Page 591 - Accounting Principles (A Business Perspective)

14. Stock investments

False. Under the cost method of accounting for stock investments, the Dividend Revenue account, rather than
the investment account, is adjusted.
True. For long-term investments of less than 20 per cent, the cost method should be used.

True. Revenue is not recognized when there is a stock split. The new number of shares is recorded, and the cost
per share is reduced.
True. Trading securities should be considered separately from available-for-sale securities in applying the fair
market value method.
True. Eliminating entries are not made on the accounting records of the parent and subsidiary. Only the work
sheet is affected by elimination entries made during consolidation.
Multiple-choice

c. The Accounting Principles Board has said that investors must use the equity method when accounting for
long-term investments of 20 per cent to 50 per cent.
a. Under the equity method, dividends received reduce the investment account; the other choices are not true.
d. If the market value of securities falls below their cost, an unrealized loss account is debited.
b. Under the equity method, the investment account always reflects the investor's interest in the net assets of the
investee.
a. If cost is greater than the book value of an investment because of expected above-average earnings, the excess
cost should be labeled goodwill.

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