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Exam 14: Investments

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Question 21

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Gains and losses on the sale of equity investments are recorded in the income statement as part of net income.

A) True
B) False

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Question 22

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Listed below are five terms followed by a list of phrases that describe or characterize the terms.Match each phrase with the best term placing the letter designating the term in the space provided. a.Held-to-maturity securities b.Trading securities c.Available-for-sale securities d.Equity method e.Consolidation method Phrases: _____ Used when an investor has controlling influence. _____ This category is not used for equity investments. _____ Used when an investor has insignificant influence and does not expect to sell in the near future. _____ Used when an investor has significant,but not controlling influence. _____ Used when an investor expects to sell in the near future.

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Question 23

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When significant influence exists,the investment should be accounted for by the equity method.

Seasonal refers to the revenue activities of a company varying based on the time (or season)of the year.

The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends.

When the investor has insignificant influence,the receipt of cash dividends is recorded as dividend revenue.

When insignificant influence exists,the investment should be accounted for by the equity method.

Unrealized gains and losses from changes in the fair value of trading securities are reported as part of current net income.

Which of the following is true with regard to how to account for company A's investment in company B's common stock?

When the investor has significant influence,the receipt of cash dividends is recorded as dividend revenue.

When using the equity method to account for an investment,cash dividends received by the investor from the investee should be recorded:

Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories.What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?

Listed below are five terms followed by a list of phrases that describe or characterize the terms.Match each phrase with the best term placing the letter designating the term in the space provided. a.Held-to-maturity securities b.Trading securities c.Available-for-sale securities d.Equity method e.Consolidation method Phrases: _____ This category is used only for debt securities. _____ An investor owns 40% of the common voting shares in the company and can exercise significant influence. _____ Common stock not held for immediate resale and the investor owns 2% of the outstanding shares. _____ An investor owns over 50% of the common voting shares in the company. _____ Common stock held for immediate resale.

The cash received from interest equals the face value of the investment in bonds times the stated interest rate.

Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method.

Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

When the equity method of accounting for investments is used by the investor,the Investments account increases when:

Bond investments are long-term assets that earn interest revenue,while bonds payable are long-term liabilities that incur interest expense.

Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements.

One of the primary reasons for investing in debt securities includes: