Q: Which formula correctly calculates the unrealized gain or loss on an equity security?

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

Question 1

Why might a company like Apple Inc. invest in the securities of other companies?

Accepted Answer

To use excess cash for additional income and for long-term strategic reasons such as gaining 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. What is the correct journal entry for this transaction?

Accepted Answer

Debit Investment in Equity Securities $$100,000; Credit Cash 100$$,000

Question 4

If Apple receives a $4,000 cash dividend from Intel, how should this be recorded?

Accepted Answer

Debit Cash $$4,000; Credit Dividend Revenue 4$$,000

Question 5

On September 25, the fair market value of Intel stock rises to $$22 per share. Apple owns 5,000 shares purchased at 20 $$per share. What is the unrealized gain?

Accepted Answer

$10,000

Question 6

How are unrealized gains and losses on marketable equity securities reported?

Accepted Answer

Unrealized gains and losses are recognized in other income/(expense), net

Question 7

If Apple sells its Intel stock for $$107,000 and the carrying amount is 110$$,000, what is the realized gain or loss?

Accepted Answer

Realized loss of $3,000

Question 8

Under the equity method, how does an investor record its share of the investee’s net income?

Accepted Answer

By increasing the investment account and recognizing income equal to its ownership percentage

Question 9

Intel owns 49% of IM Flash Technologies, which reports net income of $300 million. How much income does Intel recognize under the equity method?

Accepted Answer

$147 million

Question 10

When does an investor use consolidation accounting for an investment?

Accepted Answer

When the investor owns more than 50% of the investee’s voting stock

Question 11

Which of the following is eliminated in consolidation accounting?

Accepted Answer

Intercompany accounts

Question 12

Which of the following best describes a held-to-maturity debt security?

Accepted Answer

A security the company intends to hold until maturity, reported at amortized cost

Question 13

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

Accepted Answer

$9,520

Question 14

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

Accepted Answer

A discount

Question 15

Which formula correctly calculates the unrealized gain or loss on an equity security?

Accepted Answer

$$	ext{Unrealized Gain/Loss} = (	ext{Fair Value at Year-End} - 	ext{Cost}) 	imes 	ext{Number of Shares}$$

Question 16

A company classifies a marketable debt security as available-for-sale. Where are unrealized gains and losses reported?

Accepted Answer

In other comprehensive income (OCI)

Question 17

Which of the following is NOT a reason companies invest in other companies?

Accepted Answer

To increase the number of employees

Question 18

If a company owns 100% of another company, what is the relationship called?

Accepted Answer

Parent and subsidiary

Question 19

Which of the following best describes the accounting for trading debt securities?

Accepted Answer

Reported at fair value with unrealized gains and losses in net income

Question 20

A company purchases bonds with a face value of $10,000 at 95.2. What is the journal entry to record the purchase?

Accepted Answer

Debit Investment in Debt Securities $$9,520; Credit Cash 9$$,520

Appendix E: Investments – Financial Accounting Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards