EQUITY INVESTMENTS COMPREHENSIVE EXAM SCRIPT COMPLETE QUESTIONS VERIFIED
SOLUTIONS
Question:
What are the two ways to earn a return from equity investments?
Answer:
Capital gains from selling the stock for more than you paid, and dividends from regular payments of
the company's profits.
Question:
Why study equity investments?
Answer:
They represent roughly 9- 10% of total financial assets held by U.S. nonfinancial firms and provide
foundational knowledge for understanding consolidation.
Question:
When should the equity method be used in accounting?
Answer:
The equity method should be used when the investor can exercise 'significant influence' over the
investee's operations.
Question:
What is 'significant influence' in the context of equity investments?
Answer:
It is generally assumed if an investor owns 20% or more of the investee's voting stock, but it
depends on specific facts and circumstances.
,Question:
What are indicators of significant influence?
Answer:
Representation on the board, participation in policy-making, ownership relative to other
shareholders, material transactions, and managerial movements between companies.
Question:
What are signs that significant influence might not exist?
Answer:
Disputes over influence, agreements giving up rights, majority shareholder control, and
unsuccessful attempts to gain board representation.
Question:
What happens when an investor gains control of an investee?
Answer:
The investor must consolidate the financial statements of both companies, replacing the Equity
Investment account with the investee's assets and liabilities.
Question:
How is an equity investment recorded when acquired?
Answer:
The investor records the Equity Investment based on the purchase price, which may include cash
and stock issuance.
Question:
What is the equivalence of equity investment and stockholders' equity?
Answer:
, If the acquisition is made at book value, the Equity Investment account matches the percentage of
the investee's equity owned by the investor.
Question:
How is profit from the investee accounted for after the investment?
Answer:
The investee's profit is treated as a return 'on' investment, while dividends are treated as a return 'of'
investment.
Question:
What is the accounting treatment when an equity investment is sold?
Answer:
Record cash proceeds, remove the asset at book value, and recognize a gain or loss on the sale.
Question:
What is the journal entry for selling an equity investment at a gain?
Answer:
Record cash received, remove the investment at book value, and recognize the gain.
Question:
What is the journal entry for selling an equity investment at a loss?
Answer:
Record cash received, remove the investment at book value, and recognize the loss.
Question:
What is amortization of excess assets?
Answer:
SOLUTIONS
Question:
What are the two ways to earn a return from equity investments?
Answer:
Capital gains from selling the stock for more than you paid, and dividends from regular payments of
the company's profits.
Question:
Why study equity investments?
Answer:
They represent roughly 9- 10% of total financial assets held by U.S. nonfinancial firms and provide
foundational knowledge for understanding consolidation.
Question:
When should the equity method be used in accounting?
Answer:
The equity method should be used when the investor can exercise 'significant influence' over the
investee's operations.
Question:
What is 'significant influence' in the context of equity investments?
Answer:
It is generally assumed if an investor owns 20% or more of the investee's voting stock, but it
depends on specific facts and circumstances.
,Question:
What are indicators of significant influence?
Answer:
Representation on the board, participation in policy-making, ownership relative to other
shareholders, material transactions, and managerial movements between companies.
Question:
What are signs that significant influence might not exist?
Answer:
Disputes over influence, agreements giving up rights, majority shareholder control, and
unsuccessful attempts to gain board representation.
Question:
What happens when an investor gains control of an investee?
Answer:
The investor must consolidate the financial statements of both companies, replacing the Equity
Investment account with the investee's assets and liabilities.
Question:
How is an equity investment recorded when acquired?
Answer:
The investor records the Equity Investment based on the purchase price, which may include cash
and stock issuance.
Question:
What is the equivalence of equity investment and stockholders' equity?
Answer:
, If the acquisition is made at book value, the Equity Investment account matches the percentage of
the investee's equity owned by the investor.
Question:
How is profit from the investee accounted for after the investment?
Answer:
The investee's profit is treated as a return 'on' investment, while dividends are treated as a return 'of'
investment.
Question:
What is the accounting treatment when an equity investment is sold?
Answer:
Record cash proceeds, remove the asset at book value, and recognize a gain or loss on the sale.
Question:
What is the journal entry for selling an equity investment at a gain?
Answer:
Record cash received, remove the investment at book value, and recognize the gain.
Question:
What is the journal entry for selling an equity investment at a loss?
Answer:
Record cash received, remove the investment at book value, and recognize the loss.
Question:
What is amortization of excess assets?
Answer:
