Deck 12: Reporting and Analyzing Investments

Question 1

Only debt investments can be purchased as strategic investments.

Answer 1

False

Question 2

The cost model is used when the investment is held to earn cash flows but there is no fair value available.

Answer 2

True

Question 3

When investing excess cash for short periods, investors generally invest in debt securities that have both high liquidity and high risk.

Answer 3

False

Question 4

When investing excess cash for short periods of time, corporations generally invest in equity securities.

Question 5

Corporations purchase investments in debt or equity securities for the income tax write-off.

Question 6

Equity securities are always classified as long-term investments.

Question 7

Using the fair value model, both unrealized and realized gains and losses would be reported in the income statement.

Question 8

Under both the fair value model and the amortized cost model, investments are adjusted upwards or downwards to reflect their fair value at year end.

Question 9

Only equity securities can be purchased for the strategic purpose of influencing relationships between companies.

Question 10

The degree of influence determines how a strategic investment is classified.

Question 11

At acquisition, non-strategic investments are recorded at their purchase cost.

Question 12

Strategic investments are debt or equity securities that are usually purchased to generate investment income.

Question 13

If the fair value through other comprehensive income model is used, then unrealized gains and losses are not used to evaluate management.

Question 14

Non-strategic investments that are held for the purpose of earning capital gains are called trading investments.

Question 15

Non-strategic investments can be classified as short or long-term investments.

Question 16

Debt investments are generally low-risk investments the investor does not intend to sell in the near-term.

Question 17

Preferred shares are often purchased as strategic investments.

Question 18

No unrealized gains and losses are recorded when using the amortized cost model.

Question 19

Investments accounted for using the fair value through other comprehensive income model are called available-for-sale investments.

Question 20

The cost model is used only for equity investments.

Question 21

Under both IFRS and ASPE, investors can use either the cost model or the equity method for significantly influenced investments.

Question 22

Other comprehensive income (loss) increases (decreases) accumulated other comprehensive income.

Question 23

Trading investments are always classified as current assets.

Question 24

Under the equity method, the investment account is adjusted annually for a portion of associate's net profit and for dividends received.

Question 25

Like profit (loss), other comprehensive income (loss) increases (decreases) retained earnings.

Question 26

Dividends received on investments are accounted for in the same way under the fair value model cost and the equity method.

Question 27

The cost model is used to account for equity investments where there is significant influence.

Question 28

At acquisition, the investment account is debited for the cost of the shares under both the cost and equity methods of accounting for strategic investments.

Question 29

Valuing available-for-sale securities at fair value could result in unrealized gains and losses that are reported on the statement of comprehensive income.

Question 30

When the equity method is used to account for an investment in shares, dividends received are accounted for as a reduction in the investment account.

Question 31

When an investee can be significantly influenced, it is known as an associate.

Question 32

Under the equity method, revenue is recognized when profit is earned by the associate.

Question 33

Investments in associates are reported as current assets on the statement of financial position at their fair value.

Question 34

One source of comprehensive income is created when unrealized gains and losses are recorded for trading investments.

Question 35

Using the fair value method of accounting for an equity investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Question 36

Unless there is evidence to the contrary, an investor owning at least 20% of the shares of an investee is assumed to have significant influence.

Question 37

Realized gains and losses are always reported in the income statement.

Question 38

Under the equity method, the receipt of dividends from the investee results in an increase in the investment account.

Question 39

Both equity and debt investments are reported as current assets on the statement of financial position at their fair value.

Question 40

Under the equity method, the receipt of dividends from the investee results in a credit to the Dividend Revenue account.

Question 41

Consolidated financial statements are appropriate when an investor has voting control of the investee's common shares.

Question 42

Financial assets have all of the following characteristics except
(a)They include receivables and investments.
(b)They are frequently purchased for investment purposes.
(c)They have a contractual right to receive cash.
(d)They are normally difficult to measure.

Question 43

Which one of the following would not be classified as a non-strategic investment?
(a)Money-market securities
(b)Idle cash in a chequing account
(c)Trading investments
(d)Long-term bonds

Question 44

Debt investments are all of the following except
(a)low risk.
(b)classified according to maturity.
(c)equity securities.
(d)debt securities.

Question 45

Premiums and discounts must be amortized on all bond investments.

Question 46

Interest revenue is calculated by multiplying the carrying amount of the bond investment by the market rate of interest when the bond was purchased prorated by the portion of the payment period covered during the year.

Question 47

Trading investments are all of the following except
(a)debt or equity securities.
(b)securities purchased to generate a profit from short-term price fluctuations.
(c)securities held for the purpose of earning capital gains.
(d)strategic investments.

Question 48

Short-term investments in bonds are accounted for using the fair value model.

Question 49

The amortization of a bond investment is recorded in an Interest Revenue account.

Question 50

All of the following statements concerning strategic investments are true, except
(a)They include trading investments.
(b)They are purchased for the strategic purpose of influencing relationships between companies.
(c)They are generally long-term investments.
(d)They are financial assets.

Question 51

Corporations invest in other companies for all of the following reasons except to
(a)use excess cash until needed.
(b)generate investment revenue.
(c)meet strategic goals.
(d)influence the market value.

Question 52

If there is a bond premium on a long-term bond investment, the carrying amount of the investment is reduced by the amount of the amortization.

Question 53

When an investment in bonds is made, the investment account is debited for the face value of the bond less any premium or plus any discount.

Question 54

When investing excess cash for short periods of time, corporations generally invest in any of the following, except
(a)money-market funds.
(b)bankers' acceptances.
(c)equity securities.
(d)treasury bills.

Question 55

Realized and unrealized gains and losses are reported in the investing activities of the statement of cash flows.

Question 56

Debt investments held to earn interest revenue are reported at amortized cost in the statement of financial position.

Question 57

Which of the following would never be classified as a long-term investment?
(a)Strategic investments
(b)Trading investments
(c)Investments in associates
(d)Bonds with a ten-year maturity

Question 58

Under both IFRS and ASPE, the investor must use the effective-interest method to amortize bond premium or discount.

Question 59

Debt investments include all of the following except
(a)common shares.
(b)guaranteed investment certificates.
(c)treasury bills.
(d)bonds.

Question 60

The amortization of a bond investment is recorded in an Interest Expense account.

Question 61

Which of the following is not true about the accounting for trading investments?
(a)They are reported as current assets on the statement of financial position.
(b)Realized gains and losses are reported on the income statement.
(c)They are valued at fair value.
(d)Unrealized gains and losses are reported on the statement of comprehensive income.

Question 62

Which of the following statements is not true?
(a)Trading investments can be classified as either current or non-current assets on the statement of financial position.
(b)Under the fair value model, both realized and unrealized gains and losses are reported in the income statement.
(c)Under the amortized cost method, no unrealized gains or losses are reported.
(d)Non-strategic investments are purchased to generate investment income.

Question 63

Use the following information to answer questions
Lacey Inc. reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
The entry to record the purchase of the Cagney shares on Feb. 1 would include a
(a)debit to Available-for-Sale Investments.
(b)debit to Trading Investments.
(c)debit to Strategic Investments.
(d)debit to Investment in Associates.

Question 64

Use the following information to answer questions
Lacey Inc. reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
The entry to record the sale of the shares on Oct. 1 would include a
(a)credit to Trading Investments for $3,800.
(b)credit to Realized Gain for $800.
(c)credit to Unrealized Gain for $800.
(d)debit to Unrealized Gain for $3,800.

Question 65

On June 1, 2012, Rouge Corp purchased Noir Corp common shares for $9,300 as a trading investment. Three months later, Rouge sold these shares for $10,000. The entry to record the sale would include a
(a)debit to Cash of $9,300.
(b)credit to Interest Revenue of $700.
(c)credit to Trading Investments of $10,000.
(d)credit to Realized Gain on Trading Investments of $700.

Question 66

When an investee can be significantly influenced, it is known as a(n)
(a)subsidiary.
(b)associate.
(c)trading investment.
(d)parent.

Question 67

In June, Potter Corp paid $25,000 for 1,000 shares of Weasley Corp, which was classified as a long-term available-for-sale investment. At year-end, the fair value of the investment is $27,500. Potter will report
(a)nothing until the investment is sold.
(b)a $2,500 unrealized gain in its income statement.
(c)a $2,500 realized gain in its income statement.
(d)a $2,500 unrealized gain as other comprehensive income.

Question 68

Which of the following statements is not correct regarding strategic investments?
(a)They are purchased with the purpose of influencing the investee company.
(b)They are generally classified as investments in associates.
(c)They are frequently debt securities.
(d)The degree of influence determines how a strategic investment is classified.

Question 69

All of the following investments are generally shown at their fair value except
(a)Short-term debt investments.
(b)Trading investments.
(c)Bond investments intended to be held to maturity.
(d)Shares purchased with the intention of achieving a capital gain on sale.

Question 70

On September 15, 2012, Wong Ltd sells 100 common shares of Tong Corp, which were being held as a trading investment. The shares were acquired six months ago at $100 a share. Wong sells the shares for $80 a share. The entry to record the sale is

Question 71

If a company reporting under ASPE decides to use the cost model to account for an investment in common shares, dividends received should be
(a)credited to the investment account.
(b)credited to the Dividend Revenue account.
(c)debited to the investment account.
(d)recorded only when 20% or more of the shares are owned.

Question 72

Jaleem Corporation buys 1,000 shares of Samuel Ltd.'s common shares as a trading investment. The shares are purchased for $30 a share. At year-end the shares are trading at $32. The adjusting entry at year-end is

Question 73

An advantage of using the fair value through other comprehensive income is that
(a)the effect on other comprehensive income is reported in the income statement.
(b)unrealized gains and losses are not used to evaluate management.
(c)unrealized losses must be reversed, but unrealized gains are ignored for that security.
(d)unrealized gains must be reversed, but unrealized losses are ignored for that security.

Question 74

If a trading investment in bonds is sold one month after its value was adjusted at year-end, the investment account is
(a)debited for the carrying amount of the bonds at the sale date.
(b)credited for the cost of the bonds at the sale date.
(c)credited for the carrying amount of the bonds at the sale date.
(d)debited for the cost of the bonds at the sale date.

Question 75

Under the equity method of accounting for an investment
(a)Dividend Revenue is credited when dividends are received.
(b)an Unrealized Gain account is credited when the investee reports a profit.
(c)the investment account is credited when the investee reports a profit.
(d)the investment account is credited when dividends are received.

Question 76

Use the following information to answer questions
Lacey Inc. reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
The entry to record the receipt of the dividends on December 1 would include a
(a)credit to Dividend Revenue for $600.
(b)credit to Trading Investments for $600.
(c)credit to Dividend Revenue of $1,000.
(d)credit to Realized Gain for $1,000.

Question 77

On October 1 of last year, Canadian Trader Corp (CTC) purchased 1,000 shares of the Regal Bank for $50,000 as a trading investment. At year end, December 31, the fair value of these shares was $52,000. On February 1 of this year, CTC sold all these shares for $51,000. The realized gain (loss) that CTC will report this year is
(a)a gain of $1,000.
(b)a gain of $2,000.
(c)a loss of $2,000.
(d)a loss of $1,000.

Question 78

Use the following information to answer questions
Lacey Inc. reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
The entry, if any is required, to record the value of the investment on December 31 would include a debit to
(a)Realized Loss for $450.
(b)Unrealized Loss for $750.
(c)No entry is required.
(d)Unrealized Loss of $450.

Question 79

Use the following information to answer questions
Lacey Inc. reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
The entry to record the receipt of the dividends on June 1 would include a
(a)debit to Trading Investments for $1,500.
(b)debit to Dividend Revenue for $1,500.
(c)credit to Dividend Revenue for $1,500.
(d)credit to Strategic Investments for $1,500.

Question 80

Non-strategic Investments for which fair value cannot be determined are accounted for using the
(a)fair value model.
(b)equity method.
(c)cost model.
(d)amortized cost model.