Q: Which formula correctly calculates the fair value of an equity investment at year-end?

$$Fair\ Value = Number\ of\ Shares \times Market\ Price\ per\ Share$$

Q: A company owns 49% of another company’s voting stock. The investee reports net income of $$200,000 and pays dividends of 50$$,000. What is the increase in the investor’s investment account for the year?

$$49\% \times 200,000 - 49\% \times 50,000 = 98,000 - 24,500 = 73,500$$

Q: A company purchases $10,000 of bonds at 95.2. What is the initial investment recorded?

$$10,000 \times 0.952 = 9,520$$

Question 1

Which of the following is NOT a reason why companies invest in the securities of other companies?

Accepted Answer

To increase the liquidity of their own shares

Question 2

A company purchases 1,000 shares of another company’s stock for $$15 per share as a short-term investment. At year-end, the shares are trading at 18 $$per share. What is the unrealized gain reported on the balance sheet?

Accepted Answer

$3,000

Question 3

Which formula correctly calculates the fair value of an equity investment at year-end?

Accepted Answer

$$Fair\ Value = Number\ of\ Shares 	imes Market\ Price\ per\ Share$$

Question 4

If an investor owns less than 20% of another company’s voting stock, which accounting method is generally used?

Accepted Answer

Fair value method

Question 5

A company receives a cash dividend from an equity investment in which it has insignificant influence. How is this dividend recorded?

Accepted Answer

As dividend revenue

Question 6

Which of the following best describes the equity method of accounting for investments?

Accepted Answer

Investment is reported at original cost plus share of income less dividends

Question 7

A company owns 49% of another company’s voting stock. The investee reports net income of $$200,000 and pays dividends of 50$$,000. What is the increase in the investor’s investment account for the year?

Accepted Answer

$$49\% 	imes 200,000 - 49\% 	imes 50,000 = 98,000 - 24,500 = 73,500$$

Question 8

Which of the following is true regarding consolidated financial statements?

Accepted Answer

They combine the financial statements of the parent and all subsidiaries as if one company

Question 9

A company purchases $10,000 of bonds at 95.2. What is the initial investment recorded?

Accepted Answer

$$10,000 	imes 0.952 = 9,520$$

Question 10

Which of the following statements about unrealized gains and losses is correct?

Accepted Answer

Unrealized gains and losses arise when the fair market value of securities changes before they are sold

Question 11

If a company owns more than 50% of another company’s voting stock, what is the relationship called?

Accepted Answer

Subsidiary

Question 12

Which journal entry is correct for recording the purchase of an equity investment with insignificant influence?

Accepted Answer

$$Investment\ in\ Equity\ Securities \quad Debit$$

Question 13

A company sells an equity investment for $$107,000. The carrying amount before sale was 105$$,000. What is the realized gain?

Accepted Answer

$$107,000 - 105,000 = 2,000$$

Question 14

Which of the following is NOT a criterion for classifying an investment as a short-term asset?

Accepted Answer

Investment must be in equity securities

Question 15

Which method is used to account for held-to-maturity debt securities?

Accepted Answer

Amortized cost method

Question 16

A company purchases 400 shares of stock for $$4 per share. At year-end, the shares are trading at 5 $$per share. What amount is reported on the balance sheet?

Accepted Answer

$$400 	imes 5 = 2,000$$

Question 17

Which of the following is eliminated in consolidated financial statements?

Accepted Answer

Intercompany accounts

Question 18

Which of the following is a correct journal entry for adjusting an equity investment to its fair market value at year-end?

Accepted Answer

$$Unrealized\ Gain\ on\ Equity\ Securities \quad Credit$$

Question 19

Which of the following is true about the reporting of investments in equity securities when the investor has significant influence?

Accepted Answer

Share of investee’s income increases the investment account

Question 20

Which of the following best describes the relationship between a bondholder and the issuing corporation?

Accepted Answer

Bondholder is a creditor

Appendix E

Study Guide - Practice Questions

Study Guide - Flashcards