Deck 11: Financial Instruments: Investments in Bonds and Equity Securities

Question 1

Once an investment is designated as FVTOCI, this designation may be changed at will by management.

Answer 1

False

Question 2

Investments designated as FVTPL may be debt or equity instruments, while FVTOCI may include only equity instruments.

Answer 2

True

Question 3

ABC Inc. owns equity investments that are held in a foreign currency. These are designated as FVTPL investments. As a result, changes in the value of these investments arising from foreign currency fluctuations must be reported separately from changes in the value of the equity instruments in the foreign currency.

Answer 3

False

Question 4

The interest revenue recorded using FVTOCI and Amortized Cost would usually be the same.

Question 5

A bond must be held until maturity in order to be classified as an amortized cost investment.

Question 6

Amortized cost investments must have contractual terms that give rise to cash flows on specific dates.

Question 7

The equity method and consolidation will often yield the same retained earnings and comprehensive income figures, since the adjustments made under each are similar.

Question 8

It is not possible to have significant influence over another corporation without owning at least 25% of the outstanding voting shares.

Question 9

The intent to control overrides the ability to do so when determining whether control exists (and henceforth consolidation is required).

Question 10

Only FVTPL and amortized cost investments are considered passive investments.

Question 11

Impairment tests are required for all investments except those designated FVTPL.

Question 12

A triggering event must occur in order for an impairment loss to be recognized on bonds that have been designated as FVTOCI or Amortized Cost.

Question 13

A bond that is not managed as part of an actively traded portfolio and not held solely to correct its contractual cash flows would be classified as FVTOCI under IFRS.

Question 14

It is not possible to have control over another company without owning at least half of the outstanding voting shares.

Question 15

Fair-value-through-profit-and-loss (FVTPL) investments are usually held for the purpose of resale in the near-term.

Question 16

In the rare instances where fair value may not be determined using level 1, 2 or 3 inputs, an investment may be valued at cost.

Question 17

Impairment losses on all investments are reversible under ASPE.

Question 18

Realized gains and losses on the sale of equity instruments that are designated FVTOCI must be reclassified from AOCI to earnings.

Question 19

Under IFRS, equities with no directly quoted market value may usually be valued at cost.

Question 20

A company has defaulted on its most recent interest payment to a company holding its bonds. The bonds have been accounted for as amortized cost investment. The company must now recognize a loss equal to the present value of the company's expected credit losses over the next 12 months.

Question 21

A publicly quoted share price would be an example of a Level 2 input in determining fair value.

Question 22

All investments are recorded at fair value upon acquisition.

Question 23

Under ASPE, all passive investments must be accounted for using only FVTPL, Cost or Amortized Cost methods.

Question 24

Level 1 inputs should be used to determine fair value in the absence of level 2 inputs.

Question 25

Under the equity method of accounting for an investment, an investor recognizes its share of earnings in the period in which the investee declares a dividend.

Question 26

Under IFRS, discounts or premiums on amortized cost investments may be amortized using either the straight line or effective interest methods.

Question 27

Once an investor has power over an investee, consolidation is automatically required.

Question 28

The accounting approach for recording a stock dividend received on a long-term equity investment is the same whether the cost or the equity method is used by the investor.

Question 29

Under ASPE, management may choose to account for any strategic investments using either the cost or equity methods.

Question 30

Gains and losses realized from the sale of FVTOCI investments are transferred from OCI to earning when the sale occurs.

Question 31

Under IFRS, Investments in Associates may be accounted for using either the Cost or Equity Methods.

Question 32

During Consolidation, the net assets of the subsidiary are revalued to fair value at acquisition.

Question 33

When the equity method is used by an investor to account for investments in common stock, the investment account will be increased when the investor recognizes cash dividend received from investee.

Question 34

Over time, the total gain or loss flowing through income will be the same, regardless of whether an investment is designated as FVTPL or FVTOCI.

Question 35

The book value of a bond purchased at a premium or discount and classified, as an investment in marketable securities must be adjusted each period for amortization of the premium or discount.

Question 36

When shares are not actively traded on open markets, it is impossible to estimate their fair value.

Question 37

Unrealized holding gains flow through income or OCI for FVTOCI investments.

Question 38

When fair-value is not determinable, investments may be carried at cost.

Question 39

There is no separate impairment test for FVTPL investments.

Question 40

A change from the equity method to the cost method is a prospective accounting change.

Question 41

If an investor company does not have a controlling interest in another company, it must use either the cost method or the equity method to account for that investment in equity securities.

Question 42

When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as:

A) A deduction from the investor's share of the investee's profit.
B) A deduction from the investment account.
C) Dividend income.
D) An addition to the investor's share of the investee's profit.

Question 43

The equity method of accounting for long-term investments in equity securities is based on the presumption that the investor owns a sufficient number of the outstanding voting shares of another company to exercise significant influence over the operating and financing policies of the other company.

Question 44

If an investment is accounted for by using the equity method, a stock dividend received on the investment will:

A) Decrease the investment account and have no effect on the investment revenue account.
B) Increase the investment account and the investment revenue account.
C) Decrease the investment account and increase the investment revenue account.
D) Have no effect on the investment account or on the investment revenue account.

Question 45

Drabble, Inc. owns 40 percent of the outstanding stock of Gilliam Company. During 2014, Drabble received a $4,000 cash dividend from Gilliam. What effect did this have on Drabble's 2014 financial statements? (Assume that Drabble has substantial influence over Gilliam )

A) Increased total assets
B) Decreased total assets
C) Increased income
D) Decreased investment account
E) Decreased income

Question 46

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as:

A) Dividend income.
B) A deduction from the investor's share of the investee's profits.
C) A deduction from the investment account.
D) A deduction from the stockholders' equity account, dividends to shareholders.

Question 47

Dividends received on an investment in equity shares held as an Investment in Associate causes which of the following effects?

A) The investment account is decreased
B) The valuation account is increased
C) Income of the investor is increased
D) The unrealized loss is decreased or the unrealized gain is increased

Question 48

When two or more classes of equity securities are purchased for a lump sum, and the market value of neither security can be reliably determined, the lump sum payment should be allocated between the classes of securities based on the number of shares of each security purchased.

Question 49

In a lump-sum purchase of the shares of two or more companies, their relative par values are used as the basis of the allocation of cost to each.

Question 50

The equity method causes the balance in the investment account to approximate:

A) Original cost of the investment.
B) Market value of the investment.
C) Original cost of the investment minus any dividends declared and paid by the other company.
D) Original cost of the investment plus a proportionate share of subsequent undistributed earnings of the investee company.

Question 51

A parent corporation that uses the equity method of accounting for its investment in a 40 percent owned subsidiary, which earned $20,000 and paid $5,000 in dividends, made the following entries: $$\begin{array} { | l | l | l | } \hline \text { Investment in Associate } &8,000 & \\\hline \text { Investment revenue } & & 8,000\\\hline \text { Cash } & 2,000 & \\\hline \text { Dividend revenue } & & 2,000\\\hline\end{array}$$ What effect will these entries have on the parent's balance sheet?

A) Overstate investment, overstate retained earnings
B) Understate investment, understate retained earnings
C) Overstate investment, understate retained earnings
D) Financial position will be fairly stated
E) Understate investment, overstate retained earnings

Question 52

Under the equity method of accounting for Investments in Associates, the investor's investment account is decreased by all dividends received from the investee.

Question 53

Cash dividends declared out of current earnings are distributed to an investor. How will the investor's investment account be affected by those dividends under each of the following accounting methods? $\begin{array}{l}\begin{array}{|c|c|c|}\hline&\text { Cost Method }&\text { Equity method }\\\hline 1&\text { No effect } & \text { No effect } \\\hline 2&\text { No effect } & \text { Decrease } \\\hline 3&\text { Decrease } & \text { No effect } \\\hline 4&\text { Decrease } & \text { Decrease } \\\hline\end{array}\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 54

Using the cost method, an investment in a subsidiary is shown as an asset, while using the equity method, it is shown as part of shareholders' equity.

Question 55

If an investment is accounted for by using the equity method, a cash dividend received on the investment will:

A) Decrease the investment account and have no effect on the investment revenue account.
B) Increase the investment account and the investment revenue account.
C) Decrease the investment account and increase the investment revenue account.
D) Have no effect on the investment account or on the investment revenue account.

Question 56

When 30% of another company's common shares are purchased for a price in excess of 30% of the market value of its net assets, why is the excess of market value of assets over its book value amortized by the investor over its remaining useful life?

A) That part of the investment is overstated in value at acquisition date.
B) The investee's income is understated with respect to the price paid by the investor for the shares.
C) The investee's income is overstated with respect to the price paid by the investor for the shares.
D) To correct errors in the investee's accounting.

Question 57

The equity method of accounting for a consolidated company probably will be used when the proportion of its voting shares held is as low as:

A) 18 percent.
B) 20 percent.
C) 50 percent.
D) Any percent, as long as there is demonstrated significant influence.
E) 23 percent.

Question 58

Non-controlling interest (NCI) is a separate equity account which appears on the consolidated financial statements which is used to account for any portion of the subsidiary that is not owned by the parent.

Question 59

The equity method has all the following characteristics except:

A) Treats all dividends as liquidating
B) Values investments at market value
C) Treats the investor and the portion of investee owned by investor as a single economic entity
D) Removes the incentive for investor to force investee dividends in order to increase investor income

Question 60

ABC owned the following equity securities held as long-term investments on December 31, 2013. All are traded over the counter. $$\begin{array} { | l | l | } \hline \text { Security } & \text { Percent Owmed } \\\hline \text { M, Common Stock } &15 \text { percent } \\\hline \text { N, Com mon Stock } & 25 \text { percent with signitic ant intluence } \\\hline \text { O, Comm on Stock } & 5 \text { percent } \\\hline\end{array}$$ ABC should account for these securities by applying the:

A) Equity method for all of these securities.
B) Equity method for securities M and N, and the LCM value method for security O.
C) Cost method for the securities of M and O and the equity method for security N.
D) Fair value method for all of these securities.
E) Cost method for all these securities.

Question 61

On February 1, 2014, ABC purchased 10 $1,000, 12 percent bonds at 96 as a short-term investment. Interest is payable semi-annually on July 1 and January 1 of each year. How much cash did ABC spend on February 1, 2014? What amount should be debited to the investment account? $\begin{array}{|r|r|r|}\hline&\text { Total Cash Spent}& \text {Debit to Investment Account }\\\hline 1&\$ 10,100 & \$ 10,000 \\\hline 2&\$ 9,600 & \$ 9,700 \\\hline 3&\$ 9,700 & \$ 9,600 \\\hline 4&\$ 10,000 & \$ 10,100 \\\hline\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 62

On 1-1-2014 Sea Inc. purchased 40% of Gull Corporation for $30,000. At that time, Gull's owners' equity was $4,000, and Gull had the following assets with market values exceeding book value by the following amounts: Land $20,000
Buildings 30,000 (10 years life remaining)
Patent 10,000 (5 years life remaining) Gull earned $10,000 in 2014 and paid $20,000 dividends. We amortize all intangibles over 5 years. What is the 2014 ending balance in the Investment in Gull account?

A) $23,330
B) $23,120
C) $23,000
D) $33,400

Question 63

ABC owns a 35 percent interest in the voting common of XYZ and uses the equity method. For 2013, XYZ reported income of $120,000 and declared cash dividends of $40,000. If the carrying value of XYZ investment was $290,000 on January 1, 2013, ABC should (a) recognize investment revenue for 2013, and (b) report the carrying value of the investment, as follows: $$\begin{array}{l}\begin{array} { | l | l | l | } \hline\text { (a) Imrestment Resenue }&\text { (b) Camying Value }\\\hline 1) & \$ 14,000 & \$ 276,000 \\\hline 2 ) & \$ 28,000 & \$ 290,000 \\\hline 3 ) & \$ 42,000 & \$ 318,000 \\\hline 4 ) & \$ 42,000 & \$ 332,000 \\\hline\end{array}\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 64

The Mon Corporation acquired a 30% interest in the Soon Company on 1/1/2014 for $600,000. At that time, Soon had 2,000,000 shares of its common stock issued and outstanding. During 2014, Soon paid cash dividends of $20,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Soon's net income for 2014 was $120,000. What should be the balance in Mon's investment in Soon Co. account at the end of 2014? ( Assume the company uses the equity method to record the investments)

A) $570,000
B) $600,000
C) $630,000
D) $636,000

Question 65

Investor Inc. owns 40 percent of Ailmand Corporation. During the calendar year, Ailmand had net earnings of $100,000 and paid cash dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

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

Question 66

On January 1, Year 1, ABC purchased $1,200,000 USD worth of bonds for $1,150,000, which are accounted as FVTPL investments. On that date, $1 US was worth $1.20 CDN. ABC Inc. reports its results in Canadian dollars. On December 31^st, Year 1, the bonds were trading for $1,120,000 USD and $1 US was worth $1.25 CDN. Based on the information provided, which of the following choices best describes the entry(ies) required by ABC Inc. on December 31^st, Year 1, the company's year-end? Choice 1:
Investment in DEF Bonds 20,000
Foreign Exchange Gain 20,000
Choice 2:
Foreign Exchange Loss 20,000
Investment in DEF Bonds 20,000
Choice 3:
Investment in DEF Bonds 20,000
Investment Revenue - Unrealized Holding Gain 17,000
Foreign Exchange Gain 3,000
Choice 4:
Investment in DEF Bonds 20,000
Foreign Exchange Loss 3,000
Investment Revenue - Unrealized Holding Gain 23,000

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 67

WXC incurred the following costs during 2015 to purchase LXT shares: (a) 1,000 shares of LXT at $6 per share: $$\begin{array} { | l | r | } \hline \text { January } 1 \text { payment } & \$ 2,000 \\\hline \text { March } 1 \text { payment } & 1,000 \\\hline \text { May } 1 \text { payment } & 1,000 \\\hline \text { July } 1 \text { payment } & 1,000 \\\hline \text { september } 1 \text { payment } & 1,000 \\\hline \text { (b) inerest paid } &400 \\\hline \text { (c) Brokerage fee paid } &800 \\\hline \text { (d) excise tax paid } &300 \\\hline\end{array}$$ Assuming the cost method is used, WXC should record this 2015 investment at:

A) $6,000
B) $6,600
C) $6,900
D) $7,300

Question 68

ABC Inc. is a publicly traded enterprise which holds bonds in DEF Inc. The unadjusted carrying value of the bonds as at the most recent reporting date was $682,000. There was a credit balance of $5,000 in the company's Loss Allowance account with respect to these bonds at that date. ABC Inc. is doubtful about DEF's future viability, as the company has been experiencing problems as of late. ABC expects additional credit losses of $4,000 and a lifetime of credit losses totaling $500,000. The preceding amounts have already been discounted. However, DEF Inc. has not yet defaulted on any interest payments. Based on the above information, ABC Inc. should record a loss of:

A) $500,000
B) $495,000
C) $9,000
D) $4,000

Question 69

Which of the following investments need not be tested for impairment?

A) Those held at Cost.
B) Investments in Associates.
C) Amortized Cost Investments.
D) FVTPL Investments.

Question 70

On January 1, 2015, HJ paid $600,000 for 20,000 shares of MN's common shares, which represents a 15 percent investment in MN. HJ does not have the ability to exercise significant influence over MN. MN declared and paid a dividend of $1 a share to its stockholders during 2015. MN reported net income of $520,000 for the year ended December 31, 2015. The balance in HJ's balance sheet account "Investment in MN" at December 31, 2001 under the cost method, should be:

A) $560,000
B) $600,000
C) $638,000
D) $678,000

Question 71

The data below pertains to the values of various FVTOCI investments held by a client company: $$\begin{array} { | l | r | l | l | } \hline \text { Stock }&\text { Shares } & \text { Cost } & \text { Market Value (1281/2011) } \\\hline X & 500 & \$ 30 = \$ 15,000 & \$ 24 = \$ 12,000 \\\hline Y & 1,000 & 20 = 20,000 & 30 = 30,000 \\\hline Z & 750 & 24 = 18,000 & 30 = 22,500 \\\hline\end{array}$$ The company's entire FVTOCI portfolio should be valued at which amount on December 31^st, 2011?

A) $50,000
B) $53,000
C) $64,500
D) $67,500

Question 72

On January 1, 2014, XYC purchased 100 shares (1 percent) of AB common shares at $120 per share. XYC uses the cost method to account for the AB shares. Subsequent to purchase, the following transactions and events happened: June 1, 2014, received a 20 percent stock dividend on the AB shares; March 31, 2015, XYC sold half of the AB shares at $108 per share. At the date of the sale, XYC should recognize a gain (loss) on the sale of the AB shares of:

A) $600 loss.
B) $220 gain.
C) $480 gain.
D) $880 gain.

Question 73

FVTOCI is an investment classification that is prohibited for:

A) public companies.
B) non-strategic investments.
C) derivatives.
D) debt investments such as bonds.

Question 74

MNO Company purchased 10 $1,000, 9 percent bonds on February 28, 2014, at 105 plus $300 total accrued interest. MNO intends to sell the bonds to finance office remodelling in 2015. Interest is paid each April 30 and October 31. MNO paid $120 in broker's fees at the date of purchase. MNO's reporting year ends December 31. MNO should report this FVTPL investment on its 2014 balance sheet at:

A) $10,500
B) $10,620
C) $10,800
D) $10,920

Question 75

On January 1, 2014, BCD paid $600,000 for 60,000 shares of MNO's common which represents a 25 percent investment in MNO. BCD has the ability to exercise significant influence over MNO. BCD received a cash dividend of $1 per share from MNO at the end of 2014. MNO reported net income of $320,000 for the year ended December 31, 2014. The balance in BCD's investment account, at December 31, 2001, should be:

A) $540,000
B) $600,000
C) $620,000
D) $680,000

Question 76

TBC purchased 10,000 shares in ETC for $12 per share. However, TBC's broker arranged for TBC to pay only $4 cash per share now with the remaining balance to be paid in monthly instalments. TBC should record the investment by:

A) Debiting the investment account for $40,000
B) Debiting the investment account for $120,000
C) Debiting the investment account for $100,000 and crediting a contra account for $60,000
D) No entry should be made until the securities are fully paid for

Question 77

The data below pertains to the values of various FVTPL investments held by a client company: $$\begin{array} { | l | r | l | l | } \hline \text { Stock }&\text { Shares } & \text { Cost } & \text { Market Value (1281/2011) } \\\hline X & 500 & \$ 30 = \$ 15,000 & \$ 24 = \$ 12,000 \\\hline Y & 1,000 & 20 = 20,000 & 30 = 30,000 \\\hline Z & 750 & 24 = 18,000 & 30 = 22,500 \\\hline\end{array}$$ The company's entire FVTPL portfolio should be valued at which amount on December 31^st, 2011?

A) $50,000
B) $53,000
C) $64,500
D) $67,500

Question 78

On September 1, 2013, WXY bought 20 $1,000, 9 percent bonds at 94 plus $300 total accrued interest. The bonds were to be sold to finance a new machine to be purchased in the following year. Therefore, the bonds will be sold during 2014. Interest is paid each June 30 and December 31. The bonds were designated as FVTPL investments. On the purchase date, WXY paid a brokerage fee of $340. WXY should record the cost of this investment at:

A) $18,800
B) $19,140
C) $19,740
D) $20,000

Question 79

FGH purchased a $100,000, 6 percent bond at 104 plus $2,000 accrued interest. The bond pays semi-annual interest on each 6/30 and 12/31. FGH paid a brokerage fee of $1,500. What entry should FGH make to record this long-term investment? FGH adheres to ASPE. $\begin{array}{|l|l|r|r|}\hline 1)&\text { investment in FVTPL securities } & & \\\hline &\text { Cash } & 101,500 & \\\hline 2)&\text { nuestment in FVTPL securities } && 101,500 \\\hline& \text { Brokerage expense } & 104,000 & \\\hline &\text { Cash } && 1,500 \\\hline 3)&\text { Inestment in FVTPL securities } & 105,500 & \\\hline &\text { Investment rec eivable } & 2,000 & \\\hline &\text { Cash } & & 107,500 \\\hline 4)&\text { investment in FVTPL securities } & 105,500 & \\\hline &\text { Interest receivable } & 2,000 & \\\hline &\text { Cash } & & 107,500 \\\hline\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 80

ZTC purchased shares of W common on the following dates: $$\begin{array} { | l | r | } \hline \text { Purchases } & \text { Cash } \\\hline \text { January } 1,500 \text { shares at } \$ 3 &1,500 \\\hline \text { March } 30,200 \text { shares at } \$ 2 & 400 \\\hline \text { June } 20,100 \text { shares at } \$ 5 & 500 \\\hline \text { August } 30,50 \text { shares at } \$ 7 & 350 \\\hline\end{array}$$ The shares were designated FVTPL securities. ZTC then sold 150 of the March 30 shares that were purchased on September 9. The sale price was $7.00 per share. This sale should be recorded as follows (Round your intermediate calculations to two decimal places): $\begin{array}{l}\begin{array}{|l|r|l|l|}\hline (1)&\text { Cash } & 1,050 \\\hline &\text { Investment in W stock } & & 1,000 \\\hline &\text { Gain on sale of investment } & & 50 \\\hline (2)&\text { Cash } & 1,050 \\\hline&\text { Inestment in w stock } & & 486 \\\hline &\text { Gain on sale of investment } && 564 \\\hline (3) & \text { Cash } & 1,050 & \\\hline &\text { Investment in W stock } & & 1,050 \\\hline (4)&\text { Cash } & 1,050 & \\\hline &\text { Investment in w stock } & & 400 \\\hline &\text { Gain on sale of investment } & & 650 \\\hline\end{array}\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4