Deck 19: Accounting for Investments

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

For available-for-sale securities,an unrealized loss on long-term investments appears as part of other comprehensive income (loss)in the company's financial statements.

Question 5

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

Question 6

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

Question 7

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

Question 8

Another term for short-term investments is marketable securities.

Question 9

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

Question 10

A noninfluential and noncontrolling investment is defined as ownership of less than 25 percent of the stock of another company.

Question 11

A controlling investment is defined as ownership of more than 50 percent of the stock of another company.

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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 22

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 23

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 24

Unrealized Loss (Gain)on Short-Term Investments is a contra-asset account that will appear on the balance sheet.

Question 25

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

Question 26

The account Allowance to Adjust Short-Term Investments to Market appears as a contra-asset on the balance sheet.

Question 27

Trading securities appear as current assets on the balance sheet at their historical cost regardless of subsequent increases or decreases in market value.

Question 28

Trading securities are always short-term investments.

Question 29

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

Question 30

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

Question 31

The Allowance to Adjust Long-Term Investments to Market and the Unrealized Loss on Long-Term Investments are reciprocal accounts,each with the same dollar balance.

Question 32

The Allowance to Adjust Long-Term Investments to Market account appears in the assets section of the balance sheet.

Question 33

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 34

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 35

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

Question 36

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 37

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 38

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

Question 39

An increase or decrease in the fair value of a company's total trading portfolio is included in net income in the period in which the increase or decrease occurs.

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

Held-to-maturity securities are valued on the balance sheet at cost adjusted for the effects of interest.

Question 42

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

Question 43

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 44

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 45

Held-to-maturity securities that will mature within one year are classified as short-term investments and valued on the balance sheet at fair value.

Question 46

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 47

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 48

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 49

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 50

U.S.Treasury bills are considered equity securities.

Question 51

The purchase and sale of debt and equity securities would 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 52

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 53

Which of the following categories of investments can be 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 54

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

Question 55

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 56

The ability of an investing company to affect the operating and financial policies of another company,even though the investor holds less than 50 percent of the voting stock,is known as

A)significant influence.
B)control.
C)minority interest.
D)noninfluential control.

Question 57

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 58

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 59

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 60

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

Question 61

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 62

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 63

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the balance of the Short-Term Investments account appearing on the balance sheet will be

A)$9,000
B)$52,000
C)$61,000
D)none of these

Question 64

At year-end,a company's trading portfolio appears as follows: The adjusting entry will include

A)a debit to Allowance to Adjust Short-Term Investments to Market of $50.
B)a credit to Allowance to Adjust Short-Term Investments to Market of $50.
C)a debit to Unrealized Loss on Short-Term Investments of $100.
D)none of these,since no adjusting entry is necessary.

Question 65

All of the following are ways one corporation could affect the operating and financial policies of another corporation except

A)analysis of data regarding profitability.
B)material transactions between the companies.
C)representation on the board of directors.
D)exchange of managerial personnel.

Question 66

Kirk Corporation owns 25 percent of the voting stock of Allen Corporation and accounts for the investment using the equity method.Allen reports a net loss of $40,000.Kirk Corporation's entry to record its share of loss is:

A)Cash 10,000 Investment in Allen Corporation 10,000
B)Loss on Investments 40,000 Investment in Allen Corporation 40,000
C)Loss,Allen Corporation Investment 10,000 Investment in Allen Corporation 10,000
D)Cash 10,000 Loss,Allen Corporation Investment 10,000

Question 67

Singletary Corporation owns a 40 percent interest in the stock of Fleming Corporation.During 2014,Fleming pays $50,000 in dividends to Singletary and reports $214,000 in net income.Singletary Corporation's investment in Fleming will increase Singletary's income before income taxes by

A)$35,600.
B)$65,600.
C)$85,600.
D)$105,600.

Question 68

When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by

A)declines in the market value of the stock.
B)the earnings and dividends of the investee.
C)an excess of market price over cost.
D)neither the earnings nor the dividends of the investee.

Question 69

When the cost-adjusted-to-market method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is directly affected by

A)the dividend distributions of the investee.
B)the earnings and dividend distributions of the investee.
C)the earnings of the investee.
D)neither the earnings nor the dividends of the investee.

Question 70

Barkely Corporation has invested in the stock of two other corporations,Hayes Corporation and Motz Corporation.Barkely does not own a controlling interest or exercise significant influence over either corporation.Barkely's accountant is preparing financial statements and has compiled the following information: What should be the balance in the Allowance to Adjust Long-Term Investments to Market account,based on the above information?

A)$2,000 credit
B)$4,000 debit
C)$4,000 credit
D)$2,000 debit

Question 71

Camp Corporation purchased 8,500 shares of Tent Corporation common stock for $80 per share on January 1,2014.Tent reported net income of $220,000 for 2014 and paid dividends of $90,000 during 2014.As of December 31,2014,the market value of Tent Corporation common stock was $80 per share.Assuming the shares owned by Camp represent 30 percent of the total outstanding stock of Tent,Camp Corporation should report the long-term investment on December 31,2014,at a carrying value of

A)$641,000.
B)$680,000.
C)$719,000.
D)$810,000.

Question 72

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a

A)regular account in the stockholders' equity section of the balance sheet.
B)contra account to Long-Term Investments.
C)note to the financial statements.
D)current asset.

Question 73

The equity method generally should be used to account for an investment in stock when the level of ownership is

A)between 20 and 50 percent.
B)10 percent or more.
C)less than 20 percent.
D)between 10 and 40 percent.

Question 74

For available-for-sale equity securities,the Allowance to Adjust Long-Term Investments to Market account should be reported as a(n)

A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss)

Question 75

Under the cost-adjusted-to-market method of accounting for an investment,

A)Dividend Income is credited when dividends are received.
B)the investment account is credited when dividends are received.
C)the investment account is credited when the investee reports a net income.
D)Investment Income is credited when the invested reports a net income.

Question 76

The cost-adjusted-to-market method of accounting for investments is used when the investment is

A)controlling.
B)influential and noncontrolling.
C)noninfluential and controlling.
D)noninfluential and noncontrolling.

Question 77

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:

A)Allowance to Adjust Short-Term Investments to Market 9,000 Unrealized Gain on Short-Term Investments 9,000
B)Unrealized Loss on Short-Term Investments 9,000 Allowance to Adjust Short-Term Investments to Market 9,000
C)Allowance to Adjust Short-Term Investments to Market 9,000 Short-Term Investments 9,000
D)Realized Gain on Investments 9,000 Short-Term Investments 9,000

Question 78

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 79

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)Allowance to Adjust Short-Term Investments to Market 9,000 Unrealized Loss on Investments 9,000
B)Unrealized Loss on Short-Term Investments 9,000 Allowance to Adjust Short-Term Investments to Market 9,000
C)Allowance to Adjust Short-Term Investments to Market 9,000 Short-Term Investments 9,000
D)Realized Loss on Investments 9,000 Short-Term Investments 9,000

Question 80

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)

A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss).