ACC 109 EXAM 4

Which of the following would not be considered a motive for making a stock investment inanother corporation?

An increase in the amount of interest revenue from the stock investment

Which of the following is not a true statement regarding short-term debt investments?

Debt investments are recorded at the price paid less brokerage fees

Which one of the following would not be classified as a short-term investment?

Equity method investments

An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

False

Consolidated financial statements should be prepared only when a subsidiary company has acontrolling interest in the parent company.

False

Corporations purchase investments in debt or stock securities generally for one of tworeasons.

False

Which of the following would not be classified as a short-term investment?a.

Idle cash in a bank checking account

Short-term investments

Investments that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.

All of the following statements about short-term investments are true except:

Short-term investments are listed below accounts receivable in the current asset section of the balance sheet.

A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

True

For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

True

The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

True

The cost of debt investments includes each of the following except

accrued interest.

The balance in the Unrealized Gain or Loss—Equity account will

appear in the stockholders' equity section.

Reporting investments at fair value is

applicable to both debt and stock securities

If the equity method is being used, cash dividends received

are credited to the Stock Investments account.

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

between 20-50%; significant

f the cost method is used to account for a long-term investment in common stock, dividends received should be

credited to the Dividend Revenue account.

Available-for-sale securities are classified as

either short-term or long-term investments.

Corporations invest excess cash for short periods of time in each of the following except

equity securities

Short-term stock investments should be valued on the balance sheet at

fair value

An investment is readily marketable if it is management's intent to sell the investment.

false

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

false

In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

false

In accounting for stock investments of less than 20%, the equity method is used

false

The Fair Value Adjustment account can only have a credit balance or a zero balance.

false

Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.

false

When debt investments, are sold, the gain or loss is the difference between the net proceedsfrom the sale and the fair value of the bonds.

false

f the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

false

A company may purchase a noncontrolling interest in another firm in a related industry

for strategic reasons

If a company acquires a 40% common stock interest in another company, ....

he equity method is usually applicable.

Corporations invest in other companies for all of the following reasons except to

increase trading of the other companies' stock.

Under the equity method, the Stock Investments account is credited when the

investee reports a net loss.

When a company holds stock of several different corporations, the group of securities isidentified as a(n)

investment portfolio.

If a common stock investment is sold at a gain, the gain

is reported in the Other revenues and gains section of the income statement.

If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

it is presumed that the investor has relatively little influence on the investee.

A typical investment to house excess cash until needed is

low-risk, highly liquid securities.

Consolidated financial statements are prepared when a company owns _________ of thecommon stock of another company.

more than 50%

If the cost method is used to account for a long-term investment in common stock, ...

net income of the investee is not considered earned by the investor until dividends are declared by the investee.

A company that owns more than 50% of the common stock of another company is known as the

parent company.

Fair value adjustment account

relates to the entire portfolio of securities held by the company

An unrealized loss account on available-for-sale securities is

reported as a separate component of stockholders' equity.

Under the equity method, the investor records dividends received by crediting

stock investments

The company whose stock is owned by the parent company is usually called the

subsidiary company.

under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company,

the Stock Investments account is decreased.

Revenue is recognized when cash dividends are received under

the cost method

If 10% of the common stock of an investee company is purchased as a long-term investment,the appropriate method of accounting for the investment is

the cost method.

At the time of acquisition of a debt investment

the historical cost principle applies

In recognizing a decline in the fair value of short-term stock investments, an unrealized loss account is debited because

the securities have not been sold.

Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or stock securities?

they have excess cash

Changes from cost are reported as part of net income for

trading securities

securities bought and held primarily for sale in the near term to generate income on short-term price differences are

trading securities

The balance sheet presentation of an unrealized loss on an available-for-sale security is similar to the statement presentation of

treasury stock.

A reason some companies purchase investments is because they generate a significantportion of their earnings from investment income.

true

Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

true

Debt investments are investments in government and corporation bonds.

true

If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

true

In accordance with the historical cost principle, brokerage fees should be added to the costof an investment.

true

Stocks traded on the New York Stock Exchange are considered readily marketable.

true

The Stock Investments account is debited at acquisition under both the equity method andcost method of accounting for investments in common stock.

true

The accounting for short-term debt investments and for long-term debt investments is similar.

true

To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

true

Under the equity method, the investment in common stock is initially recorded at cost, andthe Stock Investments account is adjusted annually.

true

if the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognizethe loss

will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.

Short-term investments are securities that are readily marketable and intended to be converted into cash within the next

year or operating cycle, whichever is shorter.