Q: Which formula correctly calculates the amortization amount for a bond premium or discount?

$$\text{Amortization Amount} = \frac{\text{Total Bond Premium or Discount}}{\text{Total Number of Interest Periods}}$$

Q: Which of the following is the correct formula for investment income under the equity method?

$$\text{Investment Income} = \text{\% Ownership} \times \text{Net Income of Investee}$$

Question 1

A company purchases 1,000 shares of common stock in another company for $$20 per share, intending to sell them within two months. At year-end, the market price is 25 $$per share. How much should the investment be reported at on the balance sheet?

Accepted Answer

$25,000

Question 2

Which of the following best describes an equity security?

Accepted Answer

A tradable instrument representing an ownership interest in a corporation

Question 3

If a company owns 35% of another company’s outstanding common stock, which accounting method should be used?

Accepted Answer

Equity method

Question 4

Which of the following is true regarding unrealized gains and losses for trading securities?

Accepted Answer

They are reported on the Income Statement

Question 5

A company purchases $50,000 of 9% bonds at 108 when the market rate is 8%. What is the total premium paid?

Accepted Answer

$8,000

Question 6

Which formula correctly calculates the amortization amount for a bond premium or discount?

Accepted Answer

$$	ext{Amortization Amount} = \frac{	ext{Total Bond Premium or Discount}}{	ext{Total Number of Interest Periods}}$$

Question 7

On December 31, a company’s available-for-sale securities have increased in fair value. Where is the unrealized gain reported?

Accepted Answer

In Other Comprehensive Income

Question 8

A company purchases 640 shares of stock at $$35 per share and classifies them as trading securities. At year-end, the price is 41 $$per share. What is the unrealized gain?

Accepted Answer

$3,840

Question 9

Which of the following is NOT a reason a company might invest in another company’s securities?

Accepted Answer

To consolidate financial statements

Question 10

If the stated rate on a bond is less than the market rate, the bond will be issued at:

Accepted Answer

A discount

Question 11

A company owns 60% of another company’s common stock. Which method should be used to account for this investment?

Accepted Answer

Consolidation method

Question 12

Under the equity method, how is investment income recognized?

Accepted Answer

As a percentage of the investee’s net income

Question 13

A company purchases 500 shares of stock at $$60 per share as a trading security. At year-end, the market price is 65 $$per share. What is the unrealized gain?

Accepted Answer

$2,500

Question 14

Which of the following is true about dividends received under the equity method?

Accepted Answer

They reduce the carrying value of the investment

Question 15

A company purchases $50,000 of 9% bonds at 94 when the market rate is 10%. What is the total discount paid?

Accepted Answer

$6,000

Question 16

Which of the following best describes a trading security?

Accepted Answer

An investment expected to be sold in the near term through active trading

Question 17

If a company sells an investment for more than its book value, what is the result?

Accepted Answer

A realized gain

Question 18

Which of the following is the correct formula for investment income under the equity method?

Accepted Answer

$$	ext{Investment Income} = 	ext{\% Ownership} 	imes 	ext{Net Income of Investee}$$

Question 19

A company purchases 35,000 out of 87,500 shares of another company for $$400,000. The investee reports net income of 240$$,000 and pays dividends of $60,000. What is the carrying value of the investment at year-end under the equity method?

Accepted Answer

$472,000

Question 20

Which of the following is NOT a classification for investments in debt or equity securities?

Accepted Answer

Consolidated Security

Appendix E: Investments – Financial Accounting Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards