Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends

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

APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the

APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the

a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.


Answer: effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. None of these answers are correct.


Answer: debit to Available-for-Sale Securities

Which of the following is correct about the effective-interest method of amortization?

a. The effective-interest method applied to investments in debt securities is different from that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.


Answer: The effective-interest method produces a constant rate of return on the book value of the investment from period to period

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.


Answer: make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date

Which of the following is not a debt security?

a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.


Answer: Loans receivable

Unrealized holding gains or losses which are recognized in income are from securities classified as

a. held-to-maturity.
b. available-for-sale.
c. trading.
d. None of these answers are correct.


Answer: trading