Accounting II Chapter 17

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Fair Value Method Equity Method a) Income Income b) Income A reduction of the investment c) A reduction of the investment Income d) A reduction of the invest A reduction of the invest

Fair Value Method Equity method b) Income A reduction of the invest

Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for a) 20 periods and 4% from the present value of 1 table. b) 10 periods and 10% from the present value of 1 table. c) 10 periods and 8% from the present value of 1 table. d) 20 periods and 5% from the present value of 1 table.

a) 20 periods and 4% from the present value of 1 table.

Debt securities that are accounted for at amortized cost, not fair value, are a) held-to-maturity debt securities. b) available-for-sale debt securities. c) never-sell debt securities. d) trading debt securities.

a) held-to-maturity debt securities.

Transfers between categories a) result in companies omitting recognition of fair value in the year of the transfer. b) are accounted for at fair value for all transfers. c) are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. d) will always result in an impact on net income.

b) are accounted for at fair value for all transfers.

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 a) decreae no effect b) no effect decrese c) increase decrease d) no effect no effect

b) no effect decrese

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

c) 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.

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) a debit to Debt Investments at $300,000. b) a credit to Premium on Debt Investments of $15,000. c) a debit to Debt Investments at $315,000. d) none of these choices are correct.

c) a debit to Debt Investments at $315,000.

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

c) trading

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 a) never-sell debt securities. b) held-to-maturity debt securities. c) trading debt securities. d) available-for-sale debt securities.

d) available-for-sale debt securities.

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 a) the lower of its original cost or its fair value at the date of the transfer. b) the higher of its original cost or its fair value at the date of the transfer. c) its original cost. d) its fair value at the date of the transfer.

d) its fair value at the date of the transfer.