Professional Documents
Culture Documents
Investments in Debt and Equity Securities
Investments in Debt and Equity Securities
Investments in Debt and Equity Securities
Investments in Debt
and Equity Securities
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions
533
534 Chapter 14 Investments in Debt and Equity
Securities
Computational Questions
25 Computation of dividend revenue
26 Computation of investment income on available-for-sale securities
27 Computation of investment income on available-for-sale securities
28 Computation of balance in investment account on trading securities
29 Computation of carrying value of portfolio on balance sheet
30 Computation of unrealized loss related to securities transactions
31 Determine entry to record sale of a security
32 Computation of loss transfer of securities to determine net income
33 Record corresponding charges against unrealized losses
34 Computation of carrying value of investment in common stock
35 Computation of income on long-term investment
36 Computation of investment in common stock affected by goodwill
amortization
37 Computation of "Share of Net Income" of investment affected by
goodwill amortization
38 Determination of journal entry for temporary investment
39 Computation of investment loss on trading securities
40 Determination of credit to "Market Adjustment--Trading Securities"
account
41 Computation of unrealized loss on trading securities on income
statement
42 Computation of loss on securities investment on income statement
43 Computation of realized loss on short-term investment of marketable
equity securities
44 Computation of value of acquisition of bonds
PROBLEMS
c 1. Which securities are purchased with the intent of selling them in the
LO2 near future?
a. Marketable equity securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
c 2. Changes in fair value of securities are reported in the income statement for
LO5 which type of securities?
a. Marketable equity securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
535
536 Chapter 14 Investments in Debt and Equity
Securities
d. Held-to-maturity securities
b 11. For which type of investments would unrealized increases and decreases
be
LO5 recorded directly in an owners' equity account?
a. Equity method securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
c 12. The equity method of accounting for an investment in the common stock of
LO2 another company should be used when the investment
a. is composed of common stock and it is the investor’s intent to vote the
common stock.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.
b 14. If the combined market value of trading securities at the end of the year is
less
LO5 than the market value of the same portfolio of trading securities at the
beginning of the year, the difference should be accounted for by
a. reporting an unrealized loss in security investments in the stockholders'
equity section of the
balance sheet.
b. reporting an unrealized loss in security investments in the income
statement.
c. a footnote to the financial statements.
d. a credit to Investment in Trading Securities.
537
538 Chapter 14 Investments in Debt and Equity
Securities
a 15. When an investor uses the equity method to account for investments in
LO4 common stock, the investment account will be increased when the investor
recognizes
a. a proportionate share of the net income of the investee.
b. a cash dividend received from the investee.
c. periodic amortization of the goodwill related to the purchase.
d. depreciation related to the excess of market value over book value of
the investee’s depreciable assets at the date of purchase by the
investor.
b 16. When an investor uses the equity method to account for investments in
LO4 common stock, cash dividends received by the investor from the investee
should be recorded as
a. an increase in the investment account.
b. a deduction from the investment account.
c. dividend revenue.
d. a deduction from the investor’s share of the investee’s profits.
d 19. At the beginning of the year a company had a debit balance in the account
LO5 Market Adjustment--Trading Securities. During the year the company did
not
buy or sell any trading securities, but at the end of the year the related
market
adjustment account had a credit balance. This change indicates that
a. a loss on the income statement was recognized.
b. a gain on the income statement was recognized.
c. the value of the investment account increased.
d. the value of the investment account decreased.
539
540 Chapter 14 Investments in Debt and Equity
Securities
d 23. Poster Inc. owns 35 percent of Elliott Corporation. During the calendar year
LO4 2002, Elliott had net earnings of $300,000 and paid dividends of $36,000.
Poster mistakenly accounted for the investment in Elliott using the cost
method rather than the equity method of accounting. What effect would this
have on the investment account and net income, respectively?
a. Understate, overstate
b. Overstate, understate
c. Overstate, overstate
d. Understate, understate
a 27. On January 2, 2002, Adler Co. acquired 2,000 shares of Boxworth Co.
LO4 common stock for $8,000 and classified these shares as available-for-sale
securities. During 2002, Adler received $6,000 of cash dividends. Adler’s
share of Boxworth’s 2002 earnings (net income) was $5,000. The fair value
of Boxworth's stock on December 31, 2002, was $7 per share. Adler
should report what amount in 2002 related to Boxworth Co.?
a. Revenue of $6,000
b. Revenue of $12,000
c. A $1,000 decrease in the investment account
d. A $1,000 increase in the investment account
541
b 28. On January 1, 2002, Young Co. paid $500,000 for 20,000 shares of
Montana
LO5 Co.’s common stock and classified these shares as trading securities.
Young does not have the ability to exercise significant influence over
Montana. Montana declared and paid a dividend of $.50 a share to its
stockholders during 2002. Montana reported net income of $260,000 for
the year ended December 31, 2002. The fair value of Montana Co.'s stock
at December 31, 2002, is $27 per share. What is the net asset amount
(which includes both investments and any related market adjustments)
attributable to the investment in Montana that will be included on Young's
balance sheet at December 31, 2002?
a. $530,000
b. $540,000
c. $569,000
d. $579,000
c 29. Martin Co. purchased the following portfolio of trading securities during
2002
LO5 and reported the following balances at December 31, 2002. No sales
occurred during 2002. All declines are considered to be temporary.
Security Cost Market Value at 12/31/02
X $ 80,000 $ 82,000
Y 140,000 132,000
Z 32,000 28,000
The carrying value of the portfolio at December 31, 2002, on Martin Co.’s
balance sheet would be
a. $222,000.
b. $240,000.
c. $242,000.
d. $252,000.
The only transaction in 2003 was the sale of security Z for $34,000 on
December 31, 2003. The market values for the other securities at
December 31, 2003 were the same as at December 31, 2002. Marino's
entry to record the sale of security Z would include
a. a credit of $2,000 to Realized Gain on Sale of Trading Securities.
b. a debit of $2,000 to Realized Gain on Sale of Trading Securities.
c. a $2,000 debit to Market Adjustment-Trading Securities.
d. a $4,000 debit to Market Adjustment-Trading Securities.
c 32. In March of 2001, Moon Corp. bought 45,000 shares of McMahon Corp.’s
listed
LO7 stock for $450,000 and classified the shares as available-for-sale securities.
The market value of these shares had declined to $300,000 by December
31, 2001. Moon changed the classification of these shares to trading
securities in June of 2002 when the market value of this investment in
McMahon's stock had risen to $345,000. How much should Moon include
as a loss on transfer of securities in its determination of net income for
2002?
a. $0
b. $45,000
c. $105,000
d. $150,000
c 33. Walsh, Inc. began business on January 1, 2002, and at December 31,
2002,
LO5 Walsh had the following investment portfolios of equity securities:
Trading Available-For-Sale
Aggregate cost $150,000 $225,000
Aggregate market value 120,000 185,000
b 39. Edwards Company began business in February of 2001. During the year,
LO5 Edwards purchased the three trading securities listed below. On its
December 31, 2001, balance sheet, Edwards appropriately reported a
$4,000 credit balance in its Market Adjustment--Trading Securities account.
There was no change during 2002 in the composition of Edward’s portfolio
of trading securities. Pertinent data are as follows:
Market Value
Security Cost December 31, 2002
A $120,000 $126,000
B 90,000 80,000
C 160,000 157,000
$370,000 $363,000
b 42. On August 31, 2002, Stiggins Company purchased the following available-
for-
LO7 sale securities:
Market Value
Security Cost December 31, 2002
D $ 96,000 $ 84,000
E 152,000 158,000
F 162,000 146,000
Barney sold 1,000 shares of Company Y stock on March 16, 2002, for $25
per share, incurring $1,200 in brokerage commissions and taxes. On the
sale, Barney should report a realized loss of
a. $0.
b. $500.
c. $850.
d. $1,700.
b 44. On October 1, Dennis Company purchased $200,000 face value 12%
bonds
LO3 for 98 plus accrued interest and brokerage fees and classified them as
held-to-maturity securities. Interest is paid semiannually on January 1 and
July 1. Brokerage fees for this transaction were $700. At what amount
should this acquisition of bonds be recorded?
a. $196,000
b. $196,700
c. $202,000
d. $202,700
PROBLEMS
Problem 1
In 2002, KZF Inc. purchased stock as follows:
(a) Acquired 2,000 shares of Gallery Arts Corp. common stock (par value $20) in
exchange for 1,200 shares of KZF Inc. preferred stock (par value $30). The
preferred stock had a market value of $75 per share on the date of the
exchange.
(b) Purchased 800 shares of Champion Corp. common stock (par value $10) at
$70 per share, plus a brokerage fee of $800.
At December 31, 2002, the market values of the securities were as follows:
Market Increase/
Security Cost Value Decrease
Gallery Corp. $ 90,000 $ 82,000 $(8,000) (2,000 x $41)
Champion Corp. 56,800 57,600 800 (800 x $72)
$146,800 $139,600 $(7,200)
Trading Securities:
Market Market
Cost December 31, 2001 December 31, 2002
V Company $ 50,000 $ 26,000 $ 40,000
W Company 26,000 40,000 40,000
X Company 70,000 60,000 50,000
Total $146,000 $126,000 $130,000
Available-for-Sale Securities:
(1) Give the entries necessary to record the valuations for both trading and
available-for-sale securities at December 31, 2001 and 2002.
(2) What net effect would these valuations have on 2001 and 2002 net income?
Solution 2
LO5
(1) 2001
Dec. 31 Unrealized Loss on Trading Securities ................ 20,000
Market Adjustment--Trading Securities..... 20,000
Problem 3
On January 1, 2002, Alsop Corp. acquired 30 percent (13,000 shares) of Stone
Services Inc. common stock for $1,300,000 as a long-term investment. Data from
Stone’s 2002 financial statements include the following:
The market value of Stone Services Inc. common stock on December 31, 2002,
was $98 per share. Alsop does not have any other noncurrent investments in
securities.
Prepare the necessary journal entries for Alsop’s investment in Stone Services Inc.
common stock under
(1) the cost method classified as available-for-sale securities.
(2) the equity method.
Solution 3
LO4, LO5
(1) Investment in Available-for-Sale Securities--Stone
Services Stock.................................................................1,300,000
Cash......................................................................... 1,300,000
Cash................................................................................. 48,000
Investment in Stone Services Inc. Stock................. 48,000
Problem 4
On January 1, 2002, Gardner Associates purchased 30 percent of the outstanding
shares of stock of Gillen Corp. for $150,000 cash. The investment will be
accounted for by the equity method. On that date, Gillen’s net assets (book and
fair value) were $300,000. Gardner has determined that the excess of the cost of
its investment in Gillen over its share of Gillen’s net assets is attributable to
goodwill, which will be amortized over the maximum allowable period.
Gillen’s net income for the year ended December 31, 2002, was $60,000. During
2002, Gardner received $5,000 cash dividends from Gillen. There were no other
transactions between the two companies.
Compute the amount that would be reported on Gardner Associates’ books for the
investment in Gillen Corp. at December 31, 2002.
Solution 4
LO4
Investment in Gillen Corp. stock:
Original investment..................................................................$150,000
Share of net income--30% of $60,000..................................... 18,000
Amortization of implied goodwill*............................................. (1,500)
Dividends received................................................................... (5,000)
Total....................................................................................$161,500
Problem 5
On July 1, 2002, Mountain Systems acquired 8,000 shares of Precision Services’
40,000 outstanding common shares at a cost of $240,000. The book value and fair
market value of Precision's net assets on that date was $880,000. The following
data pertain to Precision Services for 2002.
Problem 6
Joseph Co. executed the following long-term investment transactions during the
current year.
Feb. 6 Purchased 1,000 shares of Large Auto Co. for $40 per share plus
brokerage costs of $225. These shares were classified as trading
securities.
June 20 Received a $2.20 per share dividend on Large Auto Co. shares.
June 30 New Tech Corp. reported second quarter earnings (total) of $40,000.
Sept. 4 Acquired 4,000 shares of Mega Conglomerate’s stock for $30 per share
plus $600 transaction costs. These shares were classified as available-
for-sale securities.
Dec. 31 Market values of Large Auto Co. and Mega Conglomerate stock were
$45 and $28 per share, respectively.
Prepare journal entries with appropriate supporting computations for the year’s
transactions.
Solution 6
LO4, LO5
Feb. 6 Investment in Trading Securities--
Large Auto Co. Stock............................................ 40,225
Cash................................................................. 40,225
Cost Market
Large Auto Co.................................................................. $ 40,225 $ 45,000
Mega Conglomerate........................................................ 120,600 112,000
Problem 7
On July 1, 2002, The Woodward Group purchased for cash 35 percent of the
outstanding capital stock of Massey Studios. Both The Woodward Group and
Massey Studios have a December 31 year-end. Massey Studios, whose common
stock is actively traded in the over-the-counter market, reported its total net income
for the year to The Woodward Group and also paid cash dividends on November
15, 2002, to The Woodward Group and its other stockholders.
How should The Woodward Group report the above facts in its December 31,
2002, balance sheet and its income statement for the year then ended? Discuss
the rationale for your answer.
Solution 7
LO4
The Woodward Group should follow the equity method of accounting for its
investment in Massey Studios because The Woodward Group is presumed,
because of the size of its investment, to be able to exercise significant influence
over the operating and financial policies of Massey Studios.
In 2002, The Woodward Group should report its interest in Massey Studios’
outstanding capital stock as a long-term investment. Following the equity method
of accounting, The Woodward Group should record the cash purchase of 35
percent of Massey Studios at cost, which is the amount paid.
Thirty-five percent of Massey Studios’ total net income from July 1, 2002, to
December 31, 2002, should be added to the carrying amount of the investment in
The Woodward Group’s balance sheet and shown as revenue in its income
statement to recognize The Woodward Group’s share of the net income of Massey
Studios after the date of acquisition. This amount should reflect adjustments
similar to those made in preparing consolidated statements, including adjustments
to eliminate intercompany gains and losses, and to amortize, if appropriate, any
difference between The Woodward Group’s cost and the underlying equity in net
assets of Massey Studios on July 1, 2002.
The cash dividends paid by Massey Studios to The Woodward Group should
reduce the carrying amount of the investment in The Woodward Group’s balance
sheet and have no effect on The Woodward Group’s income statement.
Problem 8
On February 1, 2002, Pyle Inc. had excess cash on hand. The controller
suggested to management that the company buy $200,000 of U.S. Treasury bonds
selling at 102 and paying 8 percent interest. Interest payments on these bonds are
made semiannually on January 1 and July 1.
(1) Prepare entries to record the February purchase of U.S. Treasury bonds and
the subsequent collection of interest on July 1, using
(a) the asset approach.
(b) the revenue approach.
Solution 8
LO2, LO4
(1) (a) Investment--Trading Securities................................ 204,000
Interest Receivable (200,000 x 8% x 1/12)..................... 1,333
Cash................................................................... 205,333
(2) Periodic amortization of the premium or discount is used when bonds are
acquired at a higher or lower price than their maturity value and it is expected
that they will be held until maturity. However, when bonds are acquired as a
temporary investment and it is not likely that the bonds will be held until
maturity, such procedures are normally not applied.
Problem 9
The following transactions of the Snyder Company were completed during the fiscal
year just ended:
(a) Purchased $100,000 of U.S. Treasury 7% bonds, paying 102.5 plus
accrued interest of $1,750. In addition, the company paid brokerage fees
of $500.
Snyder Company uses the revenue approach to record accrued interest.
Snyder classified these bonds as a trading security.
(b) Purchased 1,000 shares of Ferris Company common stock at $125 per
share plus brokerage fees of $950. Snyder classifies this stock as and
available-for-sale security.
(e) Sold $16,000 of U.S. Treasury 7% bonds at 102 plus accrued interest of
$93.
Solution 9
LO6
(a) Investment in Trading Securities--Treasury Bonds................103,000
Interest Revenue.................................................................... 1,750
Cash................................................................................. 104,750
1.025 x 100,000 = $102,500; $102,500 + 500 brokerage fee = $103,000
(d) Cash........................................................................................19,800
Investment in Available-for-Sale Securities..................... 18,893
Gain on Sale.................................................................... 907
$132 x 150 shares = $19,800; 150/1,000 x $125,950 = $18,893;
$19,800 - $18,893 = $907.
(e) Cash........................................................................................ 16,413
Realized Loss on Sale of Securities....................................... 160
Investment in Trading Securities--Treasury Bonds......... 16,480
Interest Revenue.............................................................. 93
($16,000 x 1.02) + ($16,000 x .035 x 1/6) = $16,413.
$16,000/$100,000 x 103,000 = $16,480.
Problem 10
Lee Company had the following portfolio of securities at the end of its first year of
operations:
Year-End
Security Classification Cost Market Value
A Trading $18,000 $23,000
B Trading $25,000 $27,000
(1) Provide the entry necessary to adjust the portfolio of securities to market value.
(2) After adjusting the securities to market, Lee elects to reclassify Security B as an
available-for-sale security. On the date of the transfer, Security B’s market value is
$26,500. Provide the journal entry to reclassify Security B.
Solution 10
LO7
(1) Market Adjustment--Trading Securities........................... 7,000
Unrealized Gain on Trading Securities.................... 7,000
2001 2002
Net income ...................................................................... $80,000 $90,000
Dividends.......................................................................... 18,000 25,000
Prepare the required journal entries made by Paxman Company relating to its
investment in Monroe for the years 2001 and 2002 assuming no change in market
value during the 2-year period.
Solution 11
LO10
2001
Investment in Monroe Company...................................... 660,000
Cash......................................................................... 660,000
Cash................................................................................. 9,000
Investment in Monroe Company............................. 9,000
($18,000 x 50% = 9,000)
Cash................................................................................. 3,750
Dividend Revenue.................................................... 3,750
Problem 12
Park Company purchased 18% of the outstanding common stock of Ray Company on
January 1, 2001, when the net assets of Ray Company had a book value and fair value
of $400,000. Park Company paid $72,000 for this investment. On January 1, 2002,
Park purchased an additional 10% of the outstanding stock of Ray Company, paying
another $41,000. (Assume the book and fair values of the net assets is $410,000).
Ray Company reported income and dividends for 2001 and 2002 are given below:
2001 2002
Net income ...................................................................... $40,000 $50,000
Dividends.......................................................................... 30,000 30,000
Prepare the journal entries made by Park during 2001 and 2002 related to its
investment in Ray Company, including the adjusting entries needed to reflect the
change from an available-for-sale security to the equity method.
Solution 12
LO10
2001
Jan. 1 Investment in Available-for-Sale Securities
Ray Company.................................................................. 72,000
Cash......................................................................... 72,000
2002
Jan. 1 Investment in Ray Company............................................ 114,800
Cash......................................................................... 41,000
Retained Earnings................................................... 1,800
Investment in Available-for-Sale Securities--
Ray Company.......................................................... 72,000
Cash................................................................................. 8,400
Investment in Ray Company................................... 8,400
Problem 13
The Financial Accounting Standards Board had several goals in issuing Statement of
Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt
and Equity Securities,” and changing the accounting for certain debt and equity
securities from a lower-of-cost-or-market basis to a fair value basis. Among these
goals was the elimination of what is termed “gains trading.”
Solution 13
LO5
The term “gains trading” refers to the practice of management of selectively selling
securities the prices of which have appreciated and including the realized gains in
earnings. Gains trading results from the use of amortized cost accounting and the
available-for-sale classification.
The use of amortized cost permits recognition of holding gains through selected sales
of appreciated securities and the inclusion of these realized holding gains in earnings.
At the same time, use of amortized cost does not provide for the recognition of
unrealized losses. Managers thus can selectively manage earnings by choosing to sell
those securities that have appreciated while selectively excluding unrealized losses
from earnings. Debt and equity securities classified as available-for-sale are reported at
Test Bank, Intermediate Accounting, 14th ed. 565
fair value but unrealized changes in fair value are excluded from earnings. Managers
again can selectively sell securities the prices of which have appreciated and include
the realized gains in earnings. Securities for which prices have dropped are held. The
available-for-sale treatment thus permits unrealized gains and losses to be excluded
from earnings since these unrealized gains and losses are reported in a separate
component of stockholders’ equity.
Problem 14
Investments in debt securities currently are permitted to be classified as held-to-
maturity and accounted for at amortized cost if an enterprise has the positive intent and
ability to hold these securities to maturity. The held-to-maturity classification is the
most restrictive of the three classifications specified in accounting standards. Despite
the restrictiveness of the held-to-maturity classification, certain changes in
circumstances may occur that would necessitate transferring an investment in a debt
security from the held-to-maturity classification without calling into question the
investor’s general intention to hold other similarly classified investments to maturity.
Solution 14
LO2
The following changes in circumstances may cause an investor to change its intent to
hold a certain security to maturity without calling into question its intent to hold other
debt securities to maturity in the future:
Problem 15
On January 1, 2001, Arthur Company paid $450,000 for 10,000 shares of DW
Company voting common stock, which represented a 15% interest in DW. At this date,
the net assets of DW Company totaled $2.5 million. The fair values of DW Company’s
identifiable assets and liabilities were equal to their book values. Arthur did not have
the ability to exercise significant influence over the operating and financial policies of
DW as a result of this investment. Arthur received dividends of $0.80 per share from
DW on October 1, 2001. DW reported net income of $300,000 for the year ended
December 31, 2001. The stock was classified as available-for-sale. Market prices for
the 10,000 shares was $450,000.
On July 1, 2002, Arthur paid $1,550,000 for 30,000 shares of DW Company’s voting
common stock, which represents a 25% interest in DW. The fair value of the
identifiable assets, net of liabilities of DW was equal to their book values of $4,650,000.
As a result of this transaction, Arthur acquired the ability to exercise significant
influence over the operating and financial policies of DW. Arthur received a dividend of
$0.85 per share from DW on April 1, 2002, and $1.40 per share on October 1, 2002.
DW reported net income of $350,000 for the year ended December 31, 2002, and
$150,000 for the six months ended December 31, 2002. Arthur amortizes goodwill over
20 years.
Determine the amount of income from the investment in DW common stock that should
be reported on Arthur’s income statement for the year ended December 31, 2002, and
December 31, 2001 (restated).
Solution 15
LO10 2002 2001
Income from investment in DW Company..................................... $90,000
$45,000
Less: Goodwill amortization......................................................... 13,438
3,750
Income from investment............................................................... 76,562 $41,250
Goodwill amortization:
Goodwill on 2001 acquisition:
[$450,000 – (.15 x $2,500,000) = $75,000 20]...........................$ 3,750 $ 3,750
Goodwill on 2002 acquisition:
[$1,550,000 – (.25 x $4,650,000) = $387,500 20 x ½]............... 9,688
$13,438 $ 3,750
Problem 16
EMD Corp. loaned $200,000 to Alco Corp. on January 1, 2001. The terms of the loan
require principal payments of $40,000 each year for five years plus interest at 8%. The
first principal and interest payment is due on January 1, 2002. Alco made the required
payments during 2002 and 2003. Alco began to experience financial difficulties in
2003, however, which made it necessary for EMD to reassess the likelihood of the loan
being collected. On December 31, 2003, EMD determines that the principal payments
will be collected, but that the collection of interest is unlikely.
(1) Compute the present value of the expected future cash flows as of December 31,
2003.
(2) Provide the journal entry to record the loan impairment as of December 31, 2003.
(3) Provide the journal entries for 2004 to record receipt of the principal payment on
January 1 and the recognition of interest revenue as of December 31, assuming that
EMD’s assessment of the likelihood of collecting the loan has not changed.
Solution 16
LO11
(1) Present value of expected future cash flows:
Name _________________________
Section ________________________
T F 4. The cost method of accounting should always be used when the investor does
not exercise significant influence over the investee.
T F 5. The equity method may not be appropriate in some cases even though the
investor owns more than 20 percent of the voting stock of the investee.
T F 8. When an investment in equity securities has been accounted for under the
equity method, but circumstances dictate a change to the cost method,
retroactive application of the cost method is required.
T F 9. When the purchase price of stock is greater or less than the underlying book
value of the investee’s net assets, an adjustment is made by the investor to
the income reported by the investee in applying the equity method.
T F 10. No adjustment is made to the investment account when changing from the
equity method to the cost method.
569
CHAPTER 14 -- QUIZ B
Name _________________________
Section ________________________
T F 6. When investments in trading securities are sold, the realized gain or loss is
the difference in the market value since acquisition.
T F 10. If an investor does not have a controlling interest in another company, the
investor may choose to use either the cost method or the equity method to
account for that investment in equity securities.
570
CHAPTER 14 -- QUIZ C
Name _________________________
Section ________________________
Select the term that best fits each of the following definitions and descriptions. Indicate
your answer by placing the appropriate letter in the space provided.
____ 2. The ability of an investor to impact the operating, investing, and financing
decisions of an investee but not absolutely determine those decisions.
____ 4. An accounting method under which the initial investment is recorded and
maintained at cost with dividends being recognized as revenue when
received.
____ 6. A company that exercises control over other companies through majority
ownership of voting stock.
____ 8. Investments that are either not readily marketable or not expected to be
converted to cash within a year.
____ 9. Securities purchased with the intent of selling them in the near future.
571
____ 10. Securities purchased without the intent of selling them in the near future.
572
CHAPTER 14 -- QUIZ SOLUTIONS
1. F 1. T 1. E
2. F 2. F 2. B
3. F 3. T 3. G
4. T 4. T 4. A
5. T 5. F 5. J
6. F 6. F 6. C
7. F 7. F 7. H
8. F 8. F 8. D
9. T 9. F 9. N
10. T 10. F 10. M