Deck 7: Accounting for Debt and Share Investments

Question 1

Non-strategic investments are always classified as short-term regardless of how long the investment is planned to be held.

Answer 1

False

Question 2

"Share investment" and "equity security" are interchangeable terms.

Answer 2

True

Question 3

"Debt investment" and "debt security" are interchangeable terms.

Answer 3

True

Question 4

Management's intent and the marketability of a security determine whether or not a security is classified as a long-term or current asset.

Question 5

A joint arrangement can be classified as either a joint operation or a joint venture.

Question 6

Non-strategic investments can result in gains or losses for a company.

Question 7

Non-strategic investments are usually held as an investment of cash for use in current operations.

Question 8

Strategic investments include investments in associates,business combinations and joint arrangements.

Question 9

When you purchase a debt investment such as a bond of another corporation,this type of investment represents an "equity security."

Question 10

Long-term bonds are examples of non-strategic investments.

Question 11

Investments in debt securities are always current assets.

Question 12

A joint arrangement requires the use of consolidation to account for the investment in the joint operation.

Question 13

When a company purchases the shares of another company with the goal of participating in new markets or technologies,they are considered non-strategic investors.

Question 14

Non-strategic investments are of two types: debt and share investments.

Question 15

If a company has cash available for longer term investments,both debt and equity investments may be considered.

Question 16

The term "equity security" refers to the guarantee your broker gives you concerning an investment that was just made for you.

Question 17

When a corporation purchases the shares or bonds of other companies,it has made an intercorporate investment.

Question 18

You have just purchased some shares in a Canadian public company.Your friends call you an "investee." You are surprised that they got it wrong: you are an investor.

Question 19

Investments in shares are the same as debt investments.

Question 20

Investments are often made by companies with excess cash hoping to earn a higher return than might be realized by holding cash in the bank.

Question 21

Changes in investment values are recognized with a credit to short-term investments and a debit to unrealized gains.

Question 22

Investments non-strategic debt investments require the investor to record interest income as it accrues.

Question 23

Brokerage costs and transaction costs can be included as part of the cost of non-strategic investments.

Question 24

Halifax Company purchased $50,000 worth of bonds (par value)and held them to maturity.The journal entry at maturity should include a debit to Cash for $50,000 and a credit to Long-term Investment in Bonds for $50,000.

Question 25

The distinguishing feature of debt investments held for the long-term is that they are held to maturity.

Question 26

The investor should report short-term investments at fair value.

Question 27

Tool Co.received cash dividends of $3.5 per share on 300 Sharp Systems Inc.shares.The journal entry to record the transaction is a debit to Cash of $1,050 and a credit to Dividend Income of $1,050.

Question 28

After recording the initial purchase of non-strategic investments,an entity must continue to measure the investment at fair value; subsequent profits or losses arising are recognized in profit.

Question 29

Repeat Inc.purchased $60,000 (40%)worth of Quiet Corp.common shares.The journal entry to record the purchase should include a debit to Cash for $60,000 and a credit to Quiet Corp.Investment for $60,000.

Question 30

Purchases of long-term debt investments are never initially recorded at fair value.

Question 31

Non-strategic equity investments securities are equity securities that the company has the intent and ability to hold until maturity.

Question 32

Classical City holds $40,000 worth of 7% bonds (par value)as debt investments.The journal entry to record receipt of the semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest Income for $2,800.

Question 33

Investors originally record non-strategic investments using the cost method.

Question 34

The sale of a short-term equity investment requires a debit to cash and a credit to short-term investments,with any resulting differences recognized as gains or losses.

Question 35

For non-strategic debt investments,the fair value through profit and loss method allows the inclusion of any transaction costs in addition to the purchase price.

Question 36

Comoco purchased $3,000 of Borel Ltd shares intending to sell the shares within a short time at a profit.The journal entry to record the transaction would include a debit to cash and a credit to short-term investments.

Question 37

Strategic investments are classified into three different categories: investments in associates,business combinations,or joint ventures.

Question 38

Non-strategic debt investments are initially recorded using either the fair value through profit or loss method or amortized cost method.

Question 39

The method of accounting for an investment under the fair value under profit or loss is irrevocable after initial designation.

Question 40

An investor that significantly influences the operations of an investee should account for the investment using the equity method.

Question 41

Joint venture arrangements are ones in which two or more parties jointly control the resulting economic activity.

Question 42

The equity method is used in accounting for significant influence investments in associates.

Question 43

Proportionate consolidation combines the financial statement of an investor and a joint operation enterprise based on the investors proportionate share of the joint operations.

Question 44

On January 5,2015,Erin Ridge Corp.purchased 28,000 shares of Forest Lawn Inc.common shares for $146,000 plus a broker's fee of $1,000.Forest Lawn Inc.has 50,000 common shares outstanding and has acknowledged the fact that its policies will be significantly influenced by Erin Ridge.The investment should be accounted for as a non-equity investment using the fair value method.

Question 45

On May 15,Kingswood Company purchased 30% worth of Pineview Ltd.'s common shares as a significant influence investment.On September 30,Pineview announced that profit for the year amounted to $650,000.Kingswood should record a debit to Investment in Pineview Common Shares of $195,000 and a credit to Earnings from Investment in Pineview of $195,000.

Question 46

Micron owns 30% of JVT Corp's common shares and has significant influence over JVT's operations.Micron receives $6,500 in dividends from JVT.The entry to record receipt of the dividends includes a debit to Cash for $6,500 and a credit to Investment in JVT Shares for $6,500.

Question 47

A business combination occurs when an investor with a long-term share investment that represents more than 50% of the investee's voting shares has control over the investee.

Question 48

Consolidated financial statements show the financial position,results of operations,and cash flows of all companies under the parent's control,including all subsidiaries

Question 49

Under IFRS,investments in associates are accounted for using the fair value through profit or loss method.

Question 50

A company that owns 100% of the outstanding shares of a subsidiary is required to take over the subsidiary's assets,cancel the subsidiary's shares,and merge the subsidiary into the parent.

Question 51

Receipt of dividends increases the value of a significant influence investment.

Question 52

Under both IFRS and ASPE,fair value through profit or loss can be used as the initial measurement of non-strategic investments.

Question 53

Consolidated financial statements show the financial position,results of operations,and cash flows of all companies under the parent's control.

Question 54

In a joint venture,the venture would use the equity method to account for their share of the joint venture.

Question 55

Consolidated statements are prepared as if a company is organized as one entity,with the amounts allocated for subsidiaries reported in the investment accounts.

Question 56

When using the equity method,the receipt of cash dividends is recorded as revenue because the investor has earned a distribution of earnings by the investee.

Question 57

When a business operates as a parent company with subsidiaries,the accounting records are combined into one set of consolidated records.

Question 58

When an investment in equity securities is sold,the gain or loss is calculated by comparing proceeds from the sale with the book value of the investment on the date of sale.

Question 59

The main feature of a non-strategic investment is that the investor's intent is to generate profit primarily through short-term changes in fair value.

Question 60

The receipt of cash dividends from a significant influence investment is recorded as a reduction to retained earnings by the investor.

Question 61

Investments in associates

A)Can be either debt or equity securities
B)Are not actively managed
C)Are purchased to earn interest,dividends,or for appreciation in value
D)Are accounted for using the equity method
E)All of these

Question 62

On December 31,as a short-term investment,Music City purchased 300 Radio Land Corporation common shares at $50 per share plus a $50 commission.The amount recorded as a debit to Short-term Investments- Radio Land would be

A)$15,050
B)$15,000
C)$50
D)No transaction need be recorded
E)$5,000

Question 63

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The journal entry to record acquisition of the bonds includes a debit to Long-Term Investment in Airport Bonds for

A)$37,800
B)$38,325
C)$40,000
D)$40,525
E)$41,525

Question 64

Strategic investments that occur when the investor can significantly influence the strategic operating,investing,and/or financing policies of the investee are called

A)Joint arrangement
B)Investments in associates
C)Business combinations
D)Non-strategic investment in bonds
E)Proportionate investment

Question 65

Debt investments

A)Are cash equivalents
B)Are usually accounted for using the amortized cost method
C)Can be converted to cash within 3 months or less
D)Reflect an ownership relationship
E)Are cash equivalents and reflect a creditor relationship

Question 66

On January 1,2015,Parris Corporation purchased 75% of Samitz Corporation for $100,000.On November 17,2015,Samitz Corporation declared total dividends of $12,000.At year-end,Samitz Corporation reported profit of $60,000.The balance in the Parris Corporation's Investment in Samitz Corporation at December 31,2015 should be

A)$91,000
B)$100,000
C)$109,000
D)$136,000
E)$148,000

Question 67

Investments in non-strategic equity investments

A)Include purchase costs and any transaction costs
B)Are always reported as long-term assets
C)Are accounted for using amortized cost
D)Are held for long-term gains
E)Are held to recognize long-term changes in fair value

Question 68

Non-strategic equity investments are accounted for using the

A)Cost method
B)Equity method
C)Consolidation method
D)Amortized cost method
E)Fair value method

Question 69

On January 1, 2020, Ildiko Corporation purchased a 35% interest in the common shares of Rance Ltd. for $60,000. Rance Ltd. reported profit and paid dividends as follows: 2020 - profit $40,000; dividends paid $50,000

2021 - profit $85,000; dividends paid $70,000. Assume that Ildiko Corporation uses the equity method to account for its investment in Rance Ltd.


-The balance in the "Investment Income" account on Ildiko's Income Statement for the year ended December 31,2021 is

A)$43,750
B)$5,250
C)$29,750
D)$61,750
E)None of these

Question 70

Strategic investments

A)Are investments in associates
B)Are business combinations
C)Are joint arrangements
D)Have significant influence or control over the investee
E)All of these

Question 71

As an investment in associates,Spotifly purchased 1,000 Tangerine Music Corp common shares for $123,000.Tangerine Music Corp also paid $575 in commissions on the transaction.The entry to record the transaction would include a:

A)Credit to Common Shares for $1,000
B)Credit to Common Shares for $123,000
C)Credit to Common Shares for $123,575
D)Debit to Investment in Tangerine Music Common Shares for $123,575
E)Debit to Investment in Associates for $123,000

Question 72

On January 1, 2020, Ildiko Corporation purchased a 35% interest in the common shares of Rance Ltd. for $60,000. Rance Ltd. reported profit and paid dividends as follows: 2020 - profit $40,000; dividends paid $50,000

2021 - profit $85,000; dividends paid $70,000. Assume that Ildiko Corporation uses the equity method to account for its investment in Rance Ltd.


-The balance in the "Investment in Associate - Rance Ltd" account on Ildiko's balance sheet at December 31,2020 is

A)$103,750
B)$64,750
C)$60,000
D)$61,750
E)None of these

Question 73

Eastjet owns Flair Corp bonds as a short-term equity investment with a carrying value of $75,000.The current market value is $68,500.Eastjet should record a

A)Debit to Investment Loss for $6,500
B)Credit to Investment Income for $6,500
C)Credit to Held-for-Trading Investment Gain for $6,500
D)Credit to Held-for-Trading Investment for $6,500
E)Debit to Investment Income for $6,500

Question 74

Swixon owns 17% of Nugoi as an investment in an associate.Nugoi paid $28,000 in total dividends to its shareholders.Swixon should record a

A)Debit to Dividend Income for $28,000
B)Debit to Dividend Income for $4,760
C)Credit to Cash for $4,760
D)Debit to Investment in Nugoi Common Shares for $4,760
E)Credit to Investment in Nugoi Common Shares for $4,760

Question 75

Master purchased 60,000 Kotram Corp common shares.This represents 40% of the outstanding shares.The purchase price was $142,000.The entry to record the transaction includes a

A)Debit to Investment in Kotram Common Shares for $56,800
B)Debit to Investment in Kotram Common Shares for $142,000
C)Credit to Investment in Kotram Common Shares for $56,800
D)Credit to Investment in Kotram Common Shares for $142,000
E)Debit to Investment in Kotram Common Shares for $24,000

Question 76

On January 1, 2020, Ildiko Corporation purchased a 35% interest in the common shares of Rance Ltd. for $60,000. Rance Ltd. reported profit and paid dividends as follows: 2020 - profit $40,000; dividends paid $50,000

2021 - profit $85,000; dividends paid $70,000. Assume that Ildiko Corporation uses the equity method to account for its investment in Rance Ltd.


-A controlling influence over the investee is based on the investor owning voting shares exceeding

A)10%
B)20%
C)30%
D)40%
E)50%

Question 77

Dax purchased 200 of the 500 outstanding Minisoft Corporation common shares at $55 per share plus a $100 brokerage fee as an investment in an associate.If Minisoft has profit for the year of $50,000 and pays a dividend of $5/share,what information should Dax report on its income statement relating to the investment?

A)$20,000 for earnings from the investment in Minisoft
B)$50,000 in investment revenue
C)$1,000 dividend income
D)$20,000 for earnings from the investment in Minisoft and dividend income of $1,000
E)$50,000 in investment revenue and dividend revenue of $1,000

Question 78

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value.Music City intends to hold the bonds to maturity.The proceeds Music City receives at maturity will be

A)$37,800
B)$38,325
C)$40,000
D)$40,525
E)$43,200

Question 79

On January 4,Year 1,Larsen Corp purchased 10,000 shares of Warner Corp for $119,000 plus a broker's fee of $2,000.Warner Corp has 50,000 common shares outstanding and it is presumed the Larsen Corp will have a significant influence over Warner Corp.During Year 1 and Year 2,Warner Corp declared and paid cash dividends of $0.85 per share.Warner Corp's profit was $72,000 and $67,000 for Year 1 and year 2,respectively.The January 12,Year 3 entry to record the sale of 5,000 shares of Warner Corp for $65,000 should be

A)
$\begin{array}{|l|r|r|}\hline \text { Cash } & 65,000 \\\hline \text { Investment Income } & & 16,600 \\\hline \text { Investment in Associate - Warner } & 48,400 & \\\hline\end{array}$
B)
$\begin{array}{|l|r|r|}\hline \text { Cash } & 65,000 \\\hline \text { Investment Loss } & & 900 \\\hline \text { Investment in Associate - Warner } & 65,900 & \\\hline\end{array}$
C)
$\begin{array}{|l|r|r|}\hline \text { Cash } & 65,00 \mathrm{~d} \\\hline \text { Investment Income } & & 100 \\\hline \text { Investment in Associate - Warner } & 64,900 \\\hline\end{array}$
D)
$\begin{array}{|l|r|r|}\hline \text { Cash } & 65,000 \\\hline \text { Investment Income } & & 4,500 \\\hline \text { Investment in Associate - Warner } & 60,500 & \\\hline\end{array}$
E)
$\begin{array}{|l|r|r|}\hline \text { Cash } & 65,000 \\\hline \text { Investment Loss } & & 56,000 \\\hline \text { Investment in Associate - Warner } & 121,000 & \\\hline\end{array}$

Question 80

On January 1,X Corporation purchased 80% of Y Corporation for $250,000.On May 20,Y Corporation declared total dividends of $30,000.At year-end Y Corporation reported profit of $150,000.The balance in X Corporation's Investment in Y Corporation account at December 31 should be

A)$370,000
B)$346,000
C)$250,000
D)$226,000
E)$220,000