Deck 12: Investments

Question 1

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

Answer 1

False

Question 2

If a long-term investment suffers a permanent decline in value,a loss must be recorded,even though the investment has not yet been sold.

Answer 2

True

Question 3

Unrealized gains and losses on available-for-sale securities are reported on the income statement.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Detailed information about a company's investments is appropriately disclosed in the notes to the financial statements.

Question 8

An individual can be prosecuted by the SEC for insider trading only if that individual is employed by the company involved.

Question 9

Investments with a maturity of less than a year are classified as cash equivalents.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

Unrealized gains and losses on trading securities appear on the income statement.

Question 16

An influential but noncontrolling investment is defined as ownership of 20 to 50 percent of the stock of another company.

Question 17

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

Question 18

Available-for-sale securities may be classified as either short- or long-term,depending on how long management intends to keep them.

Question 19

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 20

Another term for short-term investments is marketable securities.

Question 21

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 22

The equity method usually is the most appropriate method for accounting for investments of less than a 20 percent interest.

Question 23

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

Question 24

When the equity method is used to account for an investment in stock,dividends received by the investor are credited to the Dividend Income account.

Question 25

When the cost-adjusted-to-market method is used to account for an investment in stock,dividends received are accounted for as a reduction in the Investment account.

Question 26

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

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

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 regardless of how much the investee distributes in the form of dividends.

Question 29

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

Question 30

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

Question 31

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 credit to Dividend Income.

Question 32

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

Question 33

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 34

At any given balance sheet date,the balance of the Unrealized 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 35

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

Question 36

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 37

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

Question 38

Unless there is evidence to the contrary,an investor owning 25 percent of the stock of an investee is assumed to have significant influence.

Question 39

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

Question 40

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 41

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

Question 42

An eliminating entry is required when a subsidiary owes a parent company but not when the parent owes the subsidiary.

Question 43

A Goodwill from Consolidation account may rise when a parent acquires a subsidiary company's common stock at a price in excess of the stock's book value.

Question 44

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

Question 45

The financial information of a foreign subsidiary should be excluded from the consolidated statements of the parent.

Question 46

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

Question 47

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

Question 48

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 49

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

Question 50

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 51

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

Question 52

The financial statements of a foreign subsidiary must be restated in terms of the reporting currency before consolidation can take place.

Question 53

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 54

All intercompany transactions resulting in revenues and/or expenses require elimination entries in the preparation of a consolidated income statement.

Question 55

If a parent company pays more than book value for a 100 percent owned subsidiary,minority interest arises on the consolidated financial statements.

Question 56

In preparing consolidated financial statements,intercompany receivables and payables must be eliminated because they do not represent amounts due to or receivable from parties outside the consolidated entity.

Question 57

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

Question 58

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

Question 59

Elimination entries are recorded in the consolidated journal and posted to the consolidated ledger.

Question 60

U.S.Treasury bills are considered equity securities.

Question 61

Stock categorized as trading securities is purchased for $72,000.At year end,when the market value of the stock is $63,000,the adjusting entry that would be recorded is:

A) $\begin{array}{llr} \text {Allowance to Adjust Short-Term Investments to Market } &9,000 \\ \text { Unrealized Loss on Investments } &&9,000\\\end{array}$

B) $\begin{array}{lc}\text { Unrealized Loss on Short-Term Investments } & 9,000 \\\text { Allowance to Adjust Short-Term Investments to Market } & 9,000\end{array}$

C) $\begin{array}{llr} \text {Allowance to Adjust Short-Term Investments to Market } &9,000 \\ \text {Short-Term Investments } &&9,000\\\end{array}$



D) $\begin{array}{llr} \text { Realized Loss on Investments } &9,000\\ \text {Short-Term Investments } &&9,000\\\end{array}$

Question 62

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.

Question 63

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

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

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

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

A) 100 percent
B) More than 50 percent
C) 20 to 50 percent
D) 90 percent

Question 66

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

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

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

A) participation in policymaking.
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 69

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 70

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 71

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 of the investments.
D) changes due to discount or premium amortization.

Question 72

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 73

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 74

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 the above

Question 75

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 76

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

Question 77

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 78

Held-to-maturity 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 79

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

A) More than 50 percent
B) 100 percent
C) 20 to 50 percent
D) 90 percent

Question 80

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