Reporting and Interpreting Investments in Other Corporations
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.
True False
2. Investments other than held-to-maturity bond investments are reported on the
balance sheet at fair value.
True False
3. Investments in bonds intended to be sold before they reach maturity should be
reported under the fair value method.
True False
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.
True False
5. Held-to-maturity bond investments must be reported on the balance sheet at fair
value.
True False
6. Passive investments other than held-to-maturity investments are reported on the
balance sheet at fair value.
True False
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.
True False
9. A decline in the fair value of the available-for-sale portfolio reduces assets and net
income.
True False
10. The sale of a stock from the available-for-sale portfolio creates a gain or loss on the
income statement based on the difference between the stock's original cost and its
selling price.
True False
11. For all periods in which a security is held in the available-for-sale portfolio, the only
income reported on the income statement is dividend revenue.
True False
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.
True False
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.
True False
14. A realized gain or loss is reported on the income statement when a trading security is
sold.
True False
15. An increase in the fair value of the trading securities portfolio increases both assets
and net income.
True False
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.
True False
18. The equity method requires the recognition of investment revenue for dividends
received.
True False
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, and the investment in Woods Corp. account will decrease by
$30,000, which is Ocean's proportionate share of the dividend.
True False
20. A company owning an investment for which it uses the equity method of accounting
would record a reduction in the investment account for the proportionate share of the
affiliate's reported net loss.
True False
21. For an investment accounted for under the equity method, the investment 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.
True False
22. An investment accounted for under the equity method is always reported on the
balance sheet at fair value.
True False
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.
True False
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.
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