Study guide 2
(Due on 2/11)
1. T F Equity security holdings between 20 and 50 percent indicates that the investor has
a controlling interest over the investee.
2. Unrealized holding gains or losses which are recognized in income are from securities
d. none of these.
3. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
4. Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a
separate component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
5. Investments in debt securities should be recorded on the date of acquisition at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
6. Santo Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of
the investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
7. When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.b. The investor should use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise "significant influence" over
c. The investor must use the fair value method unless it can clearly demonstrate
the ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its
8. Koehn Corporation accounts for its investment in the common stock of Sells Company
under the equity method. Koehn Corporation should ordinarily record a cash
dividend received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
9. Under the equity method of accounting for investments, an investor recognizes its
share of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
10. When an investment in a held-to-maturity security is transferred to an available-forsale security, the carrying value assigned to the available-for-sale security should
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.