1. When bonds are purchased between interest dates, the purchaser must pay accrued interest.
A.True
B.False


2. When a company controls the common shares of another company, the equity method is used by the parent company for financial reporting purposes.
A.True
B.False


3. The entity whose shares are owned by a parent company is called the subsidiary company.
A.True
B.False


4. Readily marketable securities are investments that can be sold easily, whenever the need for cash arises.
A.True
B.False


5. Long-term investments are reported in a separate section of the balance sheet immediately below current assets.
A.True
B.False


6. Corporations purchase equity investment for all of the following reasons except:
A.to earn dividend income.
B.to realize gains when the shares are subsequently sold.
C.to expand, diversify, or create a profitable operating relationship.
D.to earn interest income.


7. Identify the statement that is not true. Consolidated financial statements:
A.are prepared when a company owns between 20% to 50% of the common shares of another entity.
B.present the total assets and liabilities controlled by the parent company.
C.are useful because they indicate the size and range of operations of the companies under common control.
D.are prepared in addition to the financial statements for the individual parent and subsidiary companies.


8. Temporary investments that are not considered to be a substitute for cash, are reported in:
A.a separate section of the balance sheet after current assets.
B.the current asset section of the balance sheet after cash.
C.the current asset section of the balance sheet before cash.
D.a separate section of the balance sheet before current assets.


9. At acquisition, temporary debt investments are recorded at the:
A.face value of the bonds purchased.
B.price paid for the bonds plus interest.
C.price paid for the bonds plus brokerage fees (commissions) if any.
D.face value of the bonds purchased plus interest.


10. When a temporary investment in bonds is sold, the gain or loss on sale is the difference between the:
A.sales price and the cost of the bonds.
B.net proceeds and the cost of the bonds.
C.sales price and the market value of the bonds.
D.net proceeds and the market value of the bonds.


11. In accounting for equity investments of less than 20%, the:
A.consolidated financial statement method is used.
B.cost method is used.
C.equity method is used.
D.controlling interest method is used.


12. Under the equity method, the investor records dividends received by crediting:
A.Dividend Revenue.
B.Investment Income.
C.Revenue from Investment.
D.Equity Investments.


13. The investor records its share of the investee's net income under the:
A.cost method.
B.equity method.
C.fair value method.
D.controlling interest method.


14. Under the equity method, when dividends are received from the investee, the investor:
A.debits dividends and credits investment revenue.
B.debits cash and credits dividend revenue.
C.debits cash and credits equity investment.
D.debits equity investment and credits dividend revenue.


15. All of the following statements concerning temporary debt investments are true except:
A.Temporary debt investments earn interest revenue.
B.Accrued interest must be paid by the purchaser when purchasing temporary debt investments between interest payment dates.
C.The bond premium or discount is recorded separately from the principal investment and is amortized to interest revenue.
D.Temporary debt investments are used to invest idle cash.


16. Companies generally purchase investments in debt and equity securities:
A.to house excess cash until needed.
B.to generate investment income.
C.to meet strategic goals.
D.all of the options are reasons to purchase debt and equity securities.


17. A valuation allowance account is used to record:
A.a decline in the market value of long-term investments.
B.interest revenue.
C.the acquisition cost of a security.
D.the difference between the cost and market value of a portfolio of temporary investments.


18. A loss on decline in value of investments is:
A.reported under other expenses and losses in the income statement.
B.reported as an extraordinary item.
C.reported as an adjustment to the beginning balance of retained earnings.
D.netted off against investment revenue on the income statement.


19. Temporary investments are securities held by a company that are:
A.readily marketable.
B.intended to be converted into cash when the need for cash arises.
C.readily marketable and intended to be converted into cash when the need for cash arises.
D.readily marketable and intended to be held until maturity.


20. Which of the following accounting guidelines for equity investments is correct?
A.Less than 20% ownership, significant presumed influence, cost method.
B.Less than 20% ownership, insignificant presumed influence, equity method.
C.Between 20% and 50% ownership, significant presumed influence, equity method.
D.Between 20% and 50% ownership, significant presumed influence, cost method.



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