Investments

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: No Effect, Equity method: Decrease

Equity security holdings between 20 and 50 percent indicated that the investor has a controlling interest over the investee.

False

The Fair Value Adjustment account has a normal credit balance.

False

If the parent company owns 90% of the subsidiary company's outstanding common stock

Equity Method

A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.

True

All cash dividends received by an investor from the investee decrease the investment's carrying value under the equity method

True

Changes in the fair value of a company's available-for-sale debt instruments are included as part of earnings in any given period.

True

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

True

In accounting for investments in debt securities that are classified as trading securities

any discount or premium is not amortized

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

arbitrageurs

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities

The accounting for fair value hedges records the derivative at its

fair value

All of the following statements regarding accounting for derivatives are correct except that

gains and losses resulting from speculation should be deferred

A correct valuation is

held-to-maturity at amortized cost.

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

its fair value at the date of the transfer

Securities which could be classified as held-to-maturity are

municipal bonds.

"Gains trading" or "cherry picking" involves

selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition.

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

Fair Value Method: Income; Equity Method: A reduction of the investment

A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

False

Companies may not use the fair value option for investments that follow the equity method of accounting

False

The accounting profession has concluded that an investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee.

False

Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.

False

Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

False

Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015? I. $3,000,000 II. $3,040,000 III. $3,120,000

II or III only

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options.

III only

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

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

Which of the following is not correct in regard to trading securities?

They are held with the intention of selling them in a short period of time; unrealized holding gains and losses are reported as part of net income; any discount or premium is not amortized

Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.

True

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

True

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, 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?

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 Held-to-Maturity Securities at $315,000

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a reduction of the carrying value of the investment

A requirement for a security to be classified as held-to-maturity is

ability to hold the security to maturity; positive intent; the security must be a debt security

Held-to-maturity securities are reported at

acquisition cost plus amortization of a discount.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale securities where a company has holdings of less than 20%.

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

by using the fair value method.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to Available-for-Sale Securities

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements

Impairments are

evaluated at each reporting date for every investment.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities.

Gains or losses on cash flow hedges are

recorded in equity, as part of other comprehensive income

Unrealized holding gains or losses which are recognized in income are from securities classified as

trading

The fair value option allows a company to

value its own liabilities at fair value