Question 1

A decline in the fair value of the available-for-sale securities portfolio reduces assets and net income.

Accepted Answer

A decline in the fair value of available-for-sale securities reduces assets but does not directly affect net income; instead, it affects other comprehensive income.

Question 2

Investments in bonds intended to be sold before they reach maturity should be reported under the fair value method.

Accepted Answer

Under the fair value method, investments in bonds are reported at their current market value, which is appropriate for investments that are intended to be sold before reaching maturity.

Question 3

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its fair value reported in the prior period.

Accepted Answer

Unrealized holding gains and losses for trading securities are reported on the income statement as they reflect changes in fair value.

Question 4

The extent of influence and control over another company is a critical factor in determining the proper method of accounting for an investment in the common stock of another company.

Accepted Answer

The level of influence and control over another company is a significant factor in determining the appropriate accounting treatment for an investment in that company's common stock. This is because accounting standards have specific guidelines for how to account for investments based on the level of influence and control exerted over the investee company.

Question 5

Use of the equity method is required for investments between 20 and 50% of a company's voting common stock regardless of the investor's ability to influence the affiliate.

Accepted Answer

The equity method is used when the investor has significant influence over the investee, typically indicated by ownership of 20% to 50% of the voting stock, but the ability to exercise significant influence is a key determinant, not just the percentage ownership.

Question 6

The equity method is required to be used when an investor has the ability to exert significant influence over the affiliate.

Accepted Answer

The statement is true. According to the Generally Accepted Accounting Principles (GAAP), when an investor has the ability to exert significant influence over an affiliate, the equity method is required to be used. This method records the investor's share of the affiliate's net assets and results in the investor's investment being reported on the balance sheet at its equity (book) value.

Question 7

Ocean Corporation owns 30% of Woods Corp. for which it paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid stockholders a $100,000 dividend. Therefore, the Investment in Woods Corp. account will decrease by Ocean's $30,000 proportionate share of the Woods. Corp. dividend.

Accepted Answer

Since the equity method is used to account for the investment, Ocean Corporation will record its proportionate share of dividends paid by Woods Corp. Therefore, the Investment in Woods Corp. account will decrease by Ocean's $30,000 proportionate share of the Woods Corp. dividend.

Question 8

Passive investments other than held-to-maturity investments are reported on the balance sheet at fair value.

Accepted Answer

Passive investments other than held-to-maturity investments are reported at fair value on the balance sheet, as per accounting standards.

Question 9

Barnum Company owns an investment and uses the equity method of accounting. Under the equity method of accounting, Barnum would decrease the Investment in Affiliates account for the proportionate share of the affiliate's reported net loss.

Accepted Answer

Under the equity method of accounting, the investor's proportionate share of the affiliate's reported net loss is recognized and decreases the Investment in Affiliates account.

Question 10

Under the equity method, dividends received are recognized by increasing the Investment Revenue account.

Accepted Answer

Under the equity method, dividends received from the investee reduce the carrying amount of the investment on the investor's books, rather than being recognized as investment revenue.

Question 11

All investments other than held-to-maturity bond investments are reported on the balance sheet at their fair value as of the balance sheet date.

Accepted Answer

Not all investments are reported at fair value; for example, equity investments that do not result in significant influence over the investee are reported at fair value, but investments in subsidiaries (where there is control) are consolidated, and held-to-maturity debt securities are reported at amortized cost.

Question 12

An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its fair value reported in the prior period.

Accepted Answer

Unrealized holding gains for trading securities are reported in net income, not other comprehensive income.

Question 13

For all periods in which a security is held in the available-for-sale securities portfolio, the only income reported on the income statement is dividend revenue.

Accepted Answer

Available-for-sale securities are reported at fair value, and unrealized gains or losses are not included in the income statement but in other comprehensive income. Only realized gains, losses, and dividend revenue are reported in the income statement.

Question 14

An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its fair value reported in the prior period.

Accepted Answer

Unrealized holding gains for available-for-sale securities are reported in other comprehensive income, not on the income statement.

Question 15

An increase in the fair value of the trading securities portfolio increases both assets and net income.

Accepted Answer

An increase in the fair value of trading securities is recorded as a gain in net income and increases the value of the trading securities assets held by the company. This results in an increase in both assets and net income.

Question 16

A realized gain or loss is reported on the income statement when a trading security is sold.

Accepted Answer

When a trading security is sold, any realized gain or loss is recognized and reported on the income statement. This is in contrast to unrealized gains or losses, which are not recognized until the security is sold.

Question 17

Held-to-maturity bond investments must be reported on the balance sheet at fair value.

Accepted Answer

Held-to-maturity bond investments are reported on the balance sheet at amortized cost, not fair value.

Question 18

A realized gain or loss is reported on the income statement when an investment account is adjusted to reflect changes in fair value.

Accepted Answer

A realized gain or loss is reported on the income statement when an investment is sold or otherwise disposed of, not when it is adjusted for changes in fair value. Unrealized gains or losses from fair value adjustments are typically reported in other comprehensive income or directly in equity, depending on the accounting standards and the classification of the investment.

Question 19

The sale of a stock from the available-for-sale securities portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

Accepted Answer

This statement is true. When a stock is sold from the available-for-sale securities portfolio, any gain or loss is recognized on the income statement based on the difference between the stock's original cost and its selling price.

Question 20

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

Accepted Answer

According to accounting standards (ASC 320), a security can be classified as held-to-maturity only if "the entity has both the positive intent and ability to hold securities to maturity." Therefore, management must have the intent and ability to hold a bond investment until maturity for it to be classified as a held-to-maturity security.

Quiz 14: PPA: Reporting and Interpreting Investments in Other Corporations