Asked by Mandalyns Watters on Jun 17, 2024
Verified
Which of the following is true about a passive investment in common stock?
A) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment is reported on the balance sheet at cost.
B) The investment must not have any voting rights.
C) The fair value method requires unrealized gains and losses to be recognized in the stockholders' equity section of the balance sheet.
D) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment must be reported at fair value on the balance sheet.
Passive Investment
An investment strategy involving minimal buying and selling actions, typically focused on long-term gains and avoiding frequent trading.
Common Stock
A type of security that represents ownership in a corporation and grants shareholders voting rights and a share in the company's profits through dividends.
Fair Value
The estimated market price of an asset or liability, reflecting the amount for which it could be exchanged or settled between knowledgeable, willing parties in an arm's length transaction.
- Apprehend the significance of fair value adjustments in the context of financial reporting.
Verified Answer
JM
jasha moncurJun 21, 2024
Final Answer :
D
Explanation :
A passive investment in common stock usually means that the investing company owns less than 20% of the voting stock in the affiliate. For such investments, the fair value method is used, which requires the investment to be reported at fair value on the balance sheet. Unrealized gains and losses are recognized in the income statement, not in the stockholders' equity section of the balance sheet. Therefore, option D is the correct answer. Option A is incorrect because it incorrectly states that the investment is reported on the balance sheet at cost. Option B is incorrect because it is not necessary for a passive investment in common stock to have no voting rights. Option C is incorrect because it incorrectly states that unrealized gains and losses are recognized in the stockholders' equity section of the balance sheet.
Learning Objectives
- Apprehend the significance of fair value adjustments in the context of financial reporting.