Question

Question 6
If the cost method is used to account for a long-term investment in common stock, dividends received should be

credited to the Dividend Revenue account.
debited to the Stock Investments account.
recorded only when 20% or more of the stock is owned.
credited to the Stock Investments account.

Question 7
If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is

determined by agreement with whomever owns the remaining 90% of the stock.
the preparation of consolidated financial statements.
the cost method.
the equity method.

Question 8
When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor

has significant influence on the investee and that the equity method should be used to account for the investment.
has insignificant influence on the investee and that the cost method should be used to account for the investment.
will prepare consolidated financial statements.
should apply the cost method in accounting for the investment.

Question 9
Under the equity method, the Stock Investments account is increased when the

investee company reports net income.
investee company pays a dividend.
investee company reports a loss.
stock investment is sold at a gain.

Question 10
Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

% of Investor Ownership      Presumed Influence

A.More than 50%      Long-term
B.Between 20%-50%      Controlling
C.Less than 20%      Short-term
D.Between 20%-50%      Significant

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

6)

Cost method of accounting for long term investment is used when there is no influence over the company by the investor ( ownership is less than 20%). When cost method is used, dividends received are recoded as income and are credited to dividend revenue account

Equity method of accounting for long term investment is used when there is significant influence over the company by the investor ( ownership is 20% to 50%). When equity method is used, dividends received are recoded as reduction in investment value and are credited to investment account

So, as per above discussion, option A is the correct option