EQUITY INVESTMENTS UPDATED ACTUAL EXAM QUESTIONS CORRECT ANSWERS
GRADED A PLUS
Question:
What are two ways to earn a return from equity investments?
Answer:
Capital Gains (selling stock for more than paid) and Dividends (regular payments from profits).
Question:
Why study equity investments?
Answer:
They represent roughly 9- 10% of total financial assets held by U.S. nonfinancial firms and provide
groundwork for understanding consolidation.
Question:
When should the equity method be used for accounting?
Answer:
When the investor has the ability to exercise significant influence over the investee's operations.
Question:
What is considered 'significant influence'?
Answer:
Generally, owning 20% or more of the investee's voting stock indicates significant influence.
Question:
,What are indicators of significant influence?
Answer:
Representation on the board, participation in policy-making, ownership relative to other
shareholders, material transactions, and reliance on the investor for technology.
Question:
What are signs that significant influence might not exist?
Answer:
Disputes over influence, agreements giving up rights, majority shareholders ignoring the investor,
and unsuccessful attempts to gain board seats.
Question:
What happens when an investor gains control of an investee?
Answer:
The investor must consolidate the financial statements of both companies.
Question:
What is the journal entry for an investor purchasing equity?
Answer:
Record the equity investment at the purchase price, which may include cash and stock issuance.
Question:
How does the equity investment account relate to stockholders' equity?
Answer:
If acquired at book value, the equity investment account matches the percentage of the investee's
equity owned.
, Question:
How is profit and dividend from an investee recorded?
Answer:
Profit is treated as a return on investment; dividends are treated as a return of investment.
Question:
What is the accounting treatment when selling an equity investment?
Answer:
Record cash proceeds, remove the asset at book value, and recognize a gain or loss.
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 happens when acquisitions are made at greater than book value?
Answer:
The investor purchases both net assets and additional unrecorded assets.
Question:
GRADED A PLUS
Question:
What are two ways to earn a return from equity investments?
Answer:
Capital Gains (selling stock for more than paid) and Dividends (regular payments from profits).
Question:
Why study equity investments?
Answer:
They represent roughly 9- 10% of total financial assets held by U.S. nonfinancial firms and provide
groundwork for understanding consolidation.
Question:
When should the equity method be used for accounting?
Answer:
When the investor has the ability to exercise significant influence over the investee's operations.
Question:
What is considered 'significant influence'?
Answer:
Generally, owning 20% or more of the investee's voting stock indicates significant influence.
Question:
,What are indicators of significant influence?
Answer:
Representation on the board, participation in policy-making, ownership relative to other
shareholders, material transactions, and reliance on the investor for technology.
Question:
What are signs that significant influence might not exist?
Answer:
Disputes over influence, agreements giving up rights, majority shareholders ignoring the investor,
and unsuccessful attempts to gain board seats.
Question:
What happens when an investor gains control of an investee?
Answer:
The investor must consolidate the financial statements of both companies.
Question:
What is the journal entry for an investor purchasing equity?
Answer:
Record the equity investment at the purchase price, which may include cash and stock issuance.
Question:
How does the equity investment account relate to stockholders' equity?
Answer:
If acquired at book value, the equity investment account matches the percentage of the investee's
equity owned.
, Question:
How is profit and dividend from an investee recorded?
Answer:
Profit is treated as a return on investment; dividends are treated as a return of investment.
Question:
What is the accounting treatment when selling an equity investment?
Answer:
Record cash proceeds, remove the asset at book value, and recognize a gain or loss.
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 happens when acquisitions are made at greater than book value?
Answer:
The investor purchases both net assets and additional unrecorded assets.
Question:
