Page 582 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

In which of the following cases is the investor company limited to use of the equity method in accounting for its
stock investments?
a. Short-term investments.

b. Long-term investments of less than 20 per cent.
c. Long-term investments of 20 per cent—50 per cent.
d. Long-term investments of more than 50 per cent.
Under the equity method, which of the following is true?
a. Dividends received reduce the investment account.
b. Dividends received increase the investment account.
c. The investor's share of net income decreases the investment account.

d. The investor's share of net loss increases the investment account.
When the fair market value rules are followed, which of the following is true when the market value of the stocks
in the Trading Securities account falls below their cost?
a. The Unrealized Losses on Trading Securities account is credited.
b. The Recovery of Market Value of Trading Securities account is credited.
c. The Allowance for Market Decline of Current Marketable Equity Securities is debited.
d. The Unrealized Loss on Trading Securities is debited.
Under the equity method, the investment account always reflects only the:
a. Dividends paid by the investee corporation.

b. Investor's interest in the net assets of the investee.
c. Investor's share of net income.
d. Historical cost of the investment.
The excess of cost over the book value of an investment that is due to expected above-average earnings is labeled
on the consolidated balance sheet as:
a. Goodwill.
b. Common stock.

c. Retained earnings.
d. Loss on investment.
Now turn to “Answers to self-test” at the end of the chapter to check your answers.
Questions

➢ For what reasons do corporations purchase the stock of other corporations?
➢ Explain how marketable securities should be classified in the balance sheet.
➢ Describe the valuation bases used for marketable equity securities.
➢ Under what circumstances is the equity method used to account for stock investments?

➢ Explain briefly the accounting for stock dividends and stock splits from the investor's point of view.
➢ Of what significance is par value to the investing corporation?
➢ What is the purpose of preparing consolidated financial statements?
➢ Under what circumstances must consolidated financial statements be prepared?

Accounting Principles: A Business Perspective 583 A Global Text