Deck 15: Investments

Question 1

An ownership interest of greater than 50 percent is required for an investor to have accounting control over an investee.

Answer 1

True

Question 2

Detailed information about a company's investments is never disclosed in the notes to the financial statements.

Answer 2

False

Question 3

Available-for-sale securities may only be classified as short-term investments.

Answer 3

False

Question 4

Investments are valued on the balance sheet at the original purchase price,even if the price has changed since the date of purchase.

Question 5

Unrealized gains and losses on trading securities appear on the balance sheet.

Question 6

The account Allowance to Adjust Short-Term Investments to Market appears as a contra account on the income statement.

Question 7

Held-to-maturity securities are always debt securities,and never equity securities.

Question 8

A controlling investment is defined as ownership of 100 percent of the stock of another company.

Question 9

Unrealized gains and losses on available-for-sale securities are reported on the balance sheet.

Question 10

Insider trading is considered unethical,but it is not illegal in the United States.

Question 11

Another term for short-term investments is marketable securities.

Question 12

A noninfluential and noncontrolling investment is defined as ownership of less than 10 percent of the stock of another company.

Question 13

An individual can be prosecuted by the SEC for insider trading whether or not that individual is employed by the company involved.

Question 14

An influential but noncontrolling investment is defined as ownership of more than 50 percent of the stock of another company.

Question 15

Unless there is evidence to the contrary,an investor owning 35 percent of the stock of an investee is assumed to have significant influence.

Question 16

Trading securities are valued on the balance sheet at market value.

Question 17

As long as an investment can be sold within a short period of time,it must be classified as a current asset.

Question 18

If a long-term investment suffers a permanent decline in value,a loss only has to be recorded if the investment is sold.

Question 19

Investments with a maturity of less than ninety days are generally classified as cash equivalents.

Question 20

Gains and losses on the sale of investments appear as adjustments within the financing activities section of the statement of cash flows.

Question 21

When the cost-adjusted-to-market method is used to account for an investment in stock,dividends received are accounted for as an increase to dividend income.

Question 22

When the equity method is used to account for an investment in stock,dividends received by the investor decrease the investment account.

Question 23

For available-for-sale securities,the Unrealized Loss on Long-Term Investments account appears on the income statement.

Question 24

It is possible that an investor with less than a 50 percent ownership interest may qualify for accounting recognition of control and appropriately prepare consolidated financial statements.

Question 25

Under the equity method of accounting for a stock investment,a proportionate share of the investee's income is recorded on the investor's records.

Question 26

When the equity method is used to account for an investment in stock,the investor will report its share of the investee's annual earnings as income in proportion to how much the investee distributes in the form of dividends.

Question 27

Dividends received on investments are accounted for in the same way under the cost-adjusted-to-market and the equity methods.

Question 28

The equity method usually is the most appropriate method for accounting for investments of more than a 20 percent interest of another company's stock.

Question 29

When a parent company and a 100 percent owned subsidiary company are consolidated using the purchase method,only the stockholders' equity of the parent company remains.

Question 30

With few exceptions,all subsidiaries in which the parent company owns a controlling interest (more than 50 percent)must be consolidated with the parent company for financial reporting purposes.

Question 31

The cost-adjusted-to-market method of accounting for investments allows for a departure from cost when the market value of the investment falls below or rises above cost.

Question 32

When the market value of available-for-sale securities exceeds cost,an unrealized loss appears in stockholders' equity as an addition.

Question 33

It is not possible for one company to influence the operating policies of another company unless it owns more than a 50 percent interest in that company.

Question 34

Using the cost-adjusted-to-market method of accounting for a long-term investment in stock,the journal entry to record the receipt of dividends involves a debit to Dividend Income.

Question 35

Elimination entries appear only in the worksheets used to prepare the consolidated financial statements and not in the consolidated journal or the consolidated ledger.

Question 36

Goodwill is the amount by which specific assets of a subsidiary are undervalued.

Question 37

The Allowance to Adjust Long-Term Investments to Market account is placed in the asset section of the balance sheet.

Question 38

In preparing consolidated financial statements,intercompany receivables and payables are never eliminated because they represent amounts due to or receivable from parties outside the consolidated entity.

Question 39

At any given balance sheet date,the balance of the Realized Gain on Long-Term Investments account is equal in amount to the balance of the Allowance to Adjust Long-Term Investments to Market account.

Question 40

When the cost of available-for-sale securities exceeds market value,the Allowance to Adjust Long-Term Investments to Market decreases Long-Term Investments on the balance sheet.

Question 41

A company may pay more than book value for a subsidiary because the assets of the subsidiary are undervalued on its balance sheet.

Question 42

The reporting currency is defined as the currency in which the consolidated financial statements are presented.

Question 43

Only sales to outsiders and purchases from outsiders are reflected in a consolidated income statement because all intercompany transactions are eliminated in preparing the consolidated statement.

Question 44

Only the intercompany transactions resulting in revenues require elimination entries in the preparation of a consolidated income statement.

Question 45

Held-to-maturity securities that will mature within one year are classified on the balance sheet as long-term investments and are valued at cost adjusted for the effects of interest.

Question 46

U.S.Treasury bills are considered debt securities.

Question 47

If a parent company has four subsidiaries,there are five separate legal entities represented in this group.

Question 48

Held-to-maturity securities are valued on the balance sheet at fair value.

Question 49

If a parent company pays more than book value for a 100 percent owned subsidiary,goodwill could arise on the consolidated financial statements.

Question 50

Most long-term bond investments are classified as held-to-maturity securities.

Question 51

The elimination of the investment in the subsidiary company is made against the investment account,common stock,and retained earnings of the subsidiary company.

Question 52

Minority interest may be found in the asset section of a consolidated balance sheet.

Question 53

A minority interest represents the holdings of stockholders,other than the parent company,who own more than 50 percent of the voting stock of a subsidiary.

Question 54

The financial statements of a foreign subsidiary are never restated in terms of the reporting currency before consolidation takes place.

Question 55

When a parent company pays less than book value for an investment in a subsidiary,the excess of book value over the cost of the investment should be used to lower the carrying value of the subsidiary's long-term assets (other than long-term marketable securities)in preparing the consolidated financial statements.

Question 56

Although the preparation of a consolidated balance sheet requires elimination entries,a consolidated income statement may always be prepared without any elimination entries.

Question 57

An eliminating entry is required both when a subsidiary owes a parent company and when the parent owes the subsidiary.

Question 58

A Goodwill from Consolidation account may rise when a parent acquires a subsidiary company's common stock at a price that is less than the stock's book value.

Question 59

The financial information of a foreign subsidiary should be included in the consolidated statements of the parent.

Question 60

Eliminations are important because they avoid double counting when consolidated financial statements are prepared.

Question 61

Significant influence is defined as owning what percent of the stock of another company?

A) 15 to 60 percent
B) More than 50 percent
C) 20 to 50 percent
D) 75 percent

Question 62

In the United States,insider trading is considered

A) unethical,but not illegal.
B) neither unethical nor illegal.
C) both unethical and illegal.
D) illegal,but not unethical.

Question 63

All of the following are indications of significant influence over another company except

A) exchange of managerial personnel.
B) representation on the board of directors.
C) technological dependency between the two companies.
D) ownership of all of the other company's debt securities.

Question 64

Which of the following is not a category of investments?

A) Held-to-maturity securities
B) Trading securities
C) Collateral securities
D) Available-for-sale securities

Question 65

Stock categorized as trading securities is purchased for $144,000.At year end,when the market value of the stock is $126,000,the adjusting entry that would be recorded is:

A) Allowance to Adjust Short-Term Investments to Market 18,000
Unrealized Loss on Investments 18,000
B) Unrealized Loss on Short-Term Investments 18,000
Allowance to Adjust Short-Term Investments to Market 18,000
C) Allowance to Adjust Short-Term Investments to Market 18,000
Short-Term Investments 18,000
D) Realized Loss on Investments 18,000
Short-Term Investments 18,000

Question 66

The cash amounts of purchases and sales of investments appear in which section of the statement of cash flows?

A) Operating activities
B) Investing activities
C) Financing activities
D) Noncash investing and financing activities

Question 67

Trading securities are valued on the balance sheet at

A) lower of cost or market.
B) cost.
C) market value.
D) cost,adjusted for the effects of interest.

Question 68

Long-term bond investments that are classified as available-for-sale must be valued on the balance sheet at cost.

Question 69

A controlling investment is defined as owning what percent of the stock of another company?

A) More than 50 percent
B) 100 percent
C) More than 75 percent
D) 75 percent

Question 70

Which of the following categories of investments can be both debt and equity securities?

A) Available-for-sale securities
B) Trading securities
C) Held-to-maturity securities
D) Both available-for-sale and trading securities

Question 71

All the interest income on U.S.Treasury bills is recorded at maturity.

Question 72

The year-end adjusting entry to reflect an increase in the value of trading securities includes a

A) credit to Unrealized Gain on Short-Term Investments.
B) credit to Short-Term Investments.
C) credit to Allowance to Adjust Short-Term Investments to Market.
D) credit to Realized Gain on Investments.

Question 73

Which of the following categories of investments are debt,but not equity,securities?

A) Trading securities
B) Held-to-maturity securities
C) Available-for-sale securities
D) Both trading and available-for-sale securities

Question 74

All of the following are conditions that could affect the valuation of investments on the balance sheet except

A) changes in the general purchasing power of the dollar.
B) changes in the operations of investee companies.
C) changes in the market value or fair value of the investments.
D) changes caused by the passage of time.

Question 75

Which is the only type of investment that is always classified as short-term?

A) Trading securities
B) Held-to-maturity securities
C) Available-for-sale securities
D) Equity securities

Question 76

When a company holds U.S.Treasury bills,it would debit Interest Income and credit Short-Term Investments at the end of the accounting period (assuming it is prior to the T-bills' maturity).

Question 77

Which type of investment,if any,could be classified as short- or long-term,as well as debt or equity?

A) Available-for-sale securities
B) Trading securities
C) Held-to-maturity securities
D) None of these are correct.

Question 78

When bonds are purchased between interest dates,the buyer must pay (in addition to the bonds' cost)the amount of interest that has accrued since the last interest payment date.

Question 79

Short-term available-for-sale securities are valued on the balance sheet at

A) market value.
B) cost,adjusted for the effects of interest.
C) cost.
D) lower of cost or market.

Question 80

Which of the following statements is true about investments categorized as trading securities?

A) They are valued on the balance sheet at cost.
B) They can consist of debt,but not equity,securities.
C) They are purchased to be held to maturity.
D) Changes in market value are reflected in net income.