Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

In the context of investments in securities, the reduction of premium option uses the dividend to reduce which of the following?

The interest income recognized

The carrying amount of the investment

The par value of the security

The market value of the security

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Verified step by step guidance

Understand the concept of 'reduction of premium option': This method is used when an investment in securities is purchased at a premium (i.e., above its par value). The premium is amortized over the life of the investment, reducing the carrying amount of the investment.

Recognize that dividends received from the investment are used to reduce the premium. This means the carrying amount of the investment is adjusted downward by the amount of the premium amortized.

Clarify the term 'carrying amount of the investment': This refers to the book value of the investment as recorded in the financial statements, which includes adjustments for any premium or discount.

Eliminate incorrect options: The interest income recognized is not reduced by the dividend under this method. Similarly, the par value and market value of the security remain unaffected by the reduction of premium option.

Conclude that the correct answer is 'The carrying amount of the investment,' as this is the value adjusted when the reduction of premium option is applied.