Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
Answer: No Effect Decrease
Which of the following is not generally correct about recording a sale of a debt security before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
Answer: The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities
When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
Answer: by using the fair value method
