1. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a. Investor sells the investment.

b. Investee declares a dividend.

c. Investee pays a dividend.

d. Earnings are reported by the investee in its financial statements.

2. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

a. Understate, overstate, overstate

b. Overstate, understate, understate

c. Overstate, overstate, overstate

d. Understate, understate, understate

3. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011?

I. $3,000,000

II. $3,040,000

III. $3,120,000

a. I, II, or III.

b. I or II only.

c. II only.

d. II or III only.

4. The fair value option allows a company to

a. Value its own liabilities at fair value.

b. Record income when the fair value of its bonds increases.

c. Report most financial instruments at fair value by recording gains and losses as a separate component of stockholders' equity.

d. All of the above are true of the fair value option.

5. Impairments are

a. Based on discounted cash flows for securities.

b. Recognized as a realized loss if the impairment is judged to be temporary.

c. Based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments.

d. Evaluated at each reporting date for every investment.