Question 1

Which accounting method is used for stock (equity) investments when the investor owns less than 20% of the investee's voting stock?

Accepted Answer

Fair Value

Question 2

How is unrealized gain or loss from insignificant stock investments (less than 20% ownership) reported?

Accepted Answer

Reported in the Income Statement

Question 3

An investor owns 35% of another company’s voting stock. Which method should be used to account for this investment?

Accepted Answer

Equity Method

Question 4

Which formula correctly calculates the carrying value of an equity investment under the equity method?

Accepted Answer

$$Original\ Cost + \%\ Owned\ of\ Investee's\ Income - \%\ Dividends$$

Question 5

What is the recurring income recognized in the income statement for investments accounted for using the fair value method?

Accepted Answer

Dividend Revenue

Question 6

If an investor owns more than 50% of another company, which financial statements are prepared?

Accepted Answer

Consolidated financial statements

Question 7

Which of the following is NOT a characteristic of the equity method?

Accepted Answer

Investment is valued at fair value

Question 8

How are investments in bonds held to maturity valued on the balance sheet?

Accepted Answer

At amortized cost

Question 9

Which of the following best describes the income recognized from a bond investment held to maturity?

Accepted Answer

Interest Revenue

Question 10

A company owns 10% of another company’s stock and receives dividends. How should these dividends be reported?

Accepted Answer

As dividend revenue in the income statement

Question 11

Which of the following is true regarding unrealized gains and losses for equity investments with significant influence?

Accepted Answer

They are not recognized because the investment is not at fair value

Question 12

Which method is used for accounting for investments when the investor has control (more than 50% ownership) over the investee?

Accepted Answer

Consolidation Method

Question 13

Which of the following is included in consolidated financial statements?

Accepted Answer

All balances for all accounts combined

Question 14

If a company uses the equity method, how does receiving a dividend from the investee affect the investment account?

Accepted Answer

It decreases the investment account

Question 15

Which of the following is the correct formula for interest revenue from a bond held to maturity?

Accepted Answer

$$Interest\ Revenue = (Cost \pm Discount\ or\ Premium\ Amortized\ over\ time)$$

Question 16

A company owns 25% of another company and receives $10,000 in dividends. How is this recorded under the equity method?

Accepted Answer

Decrease investment account by $10,000

Question 17

Which of the following is NOT true about the fair value method for equity investments?

Accepted Answer

Recurring income is recognized as interest revenue

Question 18

Which of the following best describes the recurring income for equity investments with significant influence?

Accepted Answer

Share of Investee's Income (not dividends)

Question 19

What is the main difference between the equity method and the consolidation method?

Accepted Answer

Equity method recognizes share of income; consolidation combines all accounts

Question 20

Which of the following investments is NOT valued at fair value after purchase?

Accepted Answer

Bond investments held to maturity

Accounting for Investments: Post-Purchase Valuation and Reporting

Study Guide - Practice Questions