Deck 9: Investments

Question 1

Comprehensive income is included as part of

A)retained earnings.
B)net income.
C)shareholders' equity.
D)unearned revenue.

Answer 1

C

Question 2

The price of a debt instrument is quoted as a percentage of

A)its face value
B)its fair market value
C)its book value
D)None of these

Answer 2

A

Question 3

An investment in an entity's debt instruments makes that investor a(n)

A)owner of the issuing entity
B)creditor of the issuing entity
C)parent company
D)None of these

Answer 3

B

Question 4

An investment that is intended to be held for three years should generally be classified as a(n)

A)Long term asset
B)Equity investment
C)Temporary investment
D)None of these

Question 5

The present value of a note will equal its face value when

A)the face rate and the stated interest rate are the same.
B)risk is low.
C)the effective and stated interest rates are the same.
D)the effective and the market interest rates are the same.

Question 6

Under the cost/amortized cost model, holding gains are

A)recognized in net income only when realized
B)recognized in other comprehensive income
C)recognized depending on management's intention
D)None of these

Question 7

The difference between the face value and the present value of a note receivable, where the face value is higher at the time the note is issued, is recorded by the issuer as

A)a debit to Premium on Note Receivable.
B)a credit to Premium on Note Receivable.
C)a credit to Discount on Note Receivable.
D)a debit to Discount on Note Receivable.

Question 8

The application of the incurred loss model in accounting for impairments

A)Uses the historical rate of interest in the discounting process
B)Uses the current market rate of interest in the discounting process
C)Uses the investors internal rate of return in the discounting process
D)None of these

Question 9

The application of the expected cash flow model in accounting for impairments

A)Generally uses the historical interest rate in the discounting process.
B)Uses the historical rate of interest in the discounting process
C)Uses the investors internal rate of return in the discounting process
D)None of these

Question 10

Under the fair value through net income model, holding gains are

A)generally recognized in net income
B)recognized in other comprehensive income
C)recognized depending on management's intention
D)(a) and (c)

Question 11

A company that uses the cost method for an investment in a public company's actively traded shares

A)Does not follow PE GAAP
B)Does not follow international GAAP
C)(a) and (b)
D)None of these

Question 12

If a zero interest bearing note is received in exchange for cash, the implicit interest rate is

A)calculated as the present value of the face rate.
B)agreed between the two parties to the transaction.
C)the rate that equates cash paid with the amounts receivable in the future.
D)not determinable.

Question 13

Under PE GAAP, transaction costs are

A)always expensed.
B)capitalized when the investments are accounted for under the cost/amortized cost model.
C)expensed when the investments are accounted for under the fair value through income model.
D)None of these.

Question 14

Which of the following is not a debt security?

A)Convertible bonds
B)Commercial paper
C)Loans receivable
D)All of these are debt securities.

Question 15

Comprehensive income is

A)the change in net income for the complete entity.
B)revenue and expense items that accounting standards exclude from net income.
C)all past changes and credits excluded from net income.
D)the change in equity during the period from transactions and events from non-owner sources.

Question 16

Equity investments that are accounted for under the cost model will result in

A)the recognition of a gain or loss in net income at disposal
B)the recognition of a gain or loss in other comprehensive income
C)all of these
D)the recognition of dividend income when the dividends are declared

Question 17

The test of marketability must be met before securities owned can be properly classified as

A)intangible assets.
B)long-term investments.
C)current assets.
D)none of these.

Question 18

Under the fair value through other comprehensive income model, holding gains and losses

A)are recognized in other comprehensive income
B)are accumulated in other comprehensive income
C)are recognized in net income
D)(a) and (b)

Question 19

Which of the following is an "equity security"?

A)Treasury shares
B)Term preferred shares
C)Convertible bonds
D)Warrants

Question 20

Under the fair value through other comprehensive income model, investments are reported as long term assets

A)Depending on marketability and management intent
B)Depending on the value and risk of the investment
C)Depending on the balance in the accumulated comprehensive income account
D)None of these

Question 21

Which of the following is not generally correct about recording a sale of a debt security before the maturity date?

A)Accrued interest will be received by the seller even though it is not an interest payment date.
B)An entry must be made to amortize a discount to the date of sale.
C)The entry to amortize a premium to the date of sale includes a credit to Premium on
D)A gain or loss on the sale is not extraordinary.

Question 22

Which of the following best describes the disclosure requirements for investments? The disclosure must include

A)Information about the investment's significance to the investor's financial position and performance.
B)Information about the risks that the investor faces as a result of the investments
C)Information about how these risks are managed.
D)All of these

Question 23

Other comprehensive income does not include

A)Comprehensive income
B)net income
C)Holding gains resulting from the application of the fair value through other comprehensive income model.
D)(b) and (c)

Question 24

A bond is purchased at a discount and will be accounted for under the amortized cost model.The entry to record the amortization of the discount includes a

A)debit to the investment account.
B)debit to the discount account.
C)debit to Interest Revenue.
D)none of these.

Question 25

Which of the following is not a condition for investments to be classified as current?

A)It must be held primarily for trading purposes.
B)It must be a cash equivalent.
C)It must be expected to be sold or realized within 12 months from the balance sheet
D)It must be accounted for under the cost model.

Question 26

Bitter Corporation accounts for its investment in the common shares of Young Company under the equity method.Bitter Corporation should ordinarily record a cash dividend received from Young as

A)a reduction of the carrying value of the investment.
B)additional paid-in capital.
C)an addition to the carrying value of the investment.
D)dividend income.

Question 27

An investor who owns 15% of an entity's voting shares can

A)Always be assumed to have little or no influence over the investee
B)Potentially have influence over the investee if the shares are widely held
C)Be assumed to account for the investment under the cost model.
D)(a) and (c)

Question 28

The accounting for investments in another entity's equity instruments depends mainly on

A)The level of influence the investor is able to exert
B)The level of influence the investor actually exerts
C)The quality of earnings of the investee
D)Whether the investee pays dividends

Question 29

Investments in companies with shares that are traded in an active market

A)cannot be accounted for under the cost model
B)can be accounted for under the fair value through net income model
C)should generally be accounted for under the fair value through other comprehensive income model.
D)(a) and (b)

Question 30

The fair value through net income model requires that

A)investments are measured at fair value
B)transaction costs are expensed as incurred.
C)transaction costs are generally capitalized
D)(a) and (b)

Question 31

Pippen Co.purchased ten-year, 10% bonds that pay interest semi-annually.The bonds are sold to yield 8%.One step in calculating the issue price of the bonds is to multiply the principal by the table value for

A)10 periods and 10% from the present value of 1 table.
B)10 periods and 8% from the present value of 1 table.
C)20 periods and 5% from the present value of 1 table.
D)20 periods and 4% from the present value of 1 table.

Question 32

Which of the following situations might indicate the potential impairment of the underlying securities?

A)The issuing entity is experiencing major financial difficulties
B)The issuing entity is unable to pay its liabilities
C)All of these
D)The issuing entity is undergoing a major reorganization

Question 33

Investments should be reported as current if

A)they mature within 12 months of the balance sheet date
B)the investor is expected to exert significant influence over the investee in the current reporting period.
C)the investment is expected to result in a current period loss
D)none of these

Question 34

The concept of recycling within the context of investments

A)refers to the transfer of previously unrealized gains or losses to net income.
B)refers to the switch of income between different investments categories.
C)can be used in the fair value through other comprehensive income model.
D)should not be used in the fair value through other comprehensive income model.

Question 35

When a public company holds between 20% and 50% of the outstanding common shares of an investee, which of the following statements applies?

A)The investor should always use the equity method to account for its investment.
B)The investor should use the equity method to account for its investment unless circum- stances indicate that it is unable to exercise "significant influence" over the investee.
C)The investor must use the cost method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D)The investor should always use the cost method to account for its investment.

Question 36

Dorr, Inc., owns 35% of Moik Corporation.During the calendar year 2011, Moik had net earnings of $300,000 and paid dividends of $30,000.Dorr mistakenly recorded these transactions using the cost 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

Question 37

Accumulated other comprehensive income includes

A)the balance of all previous debits to other comprehensive income.
B)the balance of all previous debits and credits to other comprehensive income.
C)current year's net income
D)(a) and (b)

Question 38

When an investment is readily marketable, it means

A)management intends to convert it to cash within a year or operating cycle, whichever is longer.
B)it can be sold easily with minimum cost.
C)it is an investment in shares rather than a debt security.
D)it is a current asset.

Question 39

Comprehensive income includes

A)Changes in equity related to non-owner sourced transactions.
B)Changes in equity related to funds received from owners or shareholders.
C)Other comprehensive income
D)All of these

Question 40

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.

Question 41

The standards as they relate to the accounting for investments, differ under PE GAAP and IFRS.Which of the following statement(s) best describe(s) the treatment of transaction costs?

A)IFRS requires that transaction costs are capitalized except for those investments that are accounted under the fair value to net income model.
B)PE GAAP requires that transaction costs are capitalized except for those investments that are accounted under the fair value to net income model.
C)PE GAAP requires that transaction costs are expenses whenever cost-based measures are used.
D)(a) and (c)

Question 42

On its December 31, 2011, balance sheet, Merck Co.reported its temporary investment in equity securities, under the fair value through net income model at $330,000.At December 31, 2012, the fair value of the securities was $350,000.What should Merck report on its 2012 income statement as a result of the increase in fair value of the investments in 2012?

A)$0
B)Loss on investments of $10,000
C)Unrealized gain of $20,000
D)Investment income of $20,000

Question 43

On August 1, 2011, Cassidy Company acquired $60,000 face value 10% bonds of Hurley Corporation at 104 plus accrued interest.The bonds were dated May 1, 2011, and mature on April 30, 2016, with interest payable each October 31 and April 30.The bonds will be held to maturity.Assuming the cost model is used, what entry should Cassidy make to record the purchase of the bonds on August 1, 2011?

Question 44

The disclosure requirements for private entities are usually less extensive as compared to those for public entities because

A)investors in private entities are expected to have less information about the company.
B)investors in private entities are expected to have more information about the company.
C)investors in private entities tend to be more sophisticated.
D)investors in private entities tend to be less sophisticated.

Question 45

An investor who owns 11% of an entity's voting shares

A)May have significant influence over the investee if the shares are closely held
B)May have significant influence over the investee if the shares are widely held
C)None of these
D)Would likely choose the consolidation method

Question 46

Russin, Inc.owns bonds that are accounted for under the fair value to net income model. The bonds have a carrying value of $124,365 on December 31, 2011.The fair value at that date is $123,000.The entry to record the year-end adjustment is Use the following information for questions 63 through 66.
The summarized balance sheets of Nolte Company and Boswell Company as of December 31,
2011 are as follows:

Question 47

Which of the following is a reason for the differences in the disclosure requirements for investments in associates under IFRS and PE GAAP?

A)Because PE GAAP requires that the associate must be a private entity
B)Because PE GAAP allows the use of methods other than the equity method
C)Because PE GAAP does not include an "associates" category
D)None of these

Question 48

The standards as they relate to the accounting for investments, differ under PE GAAP and IFRS.Which of the following best describes the differences relative to the reporting for investments in subsidiaries?

A)IFRS requires consolidation whereas PE GAAP offers a choice of methods
B)PE GAAP requires consolidation whereas IFRS offers a choice of methods
C)Consolidation is specifically excluded as one of the choices under PE GAAP
D)Consolidation is specifically excluded as one of the choices under IFRS

Question 49

When the investor has control over the investee, this method is known as the:

A)Cost method
B)Consolidation method
C)Market value method
D)Equity method

Question 50

An investor who has subsidiaries

A)Is required to prepare consolidated financial statements under IFRS
B)Has the option to prepare consolidated financial statements under PE GAAP
C)None of these
D)(a) and (b)

Question 51

The standards as they relate to the accounting for investments, differ under PE GAAP and IFRS.Which of the following statement(s)best describe(s) the treatment of interest and dividend income?

A)IFRS requires the use of the effective interest method when interest income is to be reported separately.
B)IFRS requires certain dividends to be recognized in other comprehensive income
C)PE GAAP allows the use of either the straight-line or effective interest method when applicable.
D)All of these

Question 52

If the parent company owns 90% of the subsidiary company's outstanding shares, the company should generally account for the subsidiary's income under the

A)Cost/amortized cost model
B)Fair value to net income model
C)The equity method
D)The consolidation method

Question 53

On August 1, 2011, Varney Co.acquired 40, $1,000, 9% bonds at 97 plus accrued interest.The bonds were dated May 1, 2011, and mature on April 30, 2017, with interest paid each October 31 and April 30.The bonds will be held to maturity.Under the cost model, the preferred entry to record the purchase of the bonds on August 1, 2011 is

Question 54

On October 1, 2011, Neman Co.purchased to hold to maturity, 800, $1,000, 9% bonds for $792,000 which includes $12,000 accrued interest.The bonds, which mature on February
1, 2020, pay interest semiannually on February 1 and August 1.Neman uses the straight- line method of amortization.The bonds, which are accounted for under the cost model, should be reported in the December 31, 2011 balance sheet at a carrying value of

A)$792,240.
B)$780,000.
C)$780,600.
D)$792,000.

Question 55

If Nolte Company acquired a 20% interest in Boswell Company on December 31, 2011 for $65,000 and the equity method of accounting for the investment was used, the amount of the debit to Investment in Boswell Company would have been

A)$45,000.
B)$37,000.
C)$60,000.
D)$65,000.

Question 56

During 2009, Hauser Co.purchased 1,000, $1,000, 9% bonds.The carrying value of the bonds at December 31, 2011 was $980,000.The bonds mature on March 1, 2016, and pay interest on March 1 and September 1.Hauser sells 500 bonds on September 1, 2012, for $494,000, after the interest has been received.Hauser uses straight-line amortization and has accounted for the bonds under the cost model.The gain on the sale is

A)$0.
B)$5,600.
C)$2,400.
D)$4,000.

Question 57

When one corporation has control over another corporation, the investor corporation

A)Is referred to as the parent
B)Is referred to as the subsidiary
C)Must have acquired at least 10% of the other company's voting shares
D)(a) and (c)

Question 58

On November 1, 2011, Roper Company purchased 600 of the $1,000 face value, 9% bonds of Poon, Limited, for $632,000, which includes accrued interest of $9,000.The bonds, which mature on January 1, 2016, pay interest semiannually on March 1 and September 1.Assuming that Roper uses the straight-line method of amortization and that the bonds are accounted for under the cost method, the net carrying value of the bonds should be shown on Roper 's December 31, 2011, balance sheet at

A)$632,000.
B)$600,000.
C)$623,000.
D)$622,080.

Question 59

Which of the following does not describe a financial asset?

A)Cash
B)A contractual right to receive cash
C)An equity instrument of another entity
D)None of these

Question 60

The premium or discount on bonds accounted for under the cost/amortized cost model is

A)Amortized over the expected holding period
B)Amortized over the life of the bond
C)Not amortized
D)Is treated as a transaction cost

Question 61

Use the following information for questions
Rodman Co.owns 3,000 of the 10,000 outstanding common shares of Gavin Corp.and exercises significant influence.During 2011, Gavin earns $60,000 and pays cash dividends of $20,000.
If the beginning balance in the investment account was $90,000, the balance at December 31, 2011 should be

A)$90,000.
B)$108,000.
C)$120,000.
D)$102,000.

Question 62

Use the following information for questions
Rodman Co.owns 3,000 of the 10,000 outstanding common shares of Gavin Corp.and exercises significant influence.During 2011, Gavin earns $60,000 and pays cash dividends of $20,000.
Rodman should report investment revenue for 2011 of

A)$6,000.
B)$12,000.
C)$18,000.
D)$15,000.

Question 63

If Nolte Company acquired a 20% interest in Boswell Company on December 31, 2011 for $45,000 and during 2012 Boswell Company had net income of $25,000 and paid a cash dividend of $10,000, applying the equity method would give a debit balance in the Investment in Boswell Company account at the end of 2012 of

A)$37,000.
B)$45,000.
C)$48,000.
D)$50,000.

Question 64

Use the following information for questions
Caraway Corporation earns $120,000 and pays cash dividends of $40,000 during 2011.Macoon Corporation owns 3,000 of the 10,000 outstanding shares of Caraway and exercises significant influence.
What amount should Macoon show in the investment account at December 31, 2011 if the beginning of the year balance in the account was $160,000?

A)$184,000.
B)$196,000.
C)$160,000.
D)$240,000.

Question 65

Use the following information for questions
Caraway Corporation earns $120,000 and pays cash dividends of $40,000 during 2011.Macoon Corporation owns 3,000 of the 10,000 outstanding shares of Caraway and exercises significant influence.
How much investment income should Macoon report in 2011?

A)$40,000.
B)$24,000.
C)$36,000.
D)$120,000.

Question 66

At December 31, 2011, Sedge Inc.has the following portfolio of common shares in which it does not have significant influence: Assuming Sedge uses the fair value through other comprehensive income model to account for this portfolio of investments, the entry to record the year-end adjustment is

Question 67

At December 31, 2011, Escot Corp.has the following equity securities (no significant influence) that were purchased earlier this year, its first year of operation: If the investments are correctly accounted for under the fair value through net income model the aggregate book value of the investment accounts should

A)Be increased by $15,000
B)Be decreased by $15,000
C)Be decreased by $32,000
D)Remain unchanged

Question 68

Gerard Corporation had purchased an investment in 2011 (an equity investment without significant control).The purchase price of $94,000 included transaction costs of $1,000.Assuming the transaction costs were capitalized and Gerard uses the appropriate IFRS method, which model did Gerard NOT use to account for this investment?

A)The amortized cost model
B)The fair value through OCI model
C)The fair value through net income model
D)None of these

Question 69

Kuhn Corp.began operations in 2011.An analysis of Kuhn's equity securities portfolio acquired in 2011 shows the following totals at December 31, 2011.Kuhn accounts for these investments under the fair value through net income model What amount should Kuhn report in its 2011 income statement for loss on investment?

A)$18,000.
B)$15,000.
C)$8,000.
D)$10,000.

Question 70

Arkade Corp issued a note with a face value of $20,000 and a 3-year term.The note pays interest based on a stated rate of 5% annually, when the market rate of interest is 10%.The present value of the note is

A)$15,026.
B)$20,000.
C)$22,723.
D)$18,000.

Question 71

Use the following information for questions
Altadore Ltd.acquired 30% of Dorset Corp.'s common shares on January 1, 2011 for $240,000.During 2011, Dorset earned $100,000 and paid dividends of $60,000.Altadore's 30% interest in Dorset gives Altadore the ability to exercise significant influence over Dorset 's operating and financial policies.During 2012, Dorset earned $120,000 and paid dividends of $40,000 on April 1 and $40,000 on October 1.On July 1, 2012, Altadore sold half of its shares in Dorset for
$158,000 cash.
Before income taxes, what amount should Altadore include in its 2011 income statement as a result of the investment?

A)$100,000.
B)$30,000.
C)$60,000.
D)$18,000.

Question 72

If Nolte Company acquired a 30% interest in Boswell Company on December 31, 2011 for $67,500 and during 2012 Boswell Company had net income of $25,000 and paid a cash dividend of $10,000, applying the equity method would give a debit balance in the
Investment in Boswell Company account at the end of 2012 of

A)$72,000.
B)$67,500.
C)$75,000.
D)$72,500.

Question 73

If Nolte Company acquired a 30% interest in Boswell Company on December 31, 2011 for $75,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Boswell Company Stock would have been

A)$75,000.
B)$90,000.
C)$60,000.
D)$67,500.

Question 74

For a note receivable with a face rate of zero, an implicit rate of 8%, a term of 3 years, a present value of $14,000 and a face value of $17,636, the interest to record at the end of the first year is equal to

A)$112.
B)zero.
C)$1,120.
D)$1,411.

Question 75

Use the following information for questions
Caraway Corporation earns $120,000 and pays cash dividends of $40,000 during 2011.Macoon Corporation owns 3,000 of the 10,000 outstanding shares of Caraway and exercises significant influence.
Dielman Co.acquired a 60% interest in Simpson Corp.on December 31, 2011 for $315,000.During 2012, Simpson had net income of $200,000 and paid cash dividends of
$50,000.Assuming Dielman used the equity method, at December 31, 2012, the balance in the investment account should be

A)$405,000.
B)$315,000.
C)$435,000.
D)$465,000.

Question 76

Use the following information for questions
Fossil Company purchased 200 of the 1,000 outstanding shares of Ericksen Company's common shares for $60,000 on January 2, 2011.During 2011, Ericksen Company declared dividends of
$10,000 and reported earnings for the year of $40,000.
If Fossil Company uses the cost model of accounting for its investment in Ericksen Company, its Investment in Ericksen Company account on December 31, 2011 should be

A)$58,000.
B)$66,000.
C)$68,000.
D)$60,000.

Question 77

Larsen Corp.issued a note with a face value of $10,000 and a zero interest rate with a two-year term, in return for $8,573.Determine the implicit interest rate for the note.

A)6%
B)7%
C)9%
D)8%

Question 78

Use the following information for questions
Fossil Company purchased 200 of the 1,000 outstanding shares of Ericksen Company's common shares for $60,000 on January 2, 2011.During 2011, Ericksen Company declared dividends of
$10,000 and reported earnings for the year of $40,000.
If Fossil Company uses the equity method of accounting for its investment in Ericksen Company, its Investment in Ericksen Company account at December 31, 2011 should be

A)$58,000.
B)$66,000.
C)$60,000.
D)$68,000.

Question 79

In January 2011, Colt Co.had purchased an investment for $100,000.By December 31 2011 the market value of that investment had increased by $10,000.Assuming this gain was NOT included in the company's 2011 net income, which accounting model did Colt use to account for this investment?

A)The cost model
B)The fair value through net income model
C)The fair value through OCI model
D)None of these

Question 80

On October 1, 2011, Moreau Co.purchased 500 of the $1,000 face value, eight percent bonds of Lear, Ltd., for $585,000, including accrued interest of $10,000.The bonds, which mature on January 1, 2018, pay interest semiannually on January 1 and July 1.Moreau used the straight-line method of amortization and appropriately recorded the bonds as long- term.On Moreau's December 31, 2012 balance sheet, the carrying value of the bonds is

A)$575,000.
B)$560,000.
C)$568,000.
D)$570,000.