Q: Which formula correctly calculates the unrealized gain or loss for trading securities?

$$\text{Unrealized Gain/Loss} = (\text{Fair Value per Share} - \text{Cost per Share}) \times \text{Number of Shares}$$

Q: How is interest revenue calculated for a bond investment purchased at a discount?

$$\text{Interest Revenue} = \text{Cash Interest Received} + \text{Amortization of Discount}$$

Question 1

Why might a company like Apple invest in the equity or debt securities of other companies?

Accepted Answer

To use excess cash for short-term income and for long-term strategic influence or control.

Question 2

Which of the following best describes how short-term investments are classified on the balance sheet?

Accepted Answer

As current assets if they are liquid and intended to be converted to cash within one year or the operating cycle.

Question 3

Apple Inc. purchases 5,000 shares of Intel stock at $$20 per share as a current asset. At year-end, the fair value is 22 $$per share. What is the unrealized gain, and how is it reported?

Accepted Answer

$10,000, reported in other income/(expense), net.

Question 4

Which formula correctly calculates the unrealized gain or loss for trading securities?

Accepted Answer

$$	ext{Unrealized Gain/Loss} = (	ext{Fair Value per Share} - 	ext{Cost per Share}) 	imes 	ext{Number of Shares}$$

Question 5

Grady Company purchases 400 shares of Terence Company for $$4 each. At year-end, the shares are worth 5 $$each. What amount will be reported on the balance sheet?

Accepted Answer

$2,000

Question 6

When does a company use the equity method to account for investments in another company?

Accepted Answer

When it owns between 20% and 50% of the investee's voting stock.

Question 7

Under the equity method, how are dividends received from the investee recorded?

Accepted Answer

As a reduction in the investment account.

Question 8

Which of the following is true of reporting investment using the equity method?

Accepted Answer

It is reported at original cost plus portion of income less dividends.

Question 9

If a company owns more than 50% of another company’s voting stock, what accounting method is used?

Accepted Answer

Consolidation accounting.

Question 10

Which of the following best describes consolidated financial statements?

Accepted Answer

They present the parent and subsidiaries as a single economic entity, eliminating intercompany accounts.

Question 11

Intel Capital purchases $10,000 of 6% CBS bonds at a price of 95.2. What is the amount of discount on the bonds?

Accepted Answer

$480

Question 12

How is interest revenue calculated for a bond investment purchased at a discount?

Accepted Answer

$$	ext{Interest Revenue} = 	ext{Cash Interest Received} + 	ext{Amortization of Discount}$$

Question 13

ABC Corporation purchased $$2,000,000 of 10-year, 7.5% bonds for 1$$,820,000. What is the interest revenue recognized for the first semiannual period?

Accepted Answer

$84,000

Question 14

Which of the following is NOT a characteristic of held-to-maturity debt securities?

Accepted Answer

They are reported at fair value with unrealized gains in OCI.

Question 15

A company sells an equity investment for more than its carrying amount. How is the gain classified?

Accepted Answer

As a realized gain.

Question 16

Which journal entry correctly records the purchase of a bond investment at a discount?

Accepted Answer

Debit Investment in Bonds for purchase price; credit Cash for purchase price.

Question 17

Which of the following best describes the treatment of unrealized gains and losses for marketable equity securities with insignificant influence?

Accepted Answer

Recognized in other income/(expense), net.

Question 18

If the market rate of interest is greater than the face rate on a bond, the bond will be issued at:

Accepted Answer

A discount.

Question 19

Which of the following is a key difference between the fair value method and the equity method for accounting for investments?

Accepted Answer

The fair value method recognizes investee income as dividend revenue, while the equity method recognizes a proportionate share of investee net income.

Question 20

Which of the following is eliminated in consolidated financial statements?

Accepted Answer

Intercompany accounts between parent and subsidiary.

Appendix E: Accounting for Investments – Financial Accounting Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards