Chapter 8 Textbook

Question 1

Short-term highly liquid investments with a maturity of ______________
months or less that can be readily converted to cash with little risk of loss are classified as cash equivalents.

Answer 1

three

Question 2

Select all that apply

A company may choose to invest in the debt or equity of another company when the investing company:

a. desires to enter into a new industry
b. seeks to generate interest or dividend income
c. has limited cash available

Answer 2

desires to enter into a new industry
seeks to generate interest or dividend income

Reason: Excess cash (but not limited cash) can motivate a company to invest in another company. Temporary increases in cash may occur in companies with seasonal operations.

Question 3

A key factor determining the accounting for equity investments is

a. the relative size of the company in which it invests.
b. the observed fluctuation in market prices of similar securities
c. the amount of income received from the investment.
d. the extent to which the investor can influence the company in which it invests

Answer 3

d. the extent to which the investor can influence the company in which it invests.

Question 4

Master Company owns 15% of the outstanding voting stock of Sell Company. Master should

a. apply the fair value method.
b. consolidate the financial statements.
c. apply the equity method.

Answer 4

a. apply the fair value method.

Question 5

Sampson Corp. purchases 15% of the voting shares of Mann Corp. By making this investment, Sampson is said to have Blank______ over Mann.

a. significant influence
b. control
c. insignificant influence

Answer 5

c. insignificant influence

Question 6

Short-term, highly liquid investments such as money market funds or treasury bills are classified as

a. restricted cash.
b. cash equivalents.
c. liquid securities.

Answer 6

b. cash equivalents.

Question 7

Select all that apply

A company may choose to invest in the debt or equity of another company in order to:

build strategic alliances
increase liabilities
increase market share
generate dividend or interest income

Answer 7

build strategic alliances

increase market share

generate dividend or interest income

Question 8

Milton Corp. purchases 25% of the voting shares of Lawton Corp. Which method should Milton use in accounting for this investment?

a. Equity method
b. Fair value method
c. Consolidated financial statements

Answer 8

a. Equity method

Question 9

In which method does the investor produce financial reports as if the investor and investee are operating as a combined company?

a. Fair value method
b. Consolidation
c. Equity metho

Answer 9

b. Consolidation

Question 10

Muenster Company owns 32% of the outstanding voting stock of Sloan Company. Muenster should

a. consolidate the financial statements.
b. apply the fair value method.
c. apply the equity method.

Answer 10

c. apply the equity method.

Question 11

Select all that apply

Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system.

changes in fair value
sale of investment
purchase of investment
changes in the riskiness of investment
receiving dividends

Answer 11

changes in fair value

sale of investment

purchase of investment

receiving dividends

Question 12

Under the fair value method, changes in fair value of the investment are:

a. are not reported.
b. reported as revenues and expenses on the income statement.
c. reported as gains and losses on the income statement.

Answer 12

b. reported as revenues and expenses on the income statement.

Question 13

Hearst Corp. purchases 1,000 shares of Jefferson stock for $20 per share, representing 10% of Jefferson’s total shares outstanding. For Hearst, the income statement impact of this purchase is:

a. no change in net income
b. decrease in net income of $20,000
c. increase in net income of $20,000

Answer 13

a. no change in net income

Question 14

Keller Corp. purchases 60% of the voting shares of Bogard Corp. Which method should Keller use in accounting for this investment?

a. Equity method
b. Fair value method
c. Consolidated financial statements

Answer 14

c. Consolidated financial statements

Question 15

Multiple select question.

James Company receives $6,000 in dividends from Mark Corp. on its equity investment. James has insignificant influence over Mark Corp. James Company should:

decrease Cash
increase Dividend Revenue
decrease Dividend Revenue
increase Cash

Answer 15

increase Dividend Revenue
increase Cash

Question 16

Multiple select question.

From an accounting perspective, critical events that investors experience over the life of an equity investment include

sale of investment
changes in fair value
receiving dividends
changes in related cash flows
changes in effective interest rates

Answer 16

sale of investment

changes in fair value

receiving dividends

Question 17

Select all that apply

Hearst Corp. purchases 1,000 shares of Jefferson stock for $20 per share, representing 10% of Jefferson’s total shares outstanding. For Hearst, the purchase results in a(n):

increase in Revenues of $20,000
decrease in Investments of $20,000
increase in Investments of $20,000
decrease in Cash of $20,000

Answer 17

increase in Investments of $20,000
decrease in Cash of $20,000

Question 18

On January 1, Goldsby Corp. purchases 1,000 shares of Lawton stock for $20 per share, representing 10% of Lawton’s total shares outstanding. On December 31, Lawton stock has a current price of $15. For Goldsby, adjusting the Lawton investment to fair value results in a:

a. Unrealized Holding Loss - Net Income of $5,000
b. Unrealized Holding Gain - Net Income of $5,000
c. Unrealized Holding Loss - Net Income of $15,000
d. Unrealized Holding Gain - Net Income of $15,000

Answer 18

a. Unrealized Holding Loss - Net Income of $5,000

Question 19

The term “unrealized” in the account “Unrealized Holding Gain” indicates that:

a. the gain is not yet realized because the investment has not yet been sold.
b. the gain has no impact on the financial statements.
c. the gain will never be realized.

Answer 19

a. the gain is not yet realized because the investment has not yet been sold.

Question 20

On January 1, Smith Co. purchased 5% of the outstanding common shares of North Company for $500,000. On December 31, North Company reports $250,000 in net income and pays total dividends of $100,000. To account for its share of dividends received, Smith Co. will report:

a. Dividend Revenue of $5,000
b. Dividend Revenue of $25,000
c. Equity Income of $5,000
d. Equity Income of $25,000

Answer 20

a. Dividend Revenue of $5,000

Question 21

Parker Company owns 30% of Sandra Company’s stock. Which of the following will decrease the investment account?

a. Sandra Company’s stock price increases.
b. Sandra Company reports income.
c. Parker receives dividends from Sandra Company

Answer 21

c. Parker receives dividends from Sandra Company

Question 22

Andrea Company purchases 30% of Sander Company’s outstanding stock for $420,000. For Andrea, the purchase results in a(n):

a. increase in net income of $420,000
b. decrease in net income of $420,000
c. no change in net income

Answer 22

c. no change in net income

Question 23

On January 1, Hearst Corp. purchases 1,000 shares of Jefferson stock for $20 per share, representing 10% of Jefferson’s total shares outstanding. On December 31, Jefferson stock has a current price of $25. For Hearst, the financial statement effects of adjusting the Jefferson investment to fair value include a(n):

Multiple select question.

increase in total assets of $5,000
increase in total stockholders’ equity of $5,000
increase in total stockholders’ equity of $20,000
increase in total assets of $20,000

Answer 23

increase in total assets of $5,000

increase in total stockholders’ equity of $5,000

Question 24

The account “Unrealized Holding Loss - Net Income” captures:

a. losses that are not yet realized and that do not impact current period financial statements.
b . losses that are not yet realized but that are reported in current period net income.
c. losses that will never be realized.

Answer 24

b . losses that are not yet realized but that are reported in current period net income.

Question 25

Multiple select question.

Adrianna Company purchases 35% of Saddle Company’s outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company reports its share of Saddle’s income by:

increasing Investments by $35,000
increasing Equity Income by $35,000
increasing Equity Income by $70,000
increasing Investments by $70,000

Answer 25

increasing Equity Income by $70,000
increasing Investments by $70,000

Question 26

From an accounting perspective, critical events that investors experience over the life of a debt investment include

receiving interest
changes in the stock price
changes in fair value
sale of investment

Answer 26

receiving interest
changes in fair value
sale of investment

Question 27

Select all that apply

Milligan Industries purchases $100,000 of 6%, 20-year bonds issued by Woolridge Corp., with interest receivable semiannually on June 30 and December 31 each year. The bonds are issued at par. For Milligan, the purchase of Woolridge bonds results in a(n):

increase in Cash
increase in Investments
decrease in Cash
decrease in Investments

Answer 27

increase in Investments
decrease in Cash

Question 28

Milligan Industries purchases $100,000 of 6%, 20-year bonds issued by Woolridge Corp., with interest receivable semiannually on June 30 and December 31 each year. The bonds are issued at par. For Milligan, interest earned on June 30 results in a(n):

Multiple select question.

increase in Interest Revenue of $3,000
increase in Cash of $3,000
increase in Interest Revenue of $6,000
decrease in Cash of $3,000
increase in Cash of $6,000
decrease in Interest Revenue of $6,000

Answer 28

increase in Interest Revenue of $3,000
increase in Cash of $3,000

Question 29

The balance sheet effects of the investor’s recognition of income reported by the investee when using the equity method include a(n):

Multiple choice question.

decrease in assets; increase in stockholders’ equity
increase in assets; decrease in stockholders’ equity
increase in assets; increase in stockholders’ equity

Answer 29

increase in assets; increase in stockholders’ equity

Question 30

Nettleton Company purchases 65% of the voting stock of Wayside Company. Which of the following statements is correct?

Multiple choice question.

Wayside is considered to have controlling influence over Nettleton and must prepare consolidated financial statements.

Nettleton is considered to have controlling influence over Wayside and must prepare consolidated financial statements.

Wayside is considered to have significant influence over Nettleton and must use the equity method.

Nettleton is considered to have significant influence over Wayside and must use the equity method.

Answer 30

Wayside is considered to have controlling influence over Nettleton and must prepare consolidated financial statements.

Question 31

Identify critical events that companies experience with respect to debt investments that must be recognized in the accounting system.

Multiple select question.

changes in the riskiness of investment
changes in fair value
purchase of investment
sale of investment
receiving interest

Answer 31

changes in fair value
purchase of investment
sale of investment
receiving interest

Question 32

Milligan Industries purchases $100,000 of 6%, 20-year bonds issued by Woolridge Corp., with interest receivable semiannually on June 30 and December 31 each year. The bonds are issued at par. On Milligan’s income statement, the purchase of bonds results in

a. an increase in net income
b. no change in net income
c. a decrease in net income

Answer 32

b. no change in net income

Question 33

If the market rate of interest decreases after a bond is purchased, investors holding the bond will recognize

a. a realized loss
b. an unrealized holding gain
c. a realized gain
d. an unrealized holding loss

Answer 33

an unrealized holding gain

Question 34

Waverly Industries purchases $100,000 of 8%, 10-year bonds issued by Tidewater Corp., with interest receivable semiannually on June 30 and December 31 each year. The bonds are issued at par. For Waverly, the balance sheet effects of interest earned on June 30 include a(n):

Multiple choice question.

decrease in assets of $8,000; decrease in stockholders’ equity of $8,000
decrease in assets of $4,000; decrease in stockholders’ equity of $4,000
increase in assets of $4,000; increase in stockholders’ equity of $4,000
increase in assets of $8,000; increase in stockholders’ equity of $8,000

Answer 34

increase in assets of $4,000; increase in stockholders’ equity of $4,000

Question 35

Debt securities that are classified as available-for-sale or trading are valued at

Multiple choice question.

original cost.
fair market value.
net realizable value.
amortized cost.

Answer 35

fair market value.

Question 36

Adrianna Company purchases 35% of Saddle Company’s outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company reports its share of Saddle’s income by:

Multiple select question.

increasing Equity Income by $35,00
increasing Equity Income by $70,000
increasing Investments by $35,000
increasing Investments by $70,000

Answer 36

increasing Equity Income by $70,000
increasing Investments by $70,000

Question 37

On January 1, Bartlett Company purchases bonds for $200,000. The company classifies the investment as an available-for-sale security. During the current fiscal period, interest rates decrease and the bond’s fair value increases to $203,000. As a result of the change in fair value, Bartlett should recognize a(n)

a. realized holding gain in net income
b. realized holding loss in net income
c. unrealized holding loss in other comprehensive income
d. unrealized holding gain in other comprehensive income

Answer 37

d. unrealized holding gain in other comprehensive income

Question 38

From an accounting perspective, critical events that investors experience over the life of a debt investment include

Multiple select question.

receiving interest
changes in fair value
changes in the stock price
sale of investment

Answer 38

receiving interest
changes in fair value
sale of investment

Question 39

Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. For Porter, the result of this increase in value will be

Multiple choice question.

an increase in current period net income.
disclosed in the notes, but not recorded in the financial statements.
an increase in other comprehensive income.

Answer 39

an increase in other comprehensive income.

Question 40

If the market rate of interest rises after a bond is purchased, investors holding the bond will recognize

Multiple choice question.

a realized gain
a realized loss
an unrealized holding gain
an unrealized holding loss

Answer 40

an unrealized holding loss

Question 41

On July 1, 2025, Markus Company sells its investment in Berta Inc. bonds for $20,000. Markus had purchased the bonds in January 2024 for $18,000. At the end of 2024, the bonds were correctly adjusted to fair value on that date of $19,000. Assume the investment was accounted for as an available-for-sale security. For Markus, the sale of this investment includes which of the following effects?

Multiple select question.

realized gain of $2,000
increase in cash of $20,000
decrease in cash of $18,000
realized loss of $2,000

Answer 41

increase in cash of $20,000
realized gain of $2,000

Question 42

The balance sheet effects of the investor’s recognition of income reported by the investee when using the equity method include a(n):

Multiple choice question.

increase in assets; increase in stockholders’ equity
increase in assets; decrease in stockholders’ equity
decrease in assets; increase in stockholders’ equity

Answer 42

increase in assets; increase in stockholders’ equity

Question 43

Select all that apply

On January 1, Clarion Company purchases bonds for $80,000. The company classifies the investment as an available-for-sale security. During the current fiscal period, interest rates increase and the bond’s fair value decreases to $78,000. As a result of the change in fair value, Clarion should recognize a(n):

Multiple select question.

increase in Investments
Unrealized Holding Gain in OCI
Unrealized Holding Loss in OCI
decrease in Investments

Answer 43

Unrealized Holding Loss in OCI

decrease in Investments

Question 44

Rosa Company purchases debt securities and classifies them as “available-for-sale” securities. How should Rosa recognize changes in the value of the investment?

Multiple choice question.

Rosa should not recognize changes in value.
As unrealized holding gain or loss in income.
As unrealized holding gain or loss in other comprehensive income.

Answer 44

As unrealized holding gain or loss in other comprehensive income.

Question 45

Select all that apply

On March 1, 2025, Bella Company sells its investment in Carter Inc. bonds for $40,000. Bella had purchased the bonds in January 2024 for $42,000. At the end of 2024, the bonds were correctly adjusted to fair value on that date of $43,000. Assume the investment was accounted for as an available-for-sale security. For Bella, the sale of this investment includes which of the following effects?

Multiple select question.

increase in cash of $40,000
decrease in cash of $42,000
realized loss of $2,000
realized gain of $2,000

Answer 45

increase in cash of $40,000
realized loss of $2,000

Question 46

Holding bonds during periods in which the fair value of the bonds changes results in

Multiple choice question.

realized gains and losses
a change in the amount of interest received
unrealized holding gains and losses

Answer 46

unrealized holding gains and losses