Appendix A Reporting and Interpreting Investments in Other
Corporations Answer Key
True / False Questions
1.
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.
2.
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.
3.
Investments in bonds intended to be sold before they reach maturity should be reported under
the fair value method.
4.
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.
5.
Held-to-maturity bond investments must be reported on the balance sheet at fair value.
6.
Passive investments other than held–to-maturity investments are reported on the balance
sheet at fair value.
7.
A realized gain or loss is reported on the income statement when an investment account is
adjusted to reflect changes in fair value.
8.
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.
9.
A decline in the fair value of the available-for-sale securities portfolio reduces assets and net
income.
10.
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.
11.
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.
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.
13.
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.
14.
A realized gain or loss is reported on the income statement when a trading security is sold.
15.
An increase in the fair value of the trading securities portfolio increases both assets and net
income.
16.
The equity method is required to be used when an investor has the ability to exert significant
influence over the affiliate.
17.
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.
18.
Under the equity method, dividends received are recognized by increasing the Investment
Revenue account.
19.
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.
20.
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.
21.
For an investment accounted for under the equity method, the Investment in Affiliates account
along with an investment income account would be increased for an amount equal to the
investor’s proportionate share of the affiliate’s reported net income.
22.
An investment accounted for under the equity method is always reported on the balance sheet
at fair value.
23.
When an investment accounted for under the equity method is sold, the gain or loss reported
on the income statement is the difference between the selling price and the original cost of
the investment.
24.
Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison’s total
assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4
million. Madison will report goodwill of $0.9 million.
25.
On the date that one company acquires 100% of the voting stock of another company, the
book value of the acquired assets and liabilities will be combined with book values of the
assets and liabilities of the acquiring company.
26.
Subsequent to a merger, the assets and liabilities of the acquired company will continue to be
accounted for within the acquired company’s books.
27.
Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or
acquisition.
28.
The assets of a subsidiary are depreciated and amortized over their remaining useful lives as
a part of the consolidation process.
29.
Any unrealized gains or losses on trading securities would have to be added back to or
subtracted from net income on the statement of cash flows under the indirect method of
determining cash flows from operating activities.
30.
From an economic standpoint of investment returns, the capital gain or loss includes
unrealized gains and losses as well as realized gains and losses.
31.
If a bond is bought at a discount, then interest revenue using the effective interest method
will be less than the cash interest received.
32.
If a bond is bought at a discount, the amortized book value of the bond investment will
increase as the bond approaches maturity.
Multiple Choice Questions
33.
Which of the following is the best description of investments in trading securities?
34.
Which of the following is the best description of investments in available–for-sale securities?
35.
Idaho Company purchased, as a long-term investment, 30% of the outstanding nonvoting
preferred stock of Potato Corporation. Which of the following classifications should be used
by Idaho Company in accounting for the investment?
36.
Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2016. The bonds pay
interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the
following statements is false?
37.
On January 1, 2016, Entertainment Company acquired 15% of the outstanding voting stock of
Rocker Company as a long-term investment in available-for-sale securities. During 2016,
Rocker Company reported net income of $1,500,000 and dividends were declared and paid in
the amount of $250,000. How much income will be reported during 2016 from the Rocker
investment?
38.
Which of the following statements is correct?