34. Investments are reported at fair value when a company has a significant influence over
another company in which it invests.
35. Under the equity method, the investor includes in net income its portion of the investee’s
net income.
36. When the investor has significant influence, the receipt of cash dividends is recorded as
dividend revenue.
37. Consolidated financial statements combine the separate financial statements of the
purchasing company and the acquired company into a single set of financial statements.
38. Bond investments are long-term assets that earn interest revenue, while bonds payable are
long-term liabilities that incur interest expense.
39. The cash received from interest equals the face value of the investment in bonds times the
stated interest rate.
40. Interest revenue is calculated as the carrying value of the investment in bonds times the
stated interest rate.
41. Because the carrying value of bonds purchased at a premium increases over time, interest
revenue will also increase each semi-annual interest period.
42. Because the carrying value of bonds purchased at a discount increases over time, interest
revenue will also increase each semi-annual interest period.
43. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Trading securities
2. Held-to-maturity
securities
3. Equity method
4. Available-for-sale
securities
5. Consolidation method
A)Used when an investor has controlling
influence.
5
B)This category is not used for equity
investments.
2
influence and does not expect to sell in the near
future.
4
D)Used when an investor has significant, but not
controlling influence.
3
1
44. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Available-for-sale
securities
2. Consolidation method
3. Held-to-maturity
securities
4. Equity method
5. Trading securities
A)This category is used only for debt securities.
B) An investor owns 40% of the common voting
shares in the company and can exercise significant
influence.
C)Common stock not held for immediate resale
and the investor owns 2% of the outstanding shares.
D)An investor owns over 50% of the common
voting shares in the company.
E)Common stock held for immediate resale.
45. On September 1, Investors, Inc. purchases 1,000 shares (insignificant influence) of $1 par
value common stock of Hamilton International at $15 per share. On October 15, the
investment is sold for $18 per share. Record the purchase and sale of the investment in
Hamilton International.
46. California Designs is diversifying its investment portfolio by making a small investment
(less than 5%) in the common stock of Oregon Outfitters. California Designs engages in the
following transactions relating to its investment:
1. Record each of these transactions, including the December 31 adjustment to fair value.
2. Calculate the balance of the Investments account on December 31.
47. Athletic Accessories has the following transactions related to investments in common
stock.
1. Record each of these transactions, including an entry on December 31 to adjust the
investment to fair value.
2. Calculate the balance of the investment account on December 31.
48. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for
$20,000 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is
7%. Interest is received semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.
49. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for
$18,641 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is
8%. Interest is received semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.
50. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for
$21,488 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is
6%. Interest is received semi-annually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.
51. How can an investor benefit from an equity investment that does not pay dividends?
52. Investments in equity securities for which the investor has insignificant influence over the
investee are classified for reporting purposes under the fair value method in one of two
categories. What are these two categories? How do we report unrealized holding gains and
losses under each of these two categories?
53. Under what circumstances do we use the equity method to account for an investment in
stock? Explain how we record dividends received from an investment in a company
accounted for using the equity method.
54. Discuss the meaning of consolidated financial statements. When is it appropriate to
consolidate financial statements of two companies?
55. Investments in debt securities are classified for reporting purposes in one of three
categories. List these three categories and explain which investments are included in each
category. Also briefly describe how the reporting differs for each category.
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