Q: Suppose Company A acquires 40% of Company B for $400 million. Which journal entry correctly records this investment under the equity method?

$$\begin{array}{l} \text{Equity-method Investment} \quad 400 \\ \text{Cash} \quad 400 \end{array}$$

Question 1

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

Accepted Answer

To avoid reporting financial results

Question 2

An investment is classified as a current asset if it meets which TWO criteria?

Accepted Answer

It is liquid and the investor intends to convert it to cash within one year or the current operating cycle

Question 3

Which of the following best describes equity securities?

Accepted Answer

Investments in capital stock

Question 4

If an investor owns 35% of the voting stock of another company, what level of influence does the investor have?

Accepted Answer

Significant influence

Question 5

Under U.S. GAAP, how are equity securities with insignificant influence recorded?

Accepted Answer

Using the fair value method

Question 6

Which of the following statements about unrealized gains is correct?

Accepted Answer

They arise before securities are sold, when fair market value exceeds cost

Question 7

How are realized and unrealized gains and losses on investments in equity securities reported on the income statement?

Accepted Answer

As 'other income'

Question 8

When an investor has significant influence (owns between 20% and 50% of voting stock), which method is used to account for the investment?

Accepted Answer

Equity method

Question 9

Suppose Company A acquires 40% of Company B for $400 million. Which journal entry correctly records this investment under the equity method?

Accepted Answer

$$\begin{array}{l} 	ext{Equity-method Investment} \quad 400 \ 	ext{Cash} \quad 400 \end{array}$$

Question 10

In a controlling interest, what are the investor and investee companies called?

Accepted Answer

Parent and subsidiary

Question 11

Which four financial statements are combined in consolidated financial statements?

Accepted Answer

Balance sheet, income statement, statement of stockholders’ equity, cash flow statement

Question 12

In consolidated statements, the assets, liabilities, revenues, and expenses of each subsidiary are:

Accepted Answer

Added to the parent company’s accounts

Question 13

Which type of business is a major investor in debt securities such as bonds?

Accepted Answer

Financial institutions

Question 14

Debt securities can be categorized into which three groups?

Accepted Answer

Trading, available-for-sale, held to maturity

Question 15

If an investor intends to hold debt securities longer than a year but not until maturity, how are they categorized?

Accepted Answer

Available-for-sale

Question 16

Held-to-maturity debt securities are reported using which method?

Accepted Answer

Amortized cost method

Question 17

Which of the following statements about bonds of publicly traded companies is correct?

Accepted Answer

They are traded on the open market like stocks

Question 18

Market prices of bonds fluctuate in which way relative to market interest rates?

Accepted Answer

Inversely

Question 19

A company purchases $$50,000 in equity securities with insignificant influence. At year-end, the fair value is 55$$,000. What is the unrealized gain, and how is it reported?

Accepted Answer

$$\5$$,000$ as other income on the income statement

Question 20

A pension fund invests in bonds classified as held-to-maturity. If the bond was purchased for $$100,000 and the amortized cost at year-end is 98$$,000, what value is reported on the balance sheet?

Accepted Answer

$$\98$$,000$

Guided Study: Investments in Financial Accounting

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