Chapter 3

Question 1

under the cost method, what is reflected as income by the investor?

Answer 1

dividends (not earnings)

Question 2

what is the cost method?

Answer 2

aka FV method or AFS method.

should be used when the investor owns less than 20% of the investee’s voting stock and does not exercise significant influence.

Question 3

“Investment in Investee” is adjusted for investee earnings.

TRUE or FALSE

Answer 3

FALSE.

Question 4

“Investment in Investee” is adjusted to FV.

TRUE or FALSE

Answer 4

TRUE

Question 5

Cash dividends from the investee are reported as income by the investor (parent).

TRUE or FALSE

Answer 5

TRUE.

Question 6

Debt securities classified as HTM are reported at …?

Answer 6

amortized cost

Question 7

Debt securities classified as AFS are reported at …?

Answer 7

fair value

Question 8

Debt securities classified as trading are reported at …?

Answer 8

fair value

Question 9

“available for sale equity” securities are carried at _______. Permanent impairment in value results in a write down and a change to ________ (stmt).

Answer 9

• fair value

- income statement as if the loss was realized.

Question 10

Investor records revenue as “______” (not dividends received) under the equity method

Answer 10

share of investee’s earnings, not dividends received

Question 11

should stock dividends on common stock be recorded at their FV by the investor when the related investment is accounted for under the cost method? equity method?

Answer 11

no, no. stock dividends and stock splits are not considered income to the recipient.