Deck 12: Reporting and Analyzing Investments

Question 1

Compare the accounting for a bond investment and a bond payable (Appendix 12A).

Answer 1

The accounting for a bond investment is similar to that of a bond payable in that any premium or discount is amortized using the effective-interest method of amortization. Companies using ASPE can choose to use the straight-line method instead if the results do not materially differ from the effective-interest method. Premiums and discounts are not amortized for non-strategic investments that are held for trading purposes and would normally be accounted for under the fair value through profit or loss model.

Question 2

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

Answer 2

True

Question 3

Equity securities are always classified as long-term investments.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Identify reasons to invest, and classify investments.

Question 11

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

Question 12

Only debt investments can be accounted for using the fair value through other comprehensive income model.

Question 13

Explain how investments are reported in the financial statements. Under IFRS, when a company has a strategic investment in a subsidiary where control has been obtained, the preparation of consolidated financial statements is required. In this case, the investment account is replaced by the specific assets and liabilities of the subsidiary. Under ASPE, parent companies can choose to use consolidation or, if the fair value of the investment is known, the investment can be accounted for using the fair value through profit or loss model or the equity method. If the fair value of the investment is not known, then in addition to consolidating financial statements, the investment can be accounted for using either the cost model or the equity method.Accumulated other comprehensive income is presented in the shareholders' equity section of the statement of financial position. Other comprehensive income is closed out at the end of the year into accumulated other comprehensive income.Changes in share capital, retained earnings, and accumulated comprehensive income are shown in the statement of changes in equity.

Question 14

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 15

Account for non-strategic investments.

Question 16

Debt investments earn interest revenue over time and the borrower has an obligation to return the original amount of the investment on a fixed maturity date.

Question 17

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

Question 18

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

Question 19

Account for strategic investments.

Question 20

Preferred shares are often purchased as strategic investments.

Question 21

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

Question 22

Consolidated financial statements are appropriate when one company has significant influence over another company.

Question 23

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 24

Premiums and discounts must be amortized on all bond investments.

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

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 33

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 34

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

Question 35

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 36

Securities that can be purchased for strategic purposes

A) include only equity securities to influence relationships between companies.
B) include only debt investments.
C) include both equity securities and debt investments.
D) exclude both equity securities and debt investments.

Question 37

When investing excess cash for short periods of time,

A) corporations generally invest in equity securities.
B) corporations generally invest in debt securities that have both high liquidity and high risk.
C) corporations generally invest in debt securities that have high risk and low liquidity.
D) corporations generally invest in debt securities that have low risk and high liquidity.

Question 38

Using the fair value through profit and loss model of accounting for an equity investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Question 39

Short-term investments in bonds are accounted for using the fair value through profit or loss model.

Question 40

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 41

Which of the following statements is not true?

A) Under the fair value through other comprehensive income model gains and losses are critical to the evaluation of management.
B) Under the fair value through profit or loss model, both realized and unrealized gains and losses are reported in the income statement.
C) Under the amortized cost model, no unrealized gains or losses are reported.
D) Non-strategic investments are purchased to generate investment income.

Question 42

Debt investments include all of the following except

A) common shares.
B) guaranteed investment certificates.
C) treasury bills.
D) bonds.

Question 43

Use the following information to answer questions.
Wells Inc. reported these transactions relating to marketable Held for Trading Investments intended to generate net income and to be sold in the near term:
The entry to record the receipt of the dividends on Jun 1 would include a

A) debit to Held for 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 44

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 reported on the income statement, but unrealized gains are reported in other comprehensive income.
D) unrealized gains must be reported on the income statement, but unrealized losses are reported in other comprehensive income.

Question 45

On September 15, 2018, Alonso Ltd. sells 150 common shares of Bandi Corp., which were being held as a trading investment. The shares were acquired six months ago at $75 a share. Alonso sells the shares for $60 a share. The entry to record the sale is

Question 46

All of the following investments are generally shown at their fair value except

A) short-term debt investments.
B) held for 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 47

All of the following statements concerning strategic investments are true, except

A) they include held for 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 equity securities.

Question 48

Debt investments are all of the following except

A) low risk.
B) classified according to maturity.
C) equity securities.
D) debt securities.

Question 49

Which of the following is false?

A) The cost model is used only for equity investments.
B) The cost model reports realized gains and losses on the income statement.
C) The cost model is used to account for equity investments where there is significant influence.
D) The cost model is very similar to the amortized cost model.

Question 50

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 51

Use the following information to answer questions.
Wells Inc. reported these transactions relating to marketable Held for Trading Investments intended to generate net income 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 Losses for $450.
B) Unrealized Loss for $750.
C) No entry is required.
D) Unrealized Losses of $450.

Question 52

Held for Trading Investments are all of the following except

A) debt or equity securities.
B) securities purchased to generate a net income from short-term price fluctuations.
C) securities held for the purpose of earning capital gains.
D) strategic investments.

Question 53

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) held for trading investments
D) long-term bonds

Question 54

Use the following information to answer questions.
Wells Inc. reported these transactions relating to marketable Held for Trading Investments intended to generate net income 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 Held for 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 55

Which of the following is not true about the accounting for Held 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 56

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 57

On June 1, 2018, Mango Corp. purchased Papaya Corp. common shares for $12,100 as a trading investment. Three months later, Mango sold these shares for $13,000. The entry to record the sale would include a

A) debit to Cash of $12,100.
B) credit to Interest Revenue of $900.
C) credit to Held for Trading Investments of $13,000.
D) credit to Realized Gain on Held for Trading Investments of $900.

Question 58

Which of the following would never be classified as a long-term investment?

A) strategic investments
B) held for trading investments
C) investments in associates
D) bonds with a ten-year maturity

Question 59

Hankers Corporation buys 1,500 shares of Viggo Ltd.'s common shares as a trading investment. The shares are purchased for $45 a share. At year end the shares are trading at $48. The adjusting entry at year end is
(d) No entry is required.

Question 60

Use the following information to answer questions.
Wells Inc. reported these transactions relating to marketable Held for Trading Investments intended to generate net income and to be sold in the near term:
The entry to record the purchase of the Taylor shares on Feb 1 would include a

A) debit to Long-Term Held for Trading Investments.
B) debit to Held for Trading Investments.
C) debit to Strategic Investments.
D) debit to Investment in Associates.

Question 61

The receipt of dividends from an investment affects the investment account when which of the following methods is used?

A) cost method
B) equity method
C) fair value through profit or loss model
D) fair value through other comprehensive income model

Question 62

Under the equity method, the Investment in Associates account is increased when the

A) associate reports net income.
B) associate pays a dividend.
C) associate reports a loss.
D) investment is sold at a gain.

Question 63

The equity method should generally be used to account for an investment in shares when the level of ownership is

A) less than 10%.
B) between 10% and 20%.
C) 20% or more.
D) 10% or more.

Question 64

Under the equity method of accounting for investments in common shares, when a dividend is received from the investee,

A) the Dividend Revenue account is credited.
B) the Investment account is increased.
C) the Investment account is decreased.
D) no entry is necessary.

Question 65

The ability of an investor to affect the operating and financial activities of another company, even though the investor does not control the company, is known as

A) significant influence.
B) control.
C) a combination.
D) influence and control.

Question 66

Aroma Limited owns a 25% interest in the shares of Baltic Corporation. During the year, Baltic pays $10,000 in dividends to Aroma and reports $100,000 net income. Aroma's investment in Baltic will increase Aroma's net income by

A) $25,000.
B) $27,500.
C) $10,000.
D) $ 2,500.

Question 67

Which of the following is the correct match concerning an investor's influence on the operations and financial affairs of an investee?

Question 68

Under the equity method,

A) the receipt of dividends from the investee results in an increase in the investment account.
B) the receipt of dividends from the investee results in a credit to the Dividend Revenue account.
C) the receipt of dividends from the investee results in an increase in the investment account and a credit to the Dividend Revenue account.
D) the receipt of dividends from the investee reduces the carrying amount of the investment account.

Question 69

Republic Corp. owns a 15% interest in the common shares of Wholesome Ltd. During this year, Wholesome pays a total of $25,000 in dividends and reports $160,000 net income. Republic's investment in Wholesome will increase Republic's net income by

A) $25,000.
B) $24,000.
C) $27,750.
D) $ 3,750.

Question 70

Which one of the following statements is false?

A) Under the equity method, revenue is recognized when net income is earned by the associate.
B) 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.
C) Under the equity method, the investment account is adjusted annually for a portion of associate's net income and for dividends received.
D) Under the equity method, revenue is recognized when net income is earned by the investor which may not be when it is earned by the investee.

Question 71

When the cost method is used to account for an equity investment, the carrying amount of the investment is affected by

A) the net income of the investee.
B) dividend distributions of the investee.
C) both the net income and the dividend distributions of the investee.
D) neither the net income nor the dividend distributions of the investee.

Question 72

Frisbee Inc. owns a 30% interest in the shares of California Corp. During the year, California pays $10,000 in dividends to Frisbee and reports a net loss of $80,000. Frisbee's investment in California will affect Frisbee's net income by

A) $10,000 increase.
B) $3,000 increase.
C) $24,000 decrease.
D) $21,000 decrease.

Question 73

Eurythmics Ltd. owns 20% interest in the shares of Sydney Corporation. During the year, Sydney pays $10,000 in dividends to Eurythmic and reports a net loss of $50,000. Eurythmic's investment in Sydney will affect Eurythmics's net income by

A) $2,000 increase.
B) $10,000 decrease.
C) $10,000 increase.
D) $12,000 decrease.

Question 74

On January 1, 2018, Coastal Corp. purchased 30% of the common shares of Mansbridge Corp. for $600,000. During 2018, Mansbridge Corp. reported net income of $75,000 and paid total cash dividends of $15,000. The balance in the Investment in Associates (Mansbridge) account on Coastal's books at December 31, 2018 is

A) $675,000.
B) $622,500.
C) $618,000.
D) $600,000.

Question 75

When an investee can be significantly influenced, it is known as a(n)

A) subsidiary.
B) associate.
C) trading investment.
D) parent.

Question 76

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 net income.
C) the Investment account is credited when the investee reports net income.
D) the Investment account is credited when dividends are received.

Question 77

If the equity method is used to account for an investment in common shares

A) it is presumed that the investor has no significant influence on the investee.
B) net income of the investee are ignored by the investor.
C) net income of the investee are recorded as realized gains, but dividends received are credited to the investment account.
D) the investment account may be at times greater than the acquisition cost.

Question 78

Which of the following is the correct match concerning the appropriate accounting for strategic investments?

Question 79

On October 1 of last year, Hand Tools Corp. purchased 1,500 shares of the Bindo Bank for $72,000 as a trading investment. At year end, December 31, the fair value of these shares was $75,000. On February 1 of this year, Hand Tools sold all these shares for $73,000. The realized gain (loss) that Hand Tools will report this year is

A) a gain of $2,000.
B) a gain of $1,000.
C) a loss of $1,000.
D) a loss of $2,000.

Question 80

If 30% of the common shares of an investee are purchased as a long-term investment, the appropriate classification for this investment is most likely

A) held for trading investments.
B) equity investments.
C) non-strategic investments.
D) investment in associates.