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7 the stock investments account is adjusted for net

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____7.The Stock Investments account is adjusted for net income and dividends received.____8.Investments in government and corporation bonds.____9.Entity whose stock is owned by the parent company.____ 10.An account that is reported in the stockholders' equity section.Ans: N/A, LO: 1-3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:ReportingAnswers to Matching1.H6.F2.E7.C3.G8.I4.A9.B5.J10.DFOR INSTRUCTOR USE ONLYH-60
Reporting and Analyzing InvestmentsSHORT-ANSWER ESSAY QUESTIONSS-A E 2031.What are the reasons that corporations invest in securities?Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC:Communications, IMA: Investment DecisionsSolution 203Companies invest because (1) they have excess cash for a short period of time, or (2) they wantto generate investment income or (3) they have strategic reasons such as controlling acompetitor or supplier or entering a new industry.S-A E 204(a)When should a long-term investment in common stock be accounted for by the equitymethod?(b)When is revenue recognized under the equity method?Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC:Communications, IMA: ReportingSolution 204(a)Whenever the investor's influence on the operating and financial affairs of the investee issignificant, the equity method should be used. The major factor in determining significantinfluence is the percentage of ownership interest held by the investor in the investee. Thegeneral guideline for use of the equity method is 20% or more ownership interest.Companies are required to use judgement, however, rather than blindly follow the 20%guideline. For example, 25% ownership in a company that is 75% controlled by anotherorganization would not indicate significant influence.(b)Revenue is recognized as net income is earned by the investee.S-A E 205If a company has a stock investment that is properly accounted for by the equity method, whatwill be the effect on the financial statements when they receive a dividend from its investee?Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC:Communications, IMA: ReportingSolution 205There will be no effect on the income statement. However, on the balance sheet Cash will beincreased by the same amount that the Investment account is decreased.S-A E 206Distinguish between the cost and equity methods of accounting for investments in stocks.Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC:Communications, IMA: Investment DecisionsFOR INSTRUCTOR USE ONLYH-61

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