Deck 1: Intercorporate Investments: An Overview

Question 1

A company invests $300,000 in equity securities on November 30, 2019, and classifies them as investments with no significant influence. At December 31, 2019, the company's year-end, the securities have a fair value of $310,000. On February 1, 2020, the company sells the securities for $295,000.
Which statement is true regarding how this information is reported in the company's financial statements?

A) The company's December 31, 2019 balance sheet reports the securities at $300,000, and a gain of $10,000 is reported on the 2019 income statement.
B) The company's December 31, 2019 balance sheet reports the securities at $310,000, and a loss of $5,000 is reported on the 2020 income statement.
C) The company's December 31, 2019 balance sheet reports the securities at $310,000, and a loss of $15,000 is reported on the 2020 income statement.
D) The company's December 31, 2019 balance sheet reports the securities at $300,000, and no gain or loss appears on the 2019 income statement.

Answer 1

The company's December 31, 2019 balance sheet reports the securities at $310,000, and a loss of $15,000 is reported on the 2020 income statement.

Question 2

Which statement is true concerning the reporting for equity investments with no significant influence?

A) They are reported at fair value, with any changes in value reported in income.
B) They are categorized as either trading or available-for-sale, with unrealized changes in the value of trading securities reported in income, and unrealized changes in the value of AFS securities reported in OCI.
C) They are reported at cost, with unrealized changes in value reported in OCI.
D) They are reported at fair value, with unrealized changes in value reported in OCI.

Answer 2

They are reported at fair value, with any changes in value reported in income.

Question 3

Use the following information on a company's investments in equity securities with no significant influence to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-What amount is reported for gain or loss on these securities in 2019 income?

A) No gain or loss
B) $800 loss
C) $3,000 gain
D) $1,000 loss

Answer 3

$800 loss

Question 4

Use the following information on a company's investments in equity securities with no significant influence to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-What amount is reported for gain or loss on these securities in 2020 income?

A) No gain or loss
B) $3,000 gain
C) $3,800 gain
D) $4,000 gain

Question 5

A company buys an equity investment for $100 in 2020. The investment has no significant influence. At the end of 2020, the company still holds the investment and it has a market value of $115. In 2021, the company sells the investment for $108.
How is this information reported in the company's 2020 and 2021 income statements?

A) $15 gain on the 2020 income statement; $7 loss on the 2021 income statement.
B) Does not appear on the 2020 income statement; $8 gain on the 2021 income statement.
C) Does not appear on the 2020 income statement; $7 loss on the 2021 income statement.
D) $8 gain on the 2020 income statement; does not appear on the 2021 income statement.

Question 6

On December 20, 2020, a company pays $40,000 for an investment in equity securities with no significant influence. On December 31, 2020, the company's year-end, the stock has a market value of $37,000. The company sells the stock in 2021 for $44,000.
On its income statement, the company reports:

A) A loss of $3,000 in 2020, and a gain of $7,000 in 2021
B) No gain or loss in 2020, and a gain of $4,000 in 2021
C) A gain of $4,000 in 2020, and no gain or loss in 2021
D) No gain or loss in 2020, and a gain of $7,000 in 2021

Question 7

On October 25, 2020, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2020, the company's year-end, the stock as a market value of $36,000. The company sells the stock in 2021 for $32,000. How is the company's 2020 other comprehensive income affected by the above transactions in each year?

A) Increase of $1,000 in 2020, decrease of $1,000 in 2021
B) Increase of $1,000 in 2020, decrease of $4,000 in 2021
C) No effect in 2020, decrease of $3,000 in 2021
D) No effect on OCI in either year.

Question 8

Use the following information on a company's investments in debt securities to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2019 income?

A) No gain or loss
B) $800 loss
C) $3,000 gain
D) $200 gain

Question 9

Use the following information on a company's investments in debt securities to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2020 income?

A) No gain or loss
B) $3,000 gain
C) $3,800 gain
D) $5,000 gain

Question 10

Use the following information on a company's investments in debt securities to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2019 income?

A) No gain or loss
B) $800 loss
C) $3,000 gain
D) $200 gain

Question 11

Use the following information on a company's investments in debt securities to answer bellow Questions. The company's accounting year ends December 31.
$\begin{array}{|l|r|r|r|r|r|}\hline&\text { Date of } &&\text { Fair Value } &\text { Date }&\text { Selling } \\\text { Investment }&\text { Acquisition } & \text { Cost } &12 / 31 / 19&\text { Sold }&\text { Price }\\\hline \text { Colt Company stock } & 9 / 20 / 19 & \$ 38,000 & \$ 37,000 & 2 / 10 / 20 & \$ 42,000 \\\hline \text { Dana Company stock } & 10 / 2 / 19 & 14,000 & 14,200 & 1 / 17 / 20 & 13,000 \\\hline\end{array}$

-If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2020 income?

A) $3,000 gain
B) $3,800 gain
C) $2,100 gain
D) $3,100 gain

Question 12

A company buys corporate bonds for $100 in 2019. At the end of 2019, the company still holds the investment and it has a market value of $115. In 2020, the company sells the investment for $108. How is this information reported in the company's 2019 and 2020 income statements if the investment is classified as an AFS investment?

A) $15 gain on the 2019 income statement; $7 loss on the 2020 income statement
B) Does not appear on the 2019 income statement; $8 gain on the 2020 income statement
C) Does not appear on the 2019 income statement; $7 loss on the 2020 income statement
D) $8 gain on the 2019 income statement; does not appear on the 2020 income statement

Question 13

A company invests $400,000 in corporate bonds on April 30, 2020 and classifies them as available-for-sale securities. At December 31, 2020, the company's year-end, the securities have a fair value of $410,000. On February 1, 2021, the company sells the securities for $396,000. Which statement is true regarding how is this information reported in the company's financial statements?

A) The company's 2020 balance sheet reports the securities at $410,000 and a gain of $10,000 is reported in 2020 other comprehensive income.
B) The company's 2020 balance sheet reports the securities at $400,000 and a loss of $4,000 is reported on the 2021 income statement.
C) The company's 2020 balance sheet reports the securities at $410,000 and a loss of $4,000 is reported in 2021 other comprehensive income.
D) The company's 2020 balance sheet reports the securities at $400,000 and no gain or loss appears in the 2020 financial statements.

Question 14

A company invests $700,000 in corporate bonds in 2019 and classifies them as available-for-sale. At the end of 2019, the fair value of the securities is $650,000. In 2020, the company sells the bonds for $706,000. Which statement is true concerning the entry made to record the sale of the bonds in 2020?

A) Other comprehensive income increases by $50,000 and income increases by $6,000.
B) There is no effect on other comprehensive income, and income increases by $6,000.
C) Other comprehensive income declines by $50,000, and income increases by $6,000.
D) Other comprehensive income increases by $6,000, and there is no effect on income.

Question 15

A company paid $100,000 for corporate bonds and classified them as AFS. By year-end, the bonds declined in value to $80,000 due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment?

A) No adjustment is required.
B) The investment account is directly reduced by $20,000 and a $20,000 loss is reported in OCI.
C) The investment account is directly reduced by $20,000 and a $20,000 loss is reported in income.
D) An allowance account is created to reduce the investment by $20,000, and a $20,000 loss is reported in income.

Question 16

A company paid $100,000 for corporate bonds and classified them as AFS. These bonds are currently carried at $102,000. At year-end, their market value is $90,000, due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment?

A) No adjustment is required.
B) OCI is reduced by $2,000.
C) An impairment loss of $12,000 is reported in income.
D) The investment account is reduced by $10,000.

Question 17

A U.S. company holds available-for-sale debt securities, purchased for $1,000,000 and carried at $1,500,000. At the end of the current year, the company determines that the fair value of these securities is $1,300,000, and the decline in value is due to an increase in the market rate of interest. How will the adjusting entry to record the decline in value affect income and other comprehensive income?
Income OCI

A) Decrease $300,000 Decrease $300,000
B) Increase $300,000 No effect
C) No effect Increase $200,000
D) No effect Decrease $200,000

Question 18

A company purchases corporate bonds for $1,000,000 and categorizes them as AFS. At year-end, their market value is $750,000. $100,000 of the decline in value is attributed to a rise in market interest rates, and $150,000 of the decline is attributed to credit losses. Which statement below is true concerning the entry to record the decline in value?

A) The investment account, net of its allowance for losses, declines by $100,000.
B) An impairment loss of $150,000 is reported in income.
C) The investment account is directly reduced by $150,000.
D) An impairment loss of $100,000 is reported in income.

Question 19

A company holds available-for-sale corporate bonds purchased for $100,000. Current value of these securities is $95,000 and the decline in value was properly recorded in OCI when the decline occurred. The company now determines that the decline in value is due to credit losses. Which statement is true concerning the adjusting entry needed to record this information?

A) No entry is made since the securities are already reported at $95,000.
B) Debit OCI and credit investments for $5,000.
C) Debit OCI and credit allowance for credit losses for $5,000.
D) Debit loss on securities (income) and credit OCI for $5,000.

Question 20

A company holds an investment in corporate bonds classified as AFS. At the beginning of 2020, this investment is reported at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairment losses have been reported. At the end of 2020, the market value of the investment is $2,000,000, and it is determined that the decline in value is due to credit losses.
How is this information reported in the company's 2020 financial statements?

A) $500,000 other comprehensive loss; $1,500,000 loss in income
B) $2,000,000 loss in income; no change in other comprehensive income
C) $2,000,000 other comprehensive loss; not reported in income
D) $1,500,000 other comprehensive loss; not reported in income

Question 21

An AFS debt security's market value is less than its original cost. The loss is reported in income when:

A) Current market value is at least 50% below cost.
B) Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered.
C) Current market value is below carrying value and the decline is due to increases in market interest rates.
D) Current market value is below carrying value.

Question 22

A company has previously recorded in income an impairment loss on debt securities classified as AFS. What can we conclude from this information?

A) The loss is attributed to an increase in market rates of interest.
B) The loss is attributed to a decline in the ability of the investee to meet required principal and interest payments.
C) The amount of the impairment loss directly reduced the investment account.
D) The loss was originally recorded in OCI.

Question 23

Use the following information to answer bellow Questions:
A company holds a $100,000 face value corporate bond, bought January 1, 2019, paying 3% annually on December 31, and maturing December 31, 2021. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar.

-What amount will the company report as interest revenue on the bond for 2020?

A) $3,000
B) $2,058
C) $2,039
D) $2,000

Question 24

Use the following information to answer bellow Questions:
A company holds a $100,000 face value corporate bond, bought January 1, 2019, paying 3% annually on December 31, and maturing December 31, 2021. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar.

-What is the approximate net entry to record receipt of interest and principal on December 31, 2021, assuming no impairment on the bond throughout its life

A) $\begin{array}{l}\begin{array} { l r } \text { Cash }& 103,000 \\\text { Interest revenue } & 2,020 \\\text { Investment in bond } & 100,980\end{array}\end{array}$
B) $\begin{array}{l}\begin{array} { l r } \text { Cash }& 103,000 \\\text { Interest revenue } & 3,000 \\\text { Investment in bond } & 100,000\end{array}\end{array}$
C) $\begin{array}{l}\begin{array}{lr} \text { Cash }& 102,000 \\\text { Interest revenue } & 2,000 \\\text { Investment in bond } & 100,000\end{array}\end{array}$
D) $\begin{array}{lr}\text { Cash }&103,000\\\text { Interest revenue } & 116 \\\text { Investment in bond } & 102,884\end{array}$

Question 25

Use the following information to answer bellow Questions:
A company holds a $100,000 face value corporate bond, bought January 1, 2019, paying 3% annually on December 31, and maturing December 31, 2021. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar.

-Assume the market value of the bond on December 31, 2019 is $70,000, and no previous impairment has been reported. The decline in value is due to credit losses. What impairment loss is reported on the company's 2019 income statement?

A) $30,000
B) $32,884
C) $31,942
D) $27,000

Question 26

Use the following information to answer bellow Questions:
On January 1, 2019, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond yielding 4%, interest paid annually on December 31, and classified it as held-to-maturity. Ola's reporting year ends December 31.

-On its 2019 income statement, Ola reports interest revenue on the corporate bond of:

A) $12,000
B) $11,667
C) $15,556
D) $16,000

Question 27

Use the following information to answer bellow Questions:
On January 1, 2019, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond yielding 4%, interest paid annually on December 31, and classified it as held-to-maturity. Ola's reporting year ends December 31.

-On its 2019 balance sheet, Ola reports the investment at:

A) $389,678
B) $392,965
C) $400,000
D) $392,456

Question 28

Use the following information to answer bellow Questions:
On January 1, 2019, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond yielding 4%, interest paid annually on December 31, and classified it as held-to-maturity. Ola's reporting year ends December 31.

-On its 2020 balance sheet, Ola reports the investment at:

A) $395,981
B) $397,296
C) $396,154
D) $398,231

Question 29

A company invests in a 5-year debt security at a discount. The security is classified as HTM. Using the effective interest method, the company will report interest revenue on this security that is:

A) Increasing over the years
B) Decreasing over the years
C) Equal each year
D) Decreasing in the first and second year and increasing in the remaining years

Question 30

A company invests in a 5-year debt security and classifies it as HTM. Market rates of interest for this type of investment decline while the company holds the security.
Which statement is true?

A) The company reports an unrealized loss on its income statement.
B) The investment balance reported on the balance sheet is higher than the investment's market value.
C) The investment balance reported on the balance sheet is lower than the investment's market value.
D) The company reports an unrealized gain in OCI.

Question 31

A held-to-maturity debt investment with a book value of $6,000,000 is determined to be impaired due to concerns about the investee's ability to pay principal and interest. The investment's current market value is $4,000,000. Assume the bonds were originally sold at par. Which statement is true?

A) A $2,000,000 loss is reported in income.
B) A $2,000,000 loss is reported in OCI.
C) No loss is reported.
D) The investment account is directly reduced by $2,000,000.

Question 32

Which investments in debt securities and equity securities with no significant influence must be tested for impairment?

A) All
B) Trading and AFS debt securities and HTM securities
C) AFS and HTM debt securities
D) Equity securities

Question 33

Which unrealized gain affects a company's earnings per share?

A) Unrealized gain on HTM securities
B) Unrealized gain on trading debt securities
C) Unrealized gain on AFS debt securities
D) Unrealized gain on trading and AFS debt securities

Question 34

Use the following information to answer bellow questions :
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton was $20,000,000. During 2020, Fenton reported net income of $3,000,000 and declared and paid dividends of $500,000. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.

-What is the investment balance on Exeter's balance sheet on December 31, 2020?

A) $7,000,000
B) $7,875,000
C) $9,000,000
D) $8,050,000

Question 35

Use the following information to answer bellow questions :
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton was $20,000,000. During 2020, Fenton reported net income of $3,000,000 and declared and paid dividends of $500,000. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.

-Now assume Fenton's book value at the date of acquisition was $15,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of five years. Straight-line amortization is appropriate. What amount does Exeter report as equity in net income of Fenton for 2020?

A) $ 700,000
B) $3,000,000
C) $ 927,500
D) $1,050,000

Question 36

Use the following information to answer bellow questions :
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton was $20,000,000. During 2020, Fenton reported net income of $3,000,000 and declared and paid dividends of $500,000. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.

-Assume the same information as in question 35. What is the investment balance on December 31, 2020, reported on Exeter's balance sheet?

A) $7,550,000
B) $7,525,000
C) $7,700,000
D) $7,000,000

Question 37

Use the following information to answer bellow questions :
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton was $20,000,000. During 2020, Fenton reported net income of $3,000,000 and declared and paid dividends of $500,000. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.

-Now assume Exeter's 2020 ending inventory contains $125,000 in merchandise purchased from Fenton, at a markup of 25% on cost. What is the impact on 2020 equity in net income?

A) $8,750 lower
B) $25,000 lower
C) $35,000 lower
D) None

Question 38

Monroe Company owns 40% of the voting stock of Nartal Industries, acquired at book value. Nartal reports income of $600,000 for 2020. Nartal regularly sells merchandise to Monroe at a markup of 30% on cost. Monroe's 2020 beginning inventory includes $156,000 purchased from Nartal. Its 2020 ending inventory includes $260,000 purchased from Nartal. Monroe uses the equity method to report its investment in Nartal. Equity in net income of Nartal for 2020 is:

A) $249,600
B) $230,400
C) $216,000
D) $264,000

Question 39

Acton Company uses the equity method to report its investment in 35% of the stock of Bates Company. Its original investment cost exceeded 35% of the book value of Bates by a large amount. Acton is computing equity in net income of Bates for the current year, which is five years after the acquisition. Which situation below requires Acton to adjust the equity in net income number for the current year, for write-offs of basis differences? Attribute the difference to:

A) Goodwill
B) Brand names with indefinite life
C) Databases with a 3-year life
D) Plant assets with a 20-year life

Question 40

Impairment losses on equity method investments are:

A) Not reported
B) Reported in other comprehensive income
C) Reported as a direct adjustment to beginning retained earnings
D) Reported in income

Question 41

The U.S. GAAP impairment test for equity method investments requires recognition of impairment losses when:

A) Fair value is less than cost and the decline is other than temporary.
B) A significant loss event occurs.
C) Fair value is less than carrying value and the decline in value is other than temporary.
D) Expected credit losses are significant.

Question 42

Equity in net income is affected by all but which one of these items related to the investee?

A) Investee goodwill impairment
B) Markup on inventory sold by the investee to the investor
C) Markup on inventory sold by the investor to the investee
D) Amortization of previously unreported limited life intangibles of the investee

Question 43

Following U.S. GAAP, when should a company use the equity method to report an intercorporate investment?

A) The company significantly influences the decisions of the investee.
B) The investee is the company's major supplier.
C) The company owns 20 - 50% of the investee's voting stock.
D) The company is holding the investment in its long-term portfolio.

Question 44

Fizzy Corporation uses the equity method to account for its 25% investment in Organic Juices Company, for which it paid $10 million in excess of its share of Organic Juices' book value five years ago. In 2020 Organic Juices reports net income of $2 million, and Fizzy reports equity in net income from Organic Juices on its 2020 income statement in the amount of $500,000. We can determine from this information that Fizzy attributed the $10 million extra it paid for Organic Juices to any of the following except:

A) Favorable leaseholds with an 8-year life
B) Technology rights with a 3-year life
C) Bottler franchise rights with indefinite life
D) Goodwill

Question 45

Ajax Beverages holds 40% of the stock of Bubbly Bottler, acquired at a cost equal to 40% of Bubbly's book value at the time of purchase. This is a significant influence investment. At the start of 2021, Ajax reports the investment at a balance of $100,000. In 2021, Bubbly reports net income of $1,000 and $50 in other comprehensive income. Bubbly pays no dividends in 2021. The market value of Ajax's investment in Bubbly stock increases by $500 during 2021.
At what amount does Ajax report the investment at the end of 2021?

A) $100,500
B) $100,420
C) $100,400
D) $100,450

Question 46

Company C has a significant influence investment in Company D, and appropriately reports its share of Company D's reported income as equity in net income. Under what circumstances will Company C adjust Company D's reported income to determine its share of that income, in the first year the investment is held?

A) Company D declared and paid dividends in excess of its reported net income in the first year.
B) Company C's acquisition cost was more than its share of Company D's book value, and the difference is attributable to indefinite life intangibles that are impaired in the first year.
C) Company D reported a loss in the first year.
D) Company C's acquisition cost was more than its share of Company D's book value, and the difference is attributable to previously unreported customer lists with a 3-year life.

Question 47

Grant Corporation has owned 40% of the voting stock of Halliday Company for many years, originally purchased at book value and reported using the equity method. At the beginning of the current year, the carrying value of the investment is $2,000,000. Halliday reports a loss of $6,000,000 for the year, and the loss is considered other than temporary. What amount should Grant report as equity in the net loss of Halliday for the current year?

A) none
B) $2,000,000
C) $2,400,000
D) $6,000,000

Question 48

Refer to the information from Question 47. Now assume the following year Halliday unexpectedly reports net income of $1,500,000. What amount should Grant report as equity in the net income of Halliday for the current year?

A) $200,000
B) $300,000
C) $600,000
D) $1,500,000

Question 49

Jackson Corporation owns 10% of the voting stock of Kettering Company and has been reporting it as an equity investment with no significant influence. At the beginning of the current year, the investment has a fair value of $40,000,000. Jackson originally purchased its 10% interest for $30,000,000. Jackson purchases an additional 25% interest in Kettering's voting stock for $120,000,000, and determines that the equity method is now appropriate. Any basis difference is attributed to goodwill. Kettering reports net income of $800,000 for the current year, and declares and pays $100,000 in dividends. The year-end fair value of Jackson's 35% interest is $170,000,000. At what amount does Jackson report the investment on its balance sheet?

A) $170,000,000
B) $150,245,000
C) $160,280,000
D) $160,245,000

Question 50

At the beginning of 2020, Fizzy Corporation and Healthy Beverages Company each invest $50,000,000 in a project to market ready-to-drink juices in Europe. Each has a 50% interest in this joint venture. During 2020, the joint venture reports income of $1,000,000 and pays dividends of $300,000 in cash. The joint venture's balance sheet at the end of 2020 looks like this:
$$\begin{array} { l r l r } \text { Current assets } & \$ 500,000 & \text { Liabilities } & \$ 70,000,000 \\\text { Property and equipment } & \underline { 170,200,000 } & \text { Equity } & \underline { 100,700,000 } \\\text { Total } & \$ 170,700,000 & \text { Total } & \$ 170,700,000\end{array}$$ At what amount will Fizzy report its investment in the joint venture on its balance sheet at the end of 2020?

A) $50,500,000
B) $50,000,000
C) $50,350,000
D) $50,700,000

Question 51

If a U.S. company invests in a joint venture, it reports the investment as:

A) An AFS investment
B) A held-to-maturity investment
C) An equity method investment
D) A merger

Question 52

Which statement is true concerning impairment testing of investments in debt and equity securities?

A) Impairment losses are reported in income for credit losses related to investments in debt and equity securities.
B) Impairment losses are reported in income for other than temporary declines in the value of equity securities with no significant influence and those with significant influence.
C) Impairment testing is required for investments in equity securities with no significant influence and those with significant influence.
D) Impairment testing is required for debt securities classified as AFS or HTM, but not for debt securities classified as trading.

Question 53

Fizzy Beverages invests in the debt and equity securities of other companies. Which statement is true concerning impairment testing of these investments?

A) Impairment testing only occurs for investments with an active market.
B) Impairment is always reported in income if the book value of the investment significantly exceeds its market value.
C) Impairment testing only occurs for investments carried at fair value.
D) Impairment testing is required for debt investments classified as AFS and HTM.

Question 54

Fizzy Beverages invests in the debt securities of other companies. Which statement is false concerning reporting standards for these investments?

A) Fizzy can elect to report these investments at FV-NI.
B) Interest received on trading and AFS debt investments reduces the investment balance.
C) Trading and AFS debt securities are reported on the balance sheet at fair value.
D) Fizzy reports credit losses related to AFS and HTM investments in income.

Question 55

If a company elects the fair value option under ASC Topic 825 for all eligible investments, which of its investments are not reported at fair value, with unrealized gains and losses on the investments reported in income?

A) Significant influence investments
B) Equity investments with no significant influence
C) Held-to-maturity debt investments
D) Controlling investments

Question 56

A company acquires all of the voting stock of Previn Company, and records the transaction by debiting "Investment in Previn Company." The company is accounting for its investment as a:

A) Consolidation
B) Variable interest entity
C) Joint venture
D) Stock acquisition

Question 57

Which investment(s) require consolidation of the investee's assets and liabilities on the investor's balance sheet?

A) All equity investments
B) Investments where the investor has control over the investee's operations
C) Investments where the investor lends significant amounts to the investee
D) Investments where the fair value of the investee's net assets is significant

Question 58

A company acquires all of the assets and liabilities of another company. Which statement is false?

A) The acquiring company reports the acquired assets and liabilities at fair value at the date of acquisition.
B) The acquiring company does not report acquired intangible assets unless they are already reported on the acquired company's books.
C) The acquired company no longer exists as a separate entity.
D) The acquiring company does not revalue its assets and liabilities to fair value at the date of acquisition.

Question 59

A company acquires all of the assets and liabilities of another company. Which one of the following reduces the amount of goodwill the acquiring company reports?

A) The acquired company's equipment is overvalued.
B) Acquisition cost is higher.
C) The acquired company's debt is overvalued.
D) The acquired company's inventory is overvalued.

Question 60

Porter Corporation holds a 35% interest in the voting stock of Quinn Company, and reports its investment using the equity method. Porter then acquires the remainder of Quinn's voting stock. Which statement is true concerning Porter's reporting for the acquisition of the remainder of Quinn's stock?

A) Quinn's assets and liabilities are not revalued to fair value in this transaction.
B) The difference between the fair value and book value of the equity method investment is reported in income.
C) No goodwill is reported in this tranasaction.
D) The cost of the additional 65% of Quinn's stock is reported as the book value of the equity method investment plus any cash paid and stock issued by Porter.

Question 61

Use the following information to answer bellow Questions :
Peregrine Company acquires all of the voting stock of Falcon Corporation for $65,000, in a merger. Falcon's balance sheet reports the following asset and liability balances: $$\begin{array} { l r } \text { Current assets } & \$ 15,000,000 \\\text { Plant \& equipment } & 60,000,000 \\\text { Current liabilities } & 10,000,000 \\\text { Long-term debt } & 40,000,000\end{array}$$

-Assume the book values of Falcon's assets and liabilities equal their fair values. How much goodwill does Peregrine report at the date of acquisition?

A) $30,000,000
B) $0
C) $35,000,000
D) $40,000,000

Question 62

Use the following information to answer bellow Questions :
Peregrine Company acquires all of the voting stock of Falcon Corporation for $65,000, in a merger. Falcon's balance sheet reports the following asset and liability balances: $$\begin{array} { l r } \text { Current assets } & \$ 15,000,000 \\\text { Plant \& equipment } & 60,000,000 \\\text { Current liabilities } & 10,000,000 \\\text { Long-term debt } & 40,000,000\end{array}$$

-Now assume Falcon's plant and equipment is overvalued by $15,000,000. How much goodwill does Peregrine report at the date of acquisition?

A) $55,000,000
B) $30,000,000
C) $40,000,000
D) None

Question 63

Radcliff Corporation acquires Soulon Company's assets and liabilities for $20,000,000 in cash. At the date of acquisition, Soulon's reported assets have a fair value of $50,000,000 and its reported liabilities have a fair value of $47,000,000. Investigation reveals that Soulon has unreported technology with a fair value of $5,000,000. How much goodwill does Porter report on this acquisition?

A) $20,000,000
B) $17,000,000
C) $12,000,000
D) $0

Question 64

Rand Corporation acquires Southern Company's assets and liabilities for $20,000,000 in cash. At the date of acquisition, Southern's balance sheet reported assets of $75,000,000 and liabilities of $65,000,000. Investigation reveals that Southern's reported plant assets are overvalued by $1,400,000. Rand reports how much goodwill on this acquisition?

A) $10,000,000
B) $11,400,000
C) $ 8,600,000
D) $ 7,000,000

Question 65

Trident Corporation acquires Uvell Company's assets and liabilities for $40,000,000 in cash. At the date of acquisition, Uvell's balance sheet reported assets of $90,000,000 and liabilities of $82,000,000. Investigation reveals that Uvell's buildings are overvalued by $6,000,000 and it has unreported liabilities valued at $5,000,000. Trident reports how much goodwill on this acquisition?

A) $32,000,000
B) $38,000,000
C) $33,000,000
D) $43,000,000

Question 66

Viceroy Company owns 40% of the voting stock of Wagner Enterprises, and reports the investment using the equity method. The investment balance is currently $6,000,000, but its fair value is $10,000,000. Viceroy pays $16,000,000 in cash to acquire the remainder of Wagner's stock. Wagner's reported net assets have a book value of $7,000,000 and a fair value of $5,000,000, and it has unreported technology valued at $2,000,000. If the acquisition is reported as a merger, how much goodwill is recognized?

A) $ 1,000,000
B) $19,000,000
C) $ 6,000,000
D) $14,000,000

Question 67

Lavalle Corporation creates a separate legal entity that acquires equipment and leases it to Lavalle. Lavalle does not own any of the entity's stock. Which statement is false?

A) Lavalle does not consolidate the entity because it doesn't have any ownership interests in it.
B) The entity is a variable interest entity if it cannot obtain financing on its own.
C) Lavalle consolidates the entity if the entity is a variable interest entity and Lavalle absorbs the entity's risks and rewards.
D) Lavalle will not consolidate the entity if it is not a variable interest entity.

Question 68

Sanofi reports using IFRS and invests in some of the voting shares of Pasteur. What is the deciding factor on whether it uses the equity method for this investment, or treats it as an AFS security?

A) Does Sanofi intend to hold Pasteur's stock for a term longer than one year?
B) Does Sanofi own at least 20% of Pasteur's stock?
C) Does Sanofi significantly influence Pasteur's decisions?
D) Is Pasteur a U.S. company?

Question 69

At the beginning of the current year, Jalu S.A. enters a joint venture with another company to develop new technology. Each company invests €1,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €200,000 and pays dividends of €60,000. At the end of the year, the joint venture's balance sheet reports €5,000,000 in assets and €2,860,000 in liabilities. Jalu reports €22,000,000 in assets and €10,000,000 in liabilities from its own operations.
At what amount are Jalu's total liabilities reported at the end of the year?

A) €10,000,000
B) €12,860,000
C) €11,430,000
D) € 2,860,000

Question 70

IFRS requires joint ventures to be reported as:

A) Equity method investments
B) Trading securities
C) Variable interest entities
D) Available-for-sale securities

Question 71

Unless there is a "significant deterioration" in credit quality, an IFRS company measures credit losses on AFS and HTM investments as:

A) The difference between book value and the present value of the future expected cash flows.
B) Credit losses expected over the next 12 months.
C) The difference between market value and book value.
D) The decline in value due to a specific loss event.

Question 72

What is "value-in-use," as used in reporting intercorporate investments, per IFRS?

A) Present value of the investment's future expected cash flows
B) Market value of the investment in an active market
C) Present value of the investment's future dividend payments
D) Market value of the investment when acquired

Question 73

Under current standards, when is an impairment loss reported on a significant influence investment in the stock of another company, following U.S. GAAP and IFR?

A) U.S. GAAP: Carrying value exceeds fair value, and the decline is other than temporary. IFRS: Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.
B) U.S. GAAP: Book value is greater than the higher of market value or value-in-use, and the decline is other than temporary. IFRS: Carrying value exceeds fair value, and the decline is other than temporary.
C) U.S. GAAP: Not reported IFRS: Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.
D) U.S. GAAP: Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred. IFRS: Not reported

Question 74

Under IFRS 9, IFRS companies can choose from which of the following options for reporting their investments in equity securities with no significant influence, depending on investment objectives?

A) FV-NI or FV-OCI
B) FV-NI only
C) FV-OCI only
D) FV-NI or equity method

Question 75

Under IFRS 9, IFRS companies can choose from which of the following options for reporting their investments in debt securities, depending on investment objectives?

A) FV-NI or FV-OCI
B) Amortized cost or FV-NI
C) Amortized cost or FV-OCI
D) FV-NI, FV-OCI, or amortized cost

Question 76

Realized gains and losses on which of the following investments never appear on the income statement under IFRS 9?

A) FV-NI securities and FV-OCI equity securities
B) FV-NI securities
C) Amortized cost debt securities
D) FV-OCI equity securities

Question 77

IFRS 9 identifies what categories of investments in financial instruments with no significant influence, for reporting purposes?

A) Debt and equity
B) Trading, AFS, and HTM
C) Short-term and long-term
D) Controlled and uncontrolled

Question 78

Following IFRS, significant influence investments are usually called:

A) Long-term equity method investments
B) Investments in associates
C) Noncurrent stock investments
D) Investments in financial instruments

Question 79

Which statement is true regarding U.S. GAAP and IFRS for joint ventures?

A) U.S. GAAP reports joint ventures using the equity method, and IFRS requires consolidation of joint ventures.
B) Both U.S. GAAP and IFRS require the equity method for joint ventures.
C) U.S. GAAP requires consolidation of joint ventures while IFRS requires the equity method.
D) Both U.S. GAAP and IFRS require consolidation of joint ventures.

Question 80

How do IFRS and U.S. GAAP differ concerning the reporting of equity investments with no significant influence?

A) There is no difference; both standards require the investments to be reported at FV-NI.
B) IFRS requires equity investments to be reported using the equity method, while U.S. GAAP requires FV-OCI.
C) IFRS allows investments to be reported at FV-NI or FV-OCI, while U.S. GAAP requires FV-NI for all equity investments with no significant influence.
D) U.S. GAAP allows investments to be reported at FV-NI or FV-OCI, while IFRS requires FV-NI for all equity investments with no significant influence.