Deck 9: Investments

Question 1

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

A) recognition of dividend income only when actually received.
B) expensing transaction costs when incurred.
C) recognition of a gain or loss in net income at disposal.
D) recognition of a gain or loss in other comprehensive income at disposal.

Answer 1

recognition of a gain or loss in net income at disposal.

Question 2

On August 1, 2020, Franklin Inc. acquired $ 120,000 (face value) 10% bonds of Machu Corporation at 102 plus accrued interest. The bonds were dated May 1, 2020, and mature on April 30, 2023, with interest payable each October 31 and April 30. The bonds will be held to maturity. Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2020 is

Answer 2

B

Question 3

Which of the following is NOT an equity instrument?

A) common shares
B) preferred shares
C) convertible bonds
D) put options

Answer 3

convertible bonds

Question 4

Generally, transaction costs are

A) capitalized when investments are accounted for using a cost-based model.
B) capitalized when investments are accounted for using a fair value model.
C) always expensed.
D) never expensed.

Question 5

Which of the following is NOT a motivation for investment in debt and equity instruments issued by other companies?

A) to assist those companies in meeting financial obligations
B) the returns provided by the investments
C) to have a special relationship, with a supplier, for example
D) to exercise influence or control over the operations of the investee

Question 6

To calculate the amount of interest to recognize each period for a bond investment (unless it held for trading purposes),

A) ASPE requires the use of the effective-interest method.
B) IFRS requires the use of the effective-interest method.
C) IFRS allows the use of either the effective-interest or the straight-line method.
D) ASPE requires the use of the straight-line method.

Question 7

Any contract that is evidence of a residual interest in an entity's assets is called a(n)

A) debt security.
B) liability.
C) derivative.
D) equity security.

Question 8

On August 1, 2020, Peterson Corp. acquired 20, $ 1,000, 8% bonds at 95 plus accrued interest. The bonds were dated May 1, 2020, and mature on April 30, 2020, with interest paid semi-annually on October 31 and April 30. The bonds will be held to maturity. Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2020 is

Question 9

In practice, under the cost/amortized cost method and ASPE, any discount or premium on a bond investment is

A) required to be recognized and reported separately, and amortized using the effective-interest rate method.
B) not recognized or reported separately; amortized using either the straight-line or effective-interest method.
C) not recognized or reported separately; amortized using the effective-interest method.
D) required to be recognized and reported separately, and amortized using the straight-line method.

Question 10

How investments are accounted for does NOT usually depend on

A) the type of investment.
B) whether the investments are bought on margin.
C) management intent.
D) company strategy.

Question 11

Under ASPE, for accounting for investments in associates,

A) the cost method must be used for all such investments.
B) the fair value method can be used for shares quoted in an active market.
C) the investor may use the cost method for one investment and the fair value for another.
D) the fair value method must be used for all such investments.

Question 12

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 "Gain from Discount."
C) debit to Interest Income.
D) credit to the investment account.

Question 13

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) subsidiary.

Question 14

When it comes to measuring investments, which of the following statements is true?

A) Companies are required to measure at cost/amortized cost.
B) Companies are required to measure at fair value.
C) Both cost/amortized cost and fair value are permitted in appropriate circumstances.
D) The company may report using whichever method best aligns with their financial reporting objectives.

Question 15

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) not recognized at all.

Question 16

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) treated as a transaction cost.

Question 17

Which of the following is NOT a debt security?

A) convertible bonds
B) commercial paper
C) loans receivable
D) government treasury bills

Question 18

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

A) face or par value.
B) fair market value.
C) book value.
D) present value.

Question 19

An interest-bearing investment is sold mid-way through the year. At the time of sale, how is the accrued interest typically treated?

A) The seller forfeits the right to any interest payment, and loses on the investment sale.
B) The original issuer (investee) must settle the interest owing before the sale can be completed.
C) The purchaser pays the seller an amount equal to the accrued interest since the last payment date.
D) At the next interest payment date, the original issuer (investee) splits the interest payments amongst anyone who held the investment over the period.

Question 20

When the cost model is applied to an investment in debt securities, such as bonds, it is referred to as the

A) equity method.
B) fair value through net income model.
C) fair value through other comprehensive income model.
D) amortized cost model.

Question 21

On October 1, 2020, Moray Ltd. purchased 500 of the $ 1,000 face value, 8% bonds of Eel Ltd. for $ 585,000, including accrued interest of $ 10,000. The bonds, which mature on January 1, 2027, pay interest semi-annually on January 1 and July 1. Moray used the straight-line method of amortization and appropriately recorded the bonds as long-term. On Moray's December 31, 2021 balance sheet, the carrying value of the bonds would be

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

Question 22

At December 31, 2020, Silicon Corp.'s stock investment portfolio, which is being accounted for by the fair value through net income (FV-NI) model, shows a general ledger balance of $ 318,600. It is determined that the fair value of the securities is actually $ 326,200. The entry to adjust the portfolio to fair value will include a

A) debit to Investment Income or Loss of $ 7,600.
B) credit to Cash of $ 7,600.
C) debit to FV-NI Investments of $ 7,600.
D) credit to FV-NI Investments of $ 7,600.

Question 23

On October 1, 2020, Barrick Corp. purchased 800, $ 1,000, 9% bonds for $ 792,000, which included $ 12,000 accrued interest. The bonds, which mature on February 1, 2029, pay interest semi-annually on February 1 and August 1. The bonds will be held to maturity. Barrick uses the straight-line method of amortization. The bonds, which are accounted for under the amortized cost model, should be reported in the December 31, 2020 balance sheet at a carrying value of

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

Question 24

On January 1, 2020 Limoyo Corporation purchased 600 of $ 1,000 face value, 8% bonds of Leon Company, for $ 553,668, to yield 10%. The bonds, which mature on January 1, 2025, pay interest semi-annually on January 1 and July 1. Assuming that Limoyo uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the net carrying value of the bonds should be shown on Limoyo's December 31, 2020, statement of financial position at

A) $ 557,351.
B) $ 562,934.
C) $ 600,000.
D) $ 553,668.

Question 25

George Inc. owns bonds that are accounted for under the fair value through net income model. On December 31, 2020, the bonds have a carrying value of $ 124,365. The fair value at that date is $ 123,000. The entry to record the year-end adjustment is
D) No adjustment is required.

Question 26

On November 1, 2020, Fluck Corp. purchased 10-year, 9%, bonds with a face value of $ 360,000, for $ 324,000. An additional $ 10,800 was paid for the accrued interest, which is paid semi-annually on January 1 and July 1. The bonds mature on July 1, 2027 and will be held to maturity. Fluck uses the straight-line method of amortization and the amortized cost method for these bonds. Ignoring income taxes, the amount to be reported in Fluck's 2020 income statement as a result of this investment is

A) $ 6,300.
B) $ 6,000.
C) $ 5,400.
D) $ 4,800.

Question 27

The fair value through net income model requires that

A) investments are measured at fair value.
B) transaction costs are expensed.
C) investments are measured at fair value and transaction costs are capitalized.
D) investments are measured at fair value and transaction costs are expensed.

Question 28

At December 31, 2020, Platinum Corp. has the following equity securities (no significant influence) that were purchased earlier in 2020, its first year of operation: $\begin{array}{c}\begin{array}{lll}\\\text {Security A}\\\quad\quad\quad\quad\text {B}\\\text {Totals}\\\end{array}\begin{array}{l}\underline{\text { Cost }}\\\$ 50,000 \\\underline{70,000}\\\underline{{\$ 120,000}} \end{array}\begin{array}{c}\underline{\text { Market } }\\\$ 51,875 \\\underline{77,500}\\\underline{\$ 129,375} \end{array}\end{array}$
If the investments are being accounted for under the fair value through net income (FV-NI) model, the total book value of the investment accounts should

A) be decreased by $ 9,375.
B) be increased by $ 9,375.
C) be decreased by $ 20,000.
D) remain unchanged.

Question 29

The fair value through net income (FV-NI) model is sometimes referred to as

A) the fair value through profit or loss (FVTPL).
B) held for trading.
C) discontinued operations.
D) available for sale.

Question 30

Use the following information for questions.
On July 1, 2020, Harry Ltd. purchased $ 200,000 (par value) of Prince's 8% bonds. Because the market rate was 9%, Harry purchased them for $ 186,992. The bonds pay interest semi-annually on December 31 and June 30. Harry uses the amortized cost model and the effective-interest method to recognize interest income on bond investments.
Rounding values to the nearest dollar (if necessary), the entry to recognize receipt of the first interest payment on December 31, 2020 will include a

A) debit to Cash of $ 9,000.
B) credit to Interest Income of $ 8,415.
C) debit to Cash of $ 8,415.
D) credit to Interest Income of $ 8,000.

Question 31

Masma Corp. began operations in 2020. An analysis of Masma's equity securities portfolio acquired in 2020 shows the following totals at the end of the year. Masma accounts for these investments using the fair value through net income (FV-NI) model. $$\begin{array} { l l } \text { Total cast } & \$ 182,400 \\\text { Total feir market value } & 153,600\end{array}$$ Based on this information, what amount should Masma report in its 2020 income statement for "Investment Income or Loss"?

A) $ 12,800 loss
B) $ 16,000 gain
C) $ 28,800 gain
D) $ 28,800 loss

Question 32

During 2020, Brandon Inc. purchased 2,000, $ 1,000, 9% bonds. The bonds mature on March 1, 2025, and pay interest on March 1 and September 1. The carrying value of the bonds at December 31, 2020 was $ 1,960,000. On September 1, 2021, after the semi-annual interest was received, Brandon sold half of these bonds for $ 988,000. Brandon uses straight-line amortization and has accounted for the bonds under the amortized cost model. The gain on the sale is

A) $ 11,200.
B) $ 8,000.
C) $ 4,800.
D) $ 0.

Question 33

On its December 31, 2020, balance sheet, Red Corp. reported a short-term investment in equity securities, under the fair value through net income model, at $ 330,000. At December 31, 2021, the fair value of the securities was $ 350,000. What should Red report on its 2021 income statement as a result of the increase in fair value of the investments during 2021?

A) $ 0.
B) loss on investments of $ 20,000.
C) unrealized gain of $ 20,000.
D) investment income of $ 20,000.

Question 34

Use the following information for questions.
On July 1, 2020, Harry Ltd. purchased $ 200,000 (par value) of Prince's 8% bonds. Because the market rate was 9%, Harry purchased them for $ 186,992. The bonds pay interest semi-annually on December 31 and June 30. Harry uses the amortized cost model and the effective-interest method to recognize interest income on bond investments.
Rounding values to the nearest dollar (if necessary), the bond discount to be amortized on December 31, 2020 is

A) $ 8,415.
B) $ 8,000.
C) $ 7,585.
D) $ 415.

Question 35

On October 1, 2020, Berlin Corp. purchased 250, $ 1,000, 9% bonds for $ 260,000. An additional $ 7,500 was paid for the accrued interest, which is paid semi-annually on December 1 and June 1. The bonds mature on December 1, 2024 and will be held to maturity. Berlin uses the straight-line method of amortization and the amortized cost model for these bonds. Ignoring income taxes, the amount to be reported in Berlin's 2020 income statement as a result of this investment is

A) $ 3,750.
B) $ 5,025.
C) $ 5,625.
D) $ 6,225.

Question 36

In January 2020, Haddock Ltd. had purchased an investment for $ 150,000. By December 31, 2020, the fair market value of that investment had increased by $ 20,000. Assuming this gain was included in the company's 2020 net income, which accounting method did Haddock use to account for this investment?

A) cost
B) fair value through other comprehensive income (FV-OCI)
C) fair value through net income (FV-NI)
D) equity

Question 37

Regarding the reporting of investment income under the FV-NI method, for companies reporting in accordance with ASPE, which of the following statements is true?

A) Interest income must be separated from net gains or losses recognized on financial instruments.
B) Holding gains and losses are always tracked separately from interest and dividend income.
C) Interest income must be separated from dividends recognized on financial instruments.
D) None of these are true.

Question 38

On January 2, 2020, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu Ltd. for $ 60,000. During 2020, Rindu declared total cash dividends of $ 10,000 and reported net income for the year of $ 40,000. If Fidel uses the cost model to account for its investment in Rindu, Fidel's Investment in Rindu Ltd. account at December 31, 2020 should be

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

Question 39

On November 1, 2020, Jepson Ltd. purchased 300 of the $ 1,000 face value, 9% bonds of Carly Corp., for $ 316,000, which included accrued interest of $ 4,500. The bonds, which mature on January 1, 2025, pay interest semi-annually on March 1 and September 1. The bonds will be held to maturity. Assuming that Jepson uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the carrying value of the bonds should be shown on Jepson's December 31, 2020, statement of financial position at

A) $ 316,000.
B) $ 300,000.
C) $ 311,500.
D) $ 311,040.

Question 40

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

A) recognized in other comprehensive income only.
B) recognized in either net income or other comprehensive income.
C) recognized in net income only.
D) ignored.

Question 41

Under the fair value through other comprehensive income model, with recycling, previously unrealized holding gains and/or losses to the date of disposal are

A) ignored.
B) transferred to retained earnings.
C) transferred to net income.
D) transferred to "Unrealized Gain or Loss - OCI."

Question 42

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

A) potentially have influence over the investee if the shares are widely held.
B) always be assumed to have little or no influence over the investee.
C) be assumed to be using the cost model.
D) be assumed to always use the equity method.

Question 43

The fair value loss impairment model

A) is used for all investments that are not accounted for as FV-NI.
B) requires a separate impairment test.
C) calculates the impairment loss as the difference between the asset's fair value and its current carrying amount.
D) calculates the impairment loss as the difference between the asset's original cost and its current carrying amount.

Question 44

Application of the cost model to the investment one company makes in another entity's shares is straightforward and includes all of the following EXCEPT

A) recognize the cost of the investment at the fair value of shares acquired.
B) unless impaired, report the investment at its fair value at each balance sheet date.
C) recognize dividend income when the entity has a claim to the dividend.
D) when the shares are disposed of, derecognize them and report a gain or loss on disposal in net income.

Question 45

Accumulated comprehensive income is included as part of

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

Question 46

Realized gains and losses on investment disposals are recognized in net income for all investment instruments EXCEPT those classified as

A) FV-NI.
B) FV-OCI with recycling.
C) cost/amortized cost.
D) FV-OCI without recycling.

Question 47

Other comprehensive income does NOT include

A) comprehensive income.
B) net income.
C) unrealized gains resulting from the application of the fair value through other comprehensive income model.
D) unrealized losses resulting from the application of the fair value through other comprehensive income model.

Question 48

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

A) recognized in net income.
B) recognized in other comprehensive income.
C) recognized in either net income or other comprehensive income.
D) ignored.

Question 49

Accumulated other comprehensive income includes

A) current year's net income.
B) all previous debits to other comprehensive income.
C) all previous credits to other comprehensive income.
D) all previous debits and credits to other comprehensive income.

Question 50

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 51

Which of the following situations would NOT necessarily 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) The issuing entity has temporarily halted dividend payments in order to retain cash for future expansion.
D) The issuing entity is undergoing a major reorganization.

Question 52

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) should be used in the fair value through net income model.
D) should not be used in the fair value through other comprehensive income model.

Question 53

Accounting of impairment losses is required for investments that are measured using the

A) cost/amortized cost model.
B) FV-NI model.
C) FV-OCI model.
D) All of these (all of these models require a method of accounting for impairment).

Question 54

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 circumstances 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 55

At December 31, 2020, Swift Current Inc. has the following portfolio of common shares in which it does not have significant influence: Assuming Swift Current uses the fair value through other comprehensive income (FV-OCI) model to account for this portfolio of investments, the most informative entry to record the year-end adjustment is

Question 56

When one corporation has a controlling interest in another corporation whose shares are not actively traded, under ASPE, the investment is accounted for using

A) either the consolidation method or the equity method or the cost method.
B) the consolidation method.
C) either the consolidation method or the equity method.
D) either the consolidation method or the equity method or the cost method or the FV-OCI method.

Question 57

On November 1, 2020, Mack Co. purchased a 5-year, 8% bond with a face value of $ 200,000. The purchase price of $ 184,556 was consistent with a 10% yield. Interest is payable semi-annually on January 1 and July 1. The bonds mature on January 1, 2022. The amortized cost of the bond on the maturity date is

A) $ 185,556.
B) $ 195,000.
C) $ 200,000.
D) $ 190,000.

Question 58

Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the expected loss impairment model uses which discount rate?

A) the investor's internal rate of return
B) the historical interest rate
C) the current market rate
D) either the historical rate or the current market rate

Question 59

Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the incurred loss impairment model uses which discount rate?

A) the investor's internal rate of return
B) the historical interest rate
C) the current market rate
D) either the historical rate or the current market rate

Question 60

Salmon Corporation purchased an investment in 2020 (an equity investment without significant influence). The purchase price of $ 94,000 included transaction costs of $ 1,000. Assuming the transaction costs were capitalized and Salmon follows IFRS, which accounting method did Salmon use to account for this investment?

A) amortized cost
B) fair value through net income (FV-NI)
C) fair value through other comprehensive income (FV-OCI)
D) equity

Question 61

Use the following information to solve the following questions:
The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2020, are as follows:
$\quad$$\quad$$\quad$$\quad$ THUNDER BAY CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text {Assets. } &\underline{\$400,000} \\ \text {Liabilities. } &\$50,000\\ \text { Common shares } &200,000\\ \text { Retained earnings } &\underline{150,000}\\ \text { Total equities } &\underline{\$400,000}\\\end{array}$


$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ FORT WILLIAM CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text { Assets } & \underline{\$300,000} \\\end{array}$

$\begin{array}{c}\text {FORT WILLIAM CORP.}\\\text {Balance Sheet}\\\text {December 31,2020}\\\begin{array}{lll} \text { Assets.}\\ \text { Liabilities}\\ \text { Common shares.}\\ \text { Retained earnings.}\\ \text { Total equities.}\end{array}\begin{array}{l}\underline{\$ 300,000}\\\$ 75,000 \\185,000 \\\underline{40,000} \\\underline{\$ 300,000 }\\\end{array}\end{array}$


-If Thunder Bay acquired a 20% interest in Fort William on December 31, 2020, for $ 65,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Fort William Corp. would have been

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

Question 62

When an investor is using the equity method and receives dividends from the investee, the journal entry will include a

A) credit to Dividend Revenue.
B) credit to Retained Earnings.
C) credit to the Investment account.
D) debit to the Investment account.

Question 63

When an investor is using the equity method and the investee reports a net loss, the journal entry will include a

A) debit to the Investment account.
B) debit to Retained Earnings.
C) credit to the Investment account.
D) credit to Investment Income or Loss.

Question 64

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

A) must use the equity method.
B) would be likely to prepare consolidated statements.
C) may have significant influence over the investee if the shares are closely held.
D) may have significant influence over the investee if the shares are widely held.

Question 65

Use the following information for questions.
During calendar 2020, Davel Corp. reported net income of $ 45,000 and paid total cash dividends of $ 15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant influence.
How much income from its investment in Davel should Ryan report in 2020?

A) $ 45,000
B) $ 15,000
C) $ 13,500
D) $ 22,500

Question 66

Use the following information to solve the following questions:
The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2020, are as follows:
$\quad$$\quad$$\quad$$\quad$ THUNDER BAY CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text {Assets. } &\underline{\$400,000} \\ \text {Liabilities. } &\$50,000\\ \text { Common shares } &200,000\\ \text { Retained earnings } &\underline{150,000}\\ \text { Total equities } &\underline{\$400,000}\\\end{array}$


$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ FORT WILLIAM CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text { Assets } & \underline{\$300,000} \\\end{array}$

$\begin{array}{c}\text {FORT WILLIAM CORP.}\\\text {Balance Sheet}\\\text {December 31,2020}\\\begin{array}{lll} \text { Assets.}\\ \text { Liabilities}\\ \text { Common shares.}\\ \text { Retained earnings.}\\ \text { Total equities.}\end{array}\begin{array}{l}\underline{\$ 300,000}\\\$ 75,000 \\185,000 \\\underline{40,000} \\\underline{\$ 300,000 }\\\end{array}\end{array}$


-If Thunder Bay acquired a 20% interest in Fort William on December 31, 2020, for $ 45,000, and during 2021 Fort William reported net income of $ 25,000 and paid a total cash dividend of $ 10,000, applying the equity method would give a debit balance in the Investment in Fort William Corp. account at the end of 2021 of

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

Question 67

When an investor, using the equity method, pays more than its share of the investee's book value, the difference is

A) ignored.
B) accounted for on the investor's books by a debit to Goodwill.
C) accounted for on the investee's books by a debit to Goodwill.
D) requires that the investor's Investment account and any investment income from the associate be adjusted over time.

Question 68

Use the following information for questions.
Red Corp. owns 3,000 of the 10,000 outstanding common shares of Grey Corp. and exercises significant influence. During 2020, Grey reported net income of $ 120,000 and paid total cash dividends of $ 40,000.
Red Corp. should report investment revenue for 2020 of

A) $ 12,000.
B) $ 24,000.
C) $ 36,000.
D) $ 48,000.

Question 69

Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity method. Olde Corp. should 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 70

On January 2, 2020, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu Ltd. for $ 60,000. During 2020, Rindu declared total cash dividends of $ 10,000 and reported net income for the year of $ 40,000. If Fidel uses the equity method of accounting for its investment in Rindu, Fidel's Investment in Rindu Ltd. account at December 31, 2020 should be

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

Question 71

Use the following information for questions.
During calendar 2020, Davel Corp. reported net income of $ 45,000 and paid total cash dividends of $ 15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant influence.
What amount should Ryan show in the investment account at December 31, 2020 if the beginning of the year balance in the account was $ 60,000?

A) $ 69,000
B) $ 73,500
C) $ 60,000
D) $ 90,000

Question 72

Use the following information for questions.
On January 1, 2020, Abalone Ltd. acquired 30% of Flounder Corp.'s common shares for $ 240,000. During 2020, Flounder reported net income of $ 100,000 and paid total dividends of $ 60,000. Abalone's 30% interest in Flounder gives Abalone the ability to exercise significant influence over their operating and financial policies. During 2021, Flounder reported net income of $ 150,000 and paid total dividends of $ 30,000 on April 1 and $ 40,000 on October 1. On July 1, 2021, Abalone sold half of its shares in Flounder for $ 158,000 cash.
The carrying amount of this investment in Abalone's December 31, 2020, statement of financial position should be

A) $ 252,000.
B) $ 240,000.
C) $ 270,000.
D) $ 275,000.

Question 73

Use the following information for questions.
Red Corp. owns 3,000 of the 10,000 outstanding common shares of Grey Corp. and exercises significant influence. During 2020, Grey reported net income of $ 120,000 and paid total cash dividends of $ 40,000.
If the beginning 2020 balance in the Investment in Grey Corp. account was $ 180,000, the balance at December 31, 2020 should be

A) $ 260,000.
B) $ 204,000.
C) $ 180,000.
D) $ 132,000.

Question 74

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) earnings are reported by the investee in its financial statements.
D) investee pays a dividend.

Question 75

Use the following information to solve the following questions:
The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2020, are as follows:
$\quad$$\quad$$\quad$$\quad$ THUNDER BAY CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text {Assets. } &\underline{\$400,000} \\ \text {Liabilities. } &\$50,000\\ \text { Common shares } &200,000\\ \text { Retained earnings } &\underline{150,000}\\ \text { Total equities } &\underline{\$400,000}\\\end{array}$


$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ FORT WILLIAM CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text { Assets } & \underline{\$300,000} \\\end{array}$

$\begin{array}{c}\text {FORT WILLIAM CORP.}\\\text {Balance Sheet}\\\text {December 31,2020}\\\begin{array}{lll} \text { Assets.}\\ \text { Liabilities}\\ \text { Common shares.}\\ \text { Retained earnings.}\\ \text { Total equities.}\end{array}\begin{array}{l}\underline{\$ 300,000}\\\$ 75,000 \\185,000 \\\underline{40,000} \\\underline{\$ 300,000 }\\\end{array}\end{array}$


-If Thunder Bay acquired a 30% interest in Fort William on December 31, 2020, for $ 67,500 and during 2021 Fort William reported net income of $ 25,000 and paid a total cash dividend of $ 30,000, applying the equity method would give a debit balance in the Investment in Fort William Corp. account at the end of 2021 of

A) $ 67,500.
B) $ 66,000.
C) $ 62,500.
D) $ 58,500.

Question 76

Use the following information for questions.
During calendar 2020, Davel Corp. reported net income of $ 45,000 and paid total cash dividends of $ 15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant influence.
On December 31, 2020, Ryan Corp. acquired a 40% interest in Gosling Corp. for $ 315,000. During 2021, Gosling reported net income of $ 200,000 and paid total cash dividends of $ 50,000. Assuming Ryan uses the equity method, at December 31, 2021, the balance in the investment account should be

A) $ 395,000.
B) $ 295,000.
C) $ 375,000.
D) $ 255,000.

Question 77

Use the following information to solve the following questions:
The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2020, are as follows:
$\quad$$\quad$$\quad$$\quad$ THUNDER BAY CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text {Assets. } &\underline{\$400,000} \\ \text {Liabilities. } &\$50,000\\ \text { Common shares } &200,000\\ \text { Retained earnings } &\underline{150,000}\\ \text { Total equities } &\underline{\$400,000}\\\end{array}$


$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ FORT WILLIAM CORP.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Balance Sheet
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, 2020
$\begin{array}{llcc} \text { Assets } & \underline{\$300,000} \\\end{array}$

$\begin{array}{c}\text {FORT WILLIAM CORP.}\\\text {Balance Sheet}\\\text {December 31,2020}\\\begin{array}{lll} \text { Assets.}\\ \text { Liabilities}\\ \text { Common shares.}\\ \text { Retained earnings.}\\ \text { Total equities.}\end{array}\begin{array}{l}\underline{\$ 300,000}\\\$ 75,000 \\185,000 \\\underline{40,000} \\\underline{\$ 300,000 }\\\end{array}\end{array}$


-If Thunder Bay acquired a 30% interest in Fort William on December 31, 2020, for $ 75,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Fort William Corp. would have been

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

Question 78

Use the following information for questions.
On January 1, 2020, Abalone Ltd. acquired 30% of Flounder Corp.'s common shares for $ 240,000. During 2020, Flounder reported net income of $ 100,000 and paid total dividends of $ 60,000. Abalone's 30% interest in Flounder gives Abalone the ability to exercise significant influence over their operating and financial policies. During 2021, Flounder reported net income of $ 150,000 and paid total dividends of $ 30,000 on April 1 and $ 40,000 on October 1. On July 1, 2021, Abalone sold half of its shares in Flounder for $ 158,000 cash.
Before income taxes, what income should Abalone include in its 2020 income statement as a result of this investment?

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

Question 79

Jabba Inc. owns 35% of Hutt Corp., and has significant influence over Hutt. During the calendar year 2020, Hutt reported net income of $ 300,000 and paid dividends of $ 30,000. Jabba mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on Jabba's investment account, net income, and retained earnings, respectively?

A) understate, overstate, overstate
B) overstate, understate, understate
C) understate, understate, understate
D) overstate, overstate, overstate

Question 80

Current IFRS rules for equity investments that are traded in an active market require that they

A) can 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) cannot be accounted for under the fair value through net income model.