Investments

Question 1

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

Answer 1

face value of the bonds at the beginning of the period by the contractual interest rate.

The same is true for the straight-line method as well.

Question 2

When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income?
Change in market value
cash dividends from investee
both
neither

Answer 2

Neither a change in market value of the investee’s common stock nor cash dividends from the investee

Under the equity method, investor’s share or percentage of investee’s income is recognized by increasing the investment account balance when income is reported by the investee.
When dividends are received from investee, investor will reduce the investment account balance but not increase investment income. No action is taken under the equity method when the market value of investee’s shares changes.