ch 17

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? The investor should always use the equity method to account for its investment. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. The investor should always use the fair value method to account for its investment. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

Use of the effective-interest method in amortizing bond premiums and discounts results in a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. a varying amount being recorded as interest income from period to period. a variable rate of return on the book value of the investment. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

a varying amount being recorded as interest income from period to period.

When investments in debt securities are sold between interest payment dates, preferably the accrued interest is credited to Interest Revenue. accrued interest is credited to Interest Expense. accrued interest is debited to Interest Receivable. securities account should include accrued interest.

accrued interest is credited to Interest Revenue.

Held-to-maturity securities are reported at acquisition cost plus interest. fair value. acquisition cost plus amortization of a discount. acquisition cost.

acquisition cost plus amortization of a discount.

A requirement for a security to be classified as held-to-maturity is positive intent. the security must be a debt security. all of these are required. ability to hold the security to maturity.

all of these are required.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are available-for-sale debt securities. never-sell debt securities. held-to-maturity debt securities. trading debt securities.

available-for-sale debt securities.

Investments in debt securities are generally recorded at cost including brokerage and other fees. maturity value with a separate discount or premium account. cost including accrued interest. maturity value.

cost including brokerage and other fees.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the investor sells the investment. earnings are reported by the investee in its financial statements. investee pays a dividend. investee declares a dividend.

earnings are reported by the investee in its financial statements.

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the par value method must be used and therefore no allocation is necessary. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. effective-interest method of allocation must be used. straight-line method of allocation must be used.

effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the divesture method. fair value method. equity method. cost method.

equity method.

A correct valuation for debt securities held-to-maturity at amortized cost. held-to-maturity at fair value. available-for-sale at amortized cost. none of these answers are correct

held-to-maturity at amortized cost.

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be the lower of its original cost or its fair value at the date of the transfer. its original cost. the higher of its original cost or its fair value at the date of the transfer. its fair value at the date of the transfer

its fair value at the date of the transfer

When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be the higher of its original cost or its fair value at the date of the transfer. its fair value at the date of the transfer. the lower of its original cost or its fair value at the date of the transfer. its original cost.

its fair value at the date of the transfer.

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

Securities which could be classified as held-to-maturity are redeemable preferred stock. treasury stock. warrants. municipal bonds.

municipal bonds.

"Gains trading" involves all of the above are considered methods of "gains trading" or "cherry picking." reporting investment securities at fair value but liabilities at amortized cost. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses. selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers).

selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers).

Unrealized holding gains or losses which are recognized in income are from debt securities classified as held-to-maturity. available-for-sale. trading. none of these answers are correct.

trading.

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method

Income A reduction of the investment

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? fair value method equity method

Fair Value Method no effect Equity Method decrese

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2018, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? Overstate, overstate, overstate Understate, overstate, overstate Overstate, understate, understate Understate, understate, understate

Understate, understate, understate

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a debit to Debt Investments at $300,000. a credit to Premium on Debt Investments of $15,000. a debit to Debt Investments at $315,000. none of these choices are correct.

a debit to Debt Investments at $315,000.