Chapter 14 – Investments
TRUE/FALSE
1. Gains and losses on the sale of investments appear as adjustments within the financing activities
section of the statement of cash flows.
2. Another term for short-term investments is marketable securities.
3. Investments with a maturity of less than ninety days are generally classified as cash equivalents.
4. As long as an investment can be sold within a short period of time, it must be classified as a current
asset.
5. Available-for-sale securities may only be classified as short-term investments.
6. A noninfluential and noncontrolling investment is defined as ownership of less than 10 percent of the
stock of another company.
7. An influential but noncontrolling investment is defined as ownership of more than 50 percent of the
stock of another company.
8. A controlling investment is defined as ownership of 100 percent of the stock of another company.
9. Detailed information about a company’s investments is never disclosed in the notes to the financial
statements.
10. Insider trading is considered unethical, but it is not illegal in the United States.
11. An individual can be prosecuted by the SEC for insider trading whether or not that individual is
employed by the company involved.
12. Investments are valued on the balance sheet at the original purchase price, even if the price has
changed since the date of purchase.
13. If a long-term investment suffers a permanent decline in value, a loss only has to be recorded if the
investment is sold.
14. Held-to-maturity securities are always debt securities, and never equity securities.
15. Unrealized gains and losses on trading securities appear on the balance sheet.
16. Trading securities are valued on the balance sheet at market value.
17. Unrealized gains and losses on available-for-sale securities are reported on the balance sheet.
18. The account Allowance to Adjust Short-Term Investments to Market appears as a contra account on
the income statement.
19. Unless there is evidence to the contrary, an investor owning 35 percent of the stock of an investee is
assumed to have significant influence.
20. An ownership interest of greater than 50 percent is required for an investor to have accounting control
over an investee.
21. The equity method usually is the most appropriate method for accounting for investments of more than
a 20 percent interest of another company’s stock.
22. Under the equity method of accounting for a stock investment, a proportionate share of the investee’s
income is recorded on the investor’s records.
23. When the cost-adjusted-to-market method is used to account for an investment in stock, dividends
received are accounted for as an increase to dividend income.
24. For available-for-sale securities, the Unrealized Loss on Long-Term Investments account appears on
the income statement.
25. Using the cost-adjusted-to-market method of accounting for a long-term investment in stock, the
journal entry to record the receipt of dividends involves a debit to Dividend Income.
26. The Allowance to Adjust Long-Term Investments to Market account is placed in the asset section of
the balance sheet.
27. When the equity method is used to account for an investment in stock, dividends received by the
investor decrease the investment account.
28. It is possible that an investor with less than a 50 percent ownership interest may qualify for accounting
recognition of control and appropriately prepare consolidated financial statements.
29. When the cost of available-for-sale securities exceeds market value, the Allowance to Adjust
Long-Term Investments to Market decreases Long-Term Investments on the balance sheet.
30. It is not possible for one company to influence the operating policies of another company unless it
owns more than a 50 percent interest in that company.
31. At any given balance sheet date, the balance of the Realized Gain on Long-Term Investments account
is equal in amount to the balance of the Allowance to Adjust Long-Term Investments to Market
account.
32. The cost-adjusted-to-market method of accounting for investments allows for a departure from cost
when the market value of the investment falls below or rises above cost.
33. When the market value of available-for-sale securities exceeds cost, an unrealized loss appears in
stockholders’ equity as an addition.
34. Dividends received on investments are accounted for in the same way under the
cost-adjusted-to-market and the equity methods.
35. When the equity method is used to account for an investment in stock, the investor will report its share
of the investee’s annual earnings as income in proportion to how much the investee distributes in the
form of dividends.
36. With few exceptions, all subsidiaries in which the parent company owns a controlling interest (more
than 50 percent) must be consolidated with the parent company for financial reporting purposes.
37. In preparing consolidated financial statements, intercompany receivables and payables are never
eliminated because they represent amounts due to or receivable from parties outside the consolidated
entity.
38. When a parent company and a 100 percent owned subsidiary company are consolidated using the
purchase method, only the stockholders’ equity of the parent company remains.
39. Elimination entries appear only in the worksheets used to prepare the consolidated financial statements
and not in the consolidated journal or the consolidated ledger.
40. Goodwill is the amount by which specific assets of a subsidiary are undervalued.
41. A minority interest represents the holdings of stockholders, other than the parent company, who own
more than 50 percent of the voting stock of a subsidiary.
42. Minority interest may be found in the asset section of a consolidated balance sheet.
43. A Goodwill from Consolidation account may rise when a parent acquires a subsidiary company’s
common stock at a price that is less than the stock’s book value.
44. When a parent company pays less than book value for an investment in a subsidiary, the excess of
book value over the cost of the investment should be used to lower the carrying value of the
subsidiary’s long-term assets (other than long-term marketable securities) in preparing the consolidated
financial statements.
45. Only the intercompany transactions resulting in revenues require elimination entries in the preparation
of a consolidated income statement.
46. Only sales to outsiders and purchases from outsiders are reflected in a consolidated income statement
because all intercompany transactions are eliminated in preparing the consolidated statement.
47. The financial information of a foreign subsidiary should be included in the consolidated statements of
the parent.
48. The reporting currency is defined as the currency in which the consolidated financial statements are
presented.
49. The financial statements of a foreign subsidiary are never restated in terms of the reporting currency
before consolidation takes place.
50. If a parent company has four subsidiaries, there are five separate legal entities represented in this
group.
51. The elimination of the investment in the subsidiary company is made against the investment account,
common stock, and retained earnings of the subsidiary company.
52. Eliminations are important because they avoid double counting when consolidated financial statements
are prepared.
53. If a parent company pays more than book value for a 100 percent owned subsidiary, goodwill could
arise on the consolidated financial statements.
54. A company may pay more than book value for a subsidiary because the assets of the subsidiary are
undervalued on its balance sheet.
55. An eliminating entry is required both when a subsidiary owes a parent company and when the parent
owes the subsidiary.
56. Although the preparation of a consolidated balance sheet requires elimination entries, a consolidated
income statement may always be prepared without any elimination entries.
57. U.S. Treasury bills are considered debt securities.
58. Held-to-maturity securities are valued on the balance sheet at fair value.
59. Held-to-maturity securities that will mature within one year are classified on the balance sheet as
long-term investments and are valued at cost adjusted for the effects of interest.
60. Most long-term bond investments are classified as held-to-maturity securities.
61. Long-term bond investments that are classified as available-for-sale must be valued on the balance
sheet at cost.
62. All the interest income on U.S. Treasury bills is recorded at maturity.
63. When a company holds U.S. Treasury bills, it would debit Interest Income and credit Short-Term
Investments at the end of the accounting period (assuming it is prior to the T-bills’ maturity).
64. When bonds are purchased between interest dates, the buyer must pay (in addition to the bonds’ cost)
the amount of interest that has accrued since the last interest payment date.
1. The cash amounts of purchases and sales of investments appear in which section of the statement of
cash flows?
a.
Operating activities
b.
Investing activities
c.
Financing activities
d.
Noncash investing and financing activities
2. Which of the following is not a category of investments?
a.
Held-to-maturity securities
b.
Trading securities
c.
Collateral securities
d.
Available-for-sale securities
3. Which of the following categories of investments are debt, but not equity, securities?
a.
Trading securities
b.
Held-to-maturity securities
c.
Available-for-sale securities
d.
Both trading and available-for-sale securities
4. Which of the following categories of investments can be both debt and equity securities?
a.
Available-for-sale securities
b.
Trading securities
c.
Held-to-maturity securities
d.
Both available-for-sale and trading securities
5. Which is the only type of investment that is always classified as short-term?
a.
Trading securities
b.
Held-to-maturity securities
c.
Available-for-sale securities
d.
Equity securities
6. Which type of investment, if any, could be classified as short- or long-term, as well as debt or equity?
a.
Available-for-sale securities
b.
Trading securities
c.
Held-to-maturity securities
d.
None of these are correct.
7. Significant influence is defined as owning what percent of the stock of another company?
a.
15 to 60 percent
b.
More than 50 percent
c.
20 to 50 percent
d.
75 percent
8. A controlling investment is defined as owning what percent of the stock of another company?
a.
More than 50 percent
b.
100 percent
c.
More than 75 percent
d.
75 percent
9. All of the following are indications of significant influence over another company except
a.
exchange of managerial personnel.
b.
representation on the board of directors.
c.
technological dependency between the two companies.
d.
ownership of all of the other company’s debt securities.
10. In the United States, insider trading is considered
a.
unethical, but not illegal.
b.
neither unethical nor illegal.
c.
both unethical and illegal.
d.
illegal, but not unethical.
11. All of the following are conditions that could affect the valuation of investments on the balance sheet
except
a.
changes in the general purchasing power of the dollar.
b.
changes in the operations of investee companies.
c.
changes in the market value or fair value of the investments.
d.
changes caused by the passage of time.
12. Short-term available-for-sale securities are valued on the balance sheet at
a.
market value.
b.
cost, adjusted for the effects of interest.
c.
cost.
d.
lower of cost or market.
13. Trading securities are valued on the balance sheet at
a.
lower of cost or market.
b.
cost.
c.
market value.
d.
cost, adjusted for the effects of interest.
14. Which of the following statements is true about investments categorized as trading securities?
a.
They are valued on the balance sheet at cost.
b.
They can consist of debt, but not equity, securities.
c.
They are purchased to be held to maturity.
d.
Changes in market value are reflected in net income.
15. The year-end adjusting entry to reflect an increase in the value of trading securities includes a
a.
credit to Unrealized Gain on Short-Term Investments.
b.
credit to Short-Term Investments.
c.
credit to Allowance to Adjust Short-Term Investments to Market.
d.
credit to Realized Gain on Investments.
16. Stock categorized as trading securities is purchased for $144,000. At year end, when the market value
of the stock is $126,000, the adjusting entry that would be recorded is:
a.
Allowance to Adjust Short-Term Investments to Market 18,000
Unrealized Loss on Investments 18,000
b.
Unrealized Loss on Short-Term Investments 18,000
Allowance to Adjust Short-Term Investments to Market 18,000
c.
Allowance to Adjust Short-Term Investments to Market 18,000
Short-Term Investments 18,000
d.
Realized Loss on Investments 18,000
Short-Term Investments 18,000
17. The ability of an investing company to affect the operating and financial policies of another company,
even though the investor holds less than 50 percent of the voting stock, is known as
a.
significant influence.
b.
control.
c.
minority interest.
d.
noninfluential control.
18. The cost-adjusted-to-market method of accounting for investments is used when the investment is
a.
controlling.
b.
influential and noncontrolling.
c.
noninfluential and controlling.
d.
noninfluential and noncontrolling.
19. For available-for-sale equity securities, the Unrealized Loss on Long-Term Investments account
should be reported as a(n)
a.
realized loss item on the income statement.
b.
prior period adjustment.
c.
separate item in the stockholders’ equity section of the balance sheet.
d.
extraordinary item on the income statement.
20. The equity method generally should be used to account for an investment in stock when the level of
ownership is
a.
between 20 and 50 percent.
b.
10 percent or more.
c.
less than 20 percent.
d.
between 10 and 40 percent.
21. When the cost-adjusted-to-market method is used to account for a long-term investment in stock of
another company, the carrying value of the investment is directly affected by
a.
the dividend distributions of the investee.
b.
the earnings and dividend distributions of the investee.
c.
the earnings of the investee.
d.
neither the earnings nor the dividends of the investee.
22. Under the cost-adjusted-to-market method of accounting for an investment,
a.
Dividend Income is credited when dividends are received.
b.
the investment account is credited when dividends are received.
c.
the investment account is credited when the investee reports a net income.
d.
Investment Income is credited when the invested reports a net income.
23. A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in
the financial statements as a
a.
regular account in the stockholders’ equity section of the balance sheet.
b.
contra account to Long-Term Investments.
c.
note to the financial statements.
d.
current asset.
24. When the equity method is used to account for a long-term investment in stock of another company,
the carrying value of the investment is affected by
a.
declines in the market value of the stock.
b.
the earnings and dividends of the investee.
c.
an excess of market price over cost.
d.
neither the earnings nor the dividends of the investee.
25. All of the following are ways one corporation could affect the operating and financial policies of
another corporation except
a.
analysis of data regarding profitability.
b.
material transactions between the companies.
c.
representation on the board of directors.
d.
exchange of managerial personnel.
26. Clay Corporation owns a 40 percent interest in the stock of Gilmer Corporation. During 2013, Gilmer
pays $25,000 in dividends to Clay and reports $107,000 in net income. Clay Corporation’s investment
in Gilmer will increase Clay’s income before income taxes by
a.
$17,800.
b.
$42,800.
c.
$52,800.
d.
$32,800.
27. Rapp Corporation has invested in the stock of two other corporations, Hart Corporation and Hilker
Corporation. Rapp does not own a controlling interest or exercise significant influence over either
corporation. Rapp’s accountant is preparing financial statements and has compiled the following
information:
Stock name
No. of shares
Cost
Market
Hart
1,000
$23,000
$24,000
Hilker
500
$27,500
$25,500
What should be the balance in the Allowance to Adjust Long-Term Investments to Market account,
based on the above information?
a.
$1,000 credit
b.
$2,000 debit
c.
$2,000 credit
d.
$1,000 debit
28. Wirt Corporation owns 25 percent of the voting stock of Wood Corporation and accounts for the
investment using the equity method. Wood reports a net loss of $20,000. Wirt Corporation’s entry to
record its share of loss is:
a.
Cash 5,000
Investment in Wood Corporation 5,000
b.
Loss on Investments 20,000
Investment in Wood Corporation 20,000
c.
Loss, Wood Corporation Investment 5,000
Investment in Wood Corporation 5,000
d.
Cash 5,000
Loss, Wood Corporation Investment 5,000
29. Mucura Enterprises has a credit balance of $40,000 in its Allowance to Adjust Long-Term Investments
to Market account before adjustment. Its investment portfolio has a total cost of $250,000 and a market
value of $225,000. The year-end adjustment entry that would be recorded in the books of Mucura
Enterprises is:
a.
Long-Term Investments 15,000
Allowance to Adjust Long-Term Investments to Market 15,000
b.
Allowance to Adjust Long-Term Investments to Market 15,000
Unrealized Loss on Long-Term Investments 15,000
c.
Allowance to Adjust Long-Term Investments to Market 25,000
Long-Term Investments 25,000
d.
Unrealized Loss on Long-Term Investments 25,000
Long-Term Investments 25,000
30. Wetzel Company has a credit balance of $88,000 in its Allowance to Adjust Long-Term Investments
to Market account at the end of the year, before adjustment. Its investment portfolio has a total cost of
$600,000 and a market value of $528,000 at December 31, a balance sheet date. The year-end
adjustment entry that would be recorded in the books of Wetzel Company is:
a.
Long-Term Investments 16,000
Realized Gain on Long-Term Investments 16,000
b.
Allowance to Adjust Long-Term Investments to Market 16,000
Unrealized Loss on Long-Term Investments 16,000
c.
Unrealized Loss on Long-Term Investments 16,000
Allowance to Adjust Long-Term Investments to Market 16,000
d.
Long-Term Investments 16,000
Allowance to Adjust Long-Term Investments to Market 16,000
31. Flubber Corporation owns 40 percent of the voting stock of Rhim Corporation and accounts for the
investment using the equity method; Rhim Corporation reports a net loss of $30,000. Flubber
Corporation’s entry to record the share of loss is:
a.
Loss, Rhim Corporation Investment 12,000
Investment in Rhim Corporation 12,000
b.
Loss, Rhim Corporation Investment 12,000
Loss, Rhim Corporation Investment 12,000
c.
Investment in Rhim Corporation 30,000
Cash 30,000
d.
Investment in Rhim Corporation 12,000
Cash 12,000
32. Use this information to answer the following question. These facts concern the long-term stock
investments of Webster Corporation:
Paid cash for the following long-term investments: 5,000 shares Wayne
Corporation common stock (representing 5 percent of outstanding stock) at
$40 per share; 3,000 shares Upshur Corporation common stock (representing 3
percent of outstanding stock) at $24 per share.
Quoted market prices at year end: Wayne common stock, $35; Upshur
common stock, $27.
A change in policy required the sale of 1,000 shares of Wayne Corporation
common stock at $38.
Received a cash dividend from Upshur Corporation equal to $.30 per share.
Quoted market prices at year end: Wayne common stock, $39; Upshur
common stock, $22.
The entry to record the purchase of the Wayne Corporation common stock is:
a.
Long-Term Investments 272,000
Cash 272,000
b.
Long-Term Investments 120,000
Cash 120,000
c.
Long-Term Investments 72,000
Cash 72,000
d.
Long-Term Investments 200,000
Cash 200,000
33. Use this information to answer the following question. These facts concern the long-term stock
investments of Webster Corporation:
Paid cash for the following long-term investments: 5,000 shares Wayne
Corporation common stock (representing 5 percent of outstanding stock) at
$40 per share; 3,000 shares Upshur Corporation common stock (representing 3
percent of outstanding stock) at $24 per share.
Quoted market prices at year end: Wayne common stock, $35; Upshur
common stock, $27.
A change in policy required the sale of 1,000 shares of Wayne Corporation
common stock at $38.
Received a cash dividend from Upshur Corporation equal to $.30 per share.
Quoted market prices at year end: Wayne common stock, $39; Upshur
common stock, $22.
The entry to set up the Allowance to Adjust Long-Term Investments to Market in 2012 is:
a.
Long-Term Investments 16,000
Realized Loss 16,000
b.
Realized Loss 16,000
Long-Term Investments 16,000
c.
Allowance to Adjust Long-Term Investments to Market 16,000
Long-Term Investments 16,000
d.
Unrealized Loss on Long-Term Investments 16,000
Allowance to Adjust Long-Term Investments to Market 16,000
34. Use this information to answer the following question. These facts concern the long-term stock
investments of Webster Corporation:
Paid cash for the following long-term investments: 5,000 shares Wayne
Corporation common stock (representing 5 percent of outstanding stock) at
$40 per share; 3,000 shares Upshur Corporation common stock (representing 3
percent of outstanding stock) at $24 per share.
Quoted market prices at year end: Wayne common stock, $35; Upshur
common stock, $27.
A change in policy required the sale of 1,000 shares of Wayne Corporation
common stock at $38.
Received a cash dividend from Upshur Corporation equal to $.30 per share.
Quoted market prices at year end: Wayne common stock, $39; Upshur
common stock, $22.
The entry to record the sale of 1,000 shares of Wayne Corporation common stock is:
a.
Long-Term Investments 38,000
Cash 38,000
b.
Long-Term Investments 38,000
Allowance to Adjust Long- Term Investments to Market 38,000
c.
Allowance to Adjust Long -Term Investments to Market 38,000
Cash 38,000
d.
Cash 38,000
Loss on Sale of Investments 2,000
Long-Term Investments 40,000
35. Use this information to answer the following question. These facts concern the long-term stock
investments of Webster Corporation:
Paid cash for the following long-term investments: 5,000 shares Wayne
Corporation common stock (representing 5 percent of outstanding stock) at
$40 per share; 3,000 shares Upshur Corporation common stock (representing 3
percent of outstanding stock) at $24 per share.
Quoted market prices at year end: Wayne common stock, $35; Upshur
common stock, $27.
A change in policy required the sale of 1,000 shares of Wayne Corporation
common stock at $38.
Received a cash dividend from Upshur Corporation equal to $.30 per share.
Quoted market prices at year end: Wayne common stock, $39; Upshur
common stock, $22.
The entry to record the receipt of the cash dividend from Upshur Corporation is:
a.
Investment in Upshur Corporation 900
Cash 900
b.
Cash 900
Dividend Income 900