#1
When does an investor typically use the cost method for accounting investments in subsidiaries?
When the investor has significant influence over the investee
When the investor has control over the investee
When the investor has no significant influence over the investee
When the investor holds a minority stake in the investee
#2
In the equity method, how is the initial investment recorded?
At cost
At fair value
At book value
At liquidation value
#3
Which accounting method is used when an investor has significant influence over the investee?
Cost method
Equity method
Consolidation method
Fair value method
#4
Under the equity method, how are dividends received from the investee accounted for?
As income on the income statement
As a reduction of the investment account
As an expense on the income statement
As a liability on the balance sheet
#5
What financial statement reflects the investment in subsidiary under the equity method?
Income statement
Balance sheet
Statement of cash flows
Notes to the financial statements
#6
What is the primary difference between the equity method and the cost method of accounting for investments?
Treatment of dividends
Recognition of investee's net income
Recognition of changes in fair value
Disclosure requirements
#7
In the consolidation method, how are the financial statements of the parent and subsidiary combined?
By eliminating intercompany transactions and balances
By adding the values of the parent and subsidiary
By treating the subsidiary as a separate entity
By reporting the subsidiary's financials as a footnote
#8
Which accounting standard governs the equity method of accounting for investments?
International Financial Reporting Standards (IFRS)
Generally Accepted Accounting Principles (GAAP)
International Accounting Standards (IAS)
Financial Accounting Standards Board (FASB) standards
#9
In the equity method, how are changes in the investee's net income recognized by the investor?
As a direct increase to the investment account
As a revenue on the income statement
As a reduction of the investment account
As a separate line item in the equity section
#10
Under the cost method, how are changes in the fair value of the investment recognized?
As a separate line item in the equity section
As a direct increase to the investment account
As revenue on the income statement
As a reduction of the investment account
#11
Under what circumstances would an investor discontinue using the equity method for accounting?
When the investor's ownership falls below 20%
When the investee's financial condition deteriorates
When the investee becomes a subsidiary
When the investor's ownership falls below 10%
#12
Under the equity method, how are unrealized gains or losses on intercompany transactions treated?
Recognized in income immediately
Deferred until the subsidiary is sold
Eliminated in consolidation
Recorded as an asset or liability
#13
Under the equity method, how are adjustments for changes in the investee's net assets recognized?
As an expense on the income statement
As a direct increase to the investment account
As a separate line item in the equity section
As a reduction of the investment account
#14
What happens to the carrying value of an investment under the equity method if the investor records a share of the investee's losses?
It remains unchanged
It decreases
It increases
It depends on the investor's level of ownership