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Exam 14: Investments

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Question 1

Multiple Choice

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Consolidated financial statements are prepared when one company has:

A) Accounted for the investment using the equity method.
B) Accounted for the investment as available-for-sale securities.
C) Control over another company.
D) None of these is correct.

E) A) and C)
F) A) and B)

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Question 2

Multiple Choice

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General Investment Co.(GIC) purchased bonds on January 1,2015.GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds:

A) At par.
B) At a discount.
C) At a premium.
D) Cannot be determined from the given information.

E) None of the above
F) All of the above

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Question 3

Multiple Choice

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Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share.The investment is properly classified as an available-for-sale security.By the end of the year,the stock price has increased to $32 per share.How would the change in stock price affect Sports Spectacular's net income?

Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.

Investments in debt securities are classified for reporting purposes in one of three categories.List these three categories and explain which investments are included in each category.Also briefly describe how the reporting differs for each category.

Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.

Under the equity method,the investor includes in net income its portion of the investee's net income.

The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends.

Discuss the meaning of consolidated financial statements.When is it appropriate to consolidate financial statements of two companies?

Investments are reported at fair value when a company has a significant influence over another company in which it invests.

General Investment Co.(GIC) purchased bonds on January 1,2015.GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds for:

Investments are reported at fair value when a company has an insignificant influence over another company in which it invests.

One of the primary reasons for investing in equity securities includes:

The equity method of accounting for investments in voting common stock is appropriate when:

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share.The investment is properly classified as a trading security.By the end of the year,the stock price has increased to $32 per share.How would the change in stock price affect Sports Spectacular's net income?

Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share.The investment is properly recorded using the equity method.By the end of the year,the stock price has increased to $32 per share.How would the change in stock price affect Sports Spectacular's net income under the equity method?

Because the carrying value of bonds purchased at a discount increases over time,interest revenue will also increase each semi-annual interest period.

General Investment Co.(GIC) purchased bonds on January 1,2015.GIC's accountant has projected the following amortization schedule from purchase until maturity: What is the annual market interest rate on the bonds?

Companies with large expansion plans,called growth companies,prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends.

General Investment Co.(GIC) purchased bonds on January 1,2015.GIC's accountant has projected the following amortization schedule from purchase until maturity: The investment in bonds has a maturity in: