage, regardless of whether or not the investee distributes dividends.

Question 2

The equity method usually is the most appropriate method for accounting for investments of more than a 20 percent interest of another company's stock.

Accepted Answer

The equity method is appropriate for accounting for investments of more than a 20 percent interest of another company's stock, as it allows the investor to have significant influence over the investee's operations and financial decisions.

Question 3

It is possible that an investor with less than a 50 percent ownership interest may qualify for accounting recognition of control and appropriately prepare consolidated financial statements.

Accepted Answer

The answer of It is possible that an investor with...

Question 4

Unrealized Loss (Gain)on Short-Term Investments is a contra-asset account that will appear on the balance sheet.

Accepted Answer

Unrealized Loss (Gain) on Short-Term Investments is typically reported in the equity section of the balance sheet under accumulated other comprehensive income, not as a contra-asset account.

Question 5

When a company holds U.S.Treasury bills,it debits Interest Income and credits Short-Term Investments at the end of the accounting period (assuming it is prior to the T-bills' maturity).

Accepted Answer

Interest income is recorded as a credit, not a debit, and the corresponding debit would typically be to an interest receivable account, not to short-term investments.

Question 6

The account Allowance to Adjust Short-Term Investments to Market appears as a contra-asset on the balance sheet.

Accepted Answer

The Allowance to Adjust Short-Term Investments to Market is a contra-asset account that appears on the balance sheet as a deduction from the Short-Term Investments account. Its purpose is to adjust the value of short-term investments to their fair market value.

Question 7

Trading securities appear as current assets on the balance sheet at their historical cost regardless of subsequent increases or decreases in market value.

Accepted Answer

Trading securities are initially recorded at their fair market value on the balance sheet, and any subsequent changes in market value are recorded in the income statement as unrealized gains or losses.

Question 8

Trading securities are always short-term investments.

Accepted Answer

Trading securities are typically bought with the intention of selling them in the near term to profit from short-term price movements, thus they are classified as short-term investments.

Question 9

When the equity method is used to account for an investment in stock,dividends received by the investor decrease the investment account.

Accepted Answer

Dividends received under the equity method are recorded as a reduction in the investment account, reflecting a decrease in the investor's proportionate interest in the investee's equity.

Question 10

If a long-term investment suffers a permanent decline in value,a loss only has to be recorded if the investment is sold.

Accepted Answer

The decline in value of a long-term investment is considered an impairment loss and must be recognized even if the investment has not been sold. The loss is recorded by reducing the investment's book value to its new fair value.

Question 11

The Allowance to Adjust Long-Term Investments to Market and the Unrealized Loss on Long-Term Investments are reciprocal accounts,each with the same dollar balance.

Accepted Answer

The Allowance to Adjust Long-Term Investments to Market and the Unrealized Loss on Long-Term Investments are both used to account for the decrease in value of long-term investments, but they have opposite effects on the financial statements. The Allowance increases the value of the investments on the balance sheet, while the Unrealized Loss decreases the value of the investments on the income statement. As a result, these accounts have equal but opposite balances.

Question 12

The Allowance to Adjust Long-Term Investments to Market account appears in the assets section of the balance sheet.

Accepted Answer

The Allowance to Adjust Long-Term Investments to Market account is a contra-asset account that appears in the assets section of the balance sheet.

Question 13

Using the cost-adjusted-to-market method of accounting for a long-term investment in stock,the journal entry to record the receipt of dividends involves a debit to Dividend Income.

Accepted Answer

In the cost-adjusted-to-market method, the receipt of dividends is recorded with a debit to Cash and a credit to Dividend Income, not a debit to Dividend Income.

Question 14

When the cost-adjusted-to-market method is used to account for an investment in stock,dividends received are accounted for as an increase to dividend income.

Accepted Answer

When the cost-adjusted-to-market method is used, dividends received are accounted for as an increase in the dividend income account. This is because the cost-adjusted-to-market method requires that the investment's value be adjusted to its current market value, with unrealized gains and losses reflected in the market adjustment account. Therefore, the dividend income is not directly credited to the investment account.

Question 15

When the market value of available-for-sale securities exceeds cost,an unrealized loss appears in stockholders' equity as an addition.

Accepted Answer

When the market value of available-for-sale securities exceeds cost, an unrealized gain appears in stockholders' equity as an addition.

Question 16

The cost-adjusted-to-market method of accounting for investments allows for a departure from cost when the market value of the investment falls below or rises above cost.

Accepted Answer

The cost-adjusted-to-market method, also known as the fair value method, allows for the adjustment of the cost of an investment to its market value when the market value falls below or rises above cost. This is done to reflect the current value of the investment and provide more accurate financial information to users.

Question 17

Under the equity method of accounting for a stock investment,a proportionate share of the investee's income is recorded on the investor's records.

Accepted Answer

Under the equity method, the investor records a proportionate share of the investee's income on their records, based on the percentage of ownership in the investee's equity.

Question 18

Dividends received on investments are accounted for in the same way under the cost-adjusted-to-market and the equity methods.

Accepted Answer

Under the cost-adjusted-to-market method, dividends are recognized as income. Under the equity method, dividends reduce the carrying amount of the investment.

Question 19

An increase or decrease in the fair value of a company's total trading portfolio is included in net income in the period in which the increase or decrease occurs.

Accepted Answer

This statement is true. Changes in the fair value of a company's trading portfolio are recognized in net income in the period in which they occur, as they represent gains or losses on the company's investments.

Question 20

With few exceptions,all subsidiaries in which the parent company owns a controlling interest (more than 50 percent)must be consolidated with the parent company for financial reporting purposes.

Accepted Answer

This is the requirement under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for consolidated financial statements.

Quiz 19: Accounting for Investments