D105 Intermediate Accounting 3 (Unit 3: Investments Lecture and Practice Questions and Answers 2025) Western Governors University

D105 Intermediate Accounting 3 (Unit 3: Investments
Lecture and Practice Questions and Answers 2025) Western
Governors University




Unit 3: Investments
Lecture and Practice Questions and Answers


An entire lecture on this topic is at the following link: D105 Investments. Please review this material
carefully and thoroughly in conjunction with the following practice problems.

Companies can invest in another company’s securities, comprising debt (bonds) or equity (stocks).

FFThe company initially records the investment at cost, including the security purchase price,
broker’s commissions, and other fees incidental to the purchase. The company debits debt or equity
investments and credits cash for the transaction. Thereafter, adjustments are made to the security's
carrying value (cost) depending on the level of influence and the type of security involved.

Debit: Debt or Equity investment XXX
Credit: Cash XXX

The degree to which one company (investor) acquires an interest in the equity (stocks) securities of
another company (investee) determines the accounting treatment for that equity (stock) investment
after acquisition. The classification of equity (stocks) investments depends on the percentage of the
investee voting stock that the investor holds:

• Holdings of less than 20 percent (fair value method)—the investor has a passive interest.
• Holdings between 20 percent and 50 percent (equity method)—the investor has
significant influence. Significant influence can only be exercised with voting stock.
• Holdings of more than 50 percent (consolidated statements)—the investor has a controlling

,interest. The investor is the parent company, and the investee is the subsidiary (child)
company. The investor (parent company) accounts for the long-term investment (noncurrent
asset) in the investee (subsidiary company) using the equity method.




1

, Question Answer
All investment securities are initially recorded at Ans a
a. cost.
b. present value.
c. equity value.
d. none of the above is correct.

GAAP, regarding an investment in another company’s equity Ans a
(common stock) securities not involving significant influence,
generally applies to an investment when the percentage of
ownership of another company is
a. less than 20%.
b. 20% to 50%.
c. over 50%.
d. precisely 100%.

Which equity (common stock) securities should be Ans b
accounted for using the equity method?
a. securities where a company has holdings of less than 20%.
b. securities where a company has holdings between 20%
and 50%.
c. securities where a company has between 50% and 80%
holdings.
d. securities where a company has holdings of more
than 80%.

Which equity (common stock) securities should be Ans a
accounted for using the fair value method?
a. securities where a company has holdings of less than 20%.
b. securities where a company has holdings 20% to 50%.
c. securities where a company has between 50% and 80%
holdings.
d. securities where a company has holdings of more than
80%.

Which equity (common stock) should the parent account Ans d
securities for using the consolidation method? Lesson 8: The parent generally prepares
a. securities where a company has holdings of less than 20%. consolidated financial statements when
b. securities where a company has holdings between 20% treating the investment as a subsidiary,
and 50%. which would be at a 50% ownership of the
c. securities where a company has holdings of 50% or more. subsidiary's outstanding shares of common
d. securities where a company has holdings of more stock or greater.
than 50%.




2

, Which common stock percentage ownership interest is a result Ans a
of when generally no significant influence exists?
a. a company has holdings of less than 20%.
b. a company has holdings between 20% and 50%.
c. a company has holdings of between 50% and 80%.
d. a company has holdings of more than 80%.

When generally significant influence exists, what is the Ans b
securities (common stock) investment interest?
a. a company has holdings of less than 20%.
b. a company has holdings between 20% and 50%.
c. a company has holdings of between 50% and 80%.
d. a company has holdings of more than 80%.


What is the securities (stock) investment interest when Ans d
control exists?
a. a company has holdings of less than 20%.
b. a company has holdings between 20% and 50%.
c. a company has holdings of 50% or more.
d. A company has holdings of more than 50%.

Which method accounts for an equity investment holding Ans a
of less than 20%?
a. fair value.
b. equity.
c. consolidation.
d. amortized cost.

Which method generally accounts for an equity investment Ans b
holding of 20% to 50%?
a. fair value.
b. equity.
c. consolidation.
d. amortized cost.

Which method is used by the parent company on the parent’s Ans b
books to account for an equity investment in a subsidiary for Lesson 8: Whether or not consolidated
a holding more significant than 50%? financial statements are prepared, the
a. fair value. parent company generally accounts for the
b. equity. investment in the subsidiary using the
c. consolidation. equity method on the parent company’s
d. amortized cost. books.

If the parent company owns 90% of the subsidiary Ans c
company's outstanding common stock, the parent company Lesson 8: When the parent treats the
prepares consolidated financial statements under which investment as a subsidiary, which would be
method? at a 90% level of ownership of the common
a. cost method. stock of the subsidiary, the parent generally
3