Deck 16: Accounting for Debt and Share Investments

Question 1

Management's intent and the marketability of a security determine whether or not a security is classified as a long-term or current asset.

Answer 1

True

Question 2

When a company purchases the shares of another company with the goal of participating in new markets or technologies,they are considered non-strategic investors.

Answer 2

False

Question 3

The term "equity security" refers to the guarantee your broker gives you concerning an investment that was just made for you.

Answer 3

False

Question 4

Non-strategic investments are always classified as short-term regardless of how long the investment is planned to be held.

Question 5

Investments in shares are the same as debt investments.

Question 6

Strategic investments include investments in associates,business combinations and joint arrangements.

Question 7

Non-strategic investments are of two types: debt and share investments.

Question 8

When you purchase a debt investment such as a bond of another corporation,this type of investment represents an "equity security."

Question 9

"Share investment" and "equity security" are interchangeable terms.

Question 10

Non-strategic investments are usually held as an investment of cash for use in current operations.

Question 11

You have just purchased some shares in a Canadian public company.Your friends call you an "investee." You are surprised that they got it wrong: you are an investor.

Question 12

If a company has cash available for longer term investments,both debt and equity investments may be considered.

Question 13

The main feature of a non-strategic investment is that the investor's intent is to generate profit primarily through short-term changes in fair value.

Question 14

Comoco purchased $3,000 of Borel Ltd shares intending to sell the shares within a short time at a profit.The journal entry to record the transaction would include a debit to cash and a credit to short-term investments.

Question 15

Investments are often made by companies with excess cash hoping to earn a higher return than might be realized by holding cash in the bank.

Question 16

Investments in debt securities are always current assets.

Question 17

"Debt investment" and "debt security" are interchangeable terms.

Question 18

Strategic investments are classified into three different categories: investments in associates,business combinations,or joint ventures.

Question 19

Non-strategic investments can result in gains or losses for a company.

Question 20

When a corporation purchases the shares or bonds of other companies,it has made an intercorporate investment.

Question 21

Halifax Company purchased $50,000 worth of bonds (par value)and held them to maturity.The journal entry at maturity should include a debit to Cash for $50,000 and a credit to Long-term Investment in Bonds for $50,000.

Question 22

Non-strategic debt investments are initially recorded using either the fair value through profit or loss method or amortized cost method.

Question 23

After recording the initial purchase of non-strategic investments,an entity must continue to measure the investment at fair value; subsequent profits or losses arising are recognized in net income.

Question 24

The investor should report short-term investments at fair value.

Question 25

On January 5,2015,Erin Ridge Corp.purchased 28,000 shares of Forest Lawn Inc.common shares for $146,000 plus a broker's fee of $1,000.Forest Lawn Inc.has 50,000 common shares outstanding and has acknowledged the fact that its policies will be significantly influenced by Erin Ridge.The investment should be accounted for as a non-equity investment using the fair value method.

Question 26

Investments non-strategic debt investments require the investor to record interest revenue as it accrues.

Question 27

Changes in investment values are recognized with a credit to short-term investments and a debit to unrealized gains.

Question 28

Investors originally record non-strategic investments using the cost method.

Question 29

The method of accounting for an investment under the fair value under profit or loss is irrevocable after initial designation.

Question 30

Brokerage costs and transaction costs can be included as part of the cost of non-strategic investments.

Question 31

Repeat Inc.purchased $60,000 (40%)worth of Quiet Corp.common shares.The journal entry to record the purchase should include a debit to Cash for $60,000 and a credit to Quiet Corp.Investment for $60,000.

Question 32

The distinguishing feature of debt investments held for the long-term is that they are held to maturity.

Question 33

Non-strategic equity investments securities are equity securities that the company has the intent and ability to hold until maturity.

Question 34

Long-term bonds are examples of non-strategic investments.

Question 35

The sale of a short-term equity investment requires a debit to cash and a credit to short-term investments,with any resulting differences recognized as gains or losses.

Question 36

An investor that significantly influences the operations of an investee should account for the investment using the equity method.

Question 37

For non-strategic debt investments,the fair value through profit and loss method allows the inclusion of any transaction costs in addition to the purchase price.

Question 38

Classical City holds $40,000 worth of 7% bonds (par value)as debt investments.The journal entry to record receipt of the semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest Revenue for $2,800.

Question 39

Tool Co.received dividends of $35 per share on 300 Sharp Systems Inc shares.The journal entry to record the transaction is a debit to Cash of $10,500 and a credit to Dividend Revenue of $10,500.

Question 40

Purchases of long-term debt investments are never initially recorded at fair value.

Question 41

Joint venture arrangements are ones in which two or more parties jointly control the resulting economic activity.

Question 42

Consolidated statements are prepared as if a company is organized as one entity,with the amounts allocated for subsidiaries reported in the investment accounts.

Question 43

Consolidation combines the financial statements of an investor company and a joint venture enterprise based on the investor's proportionate share of the financial statements of the joint venture.

Question 44

Proportionate consolidation combines the financial statement of an investor and a joint operation enterprise based on the investors proportionate share of the joint operations.

Question 45

Receipt of dividends increases the value of a significant influence investment.

Question 46

In a joint venture,the venture would use the equity method to account for their share of the joint venture.

Question 47

Micron owns 30% of JVT Corp's common shares and has significant influence over JVT's operations.Micron receives $6,500 in dividends from JVT.The entry to record receipt of the dividends includes a debit to Cash for $6,500 and a credit to Investment in JVT Shares for $6,500.

Question 48

A business combination occurs when an investor with a long-term share investment that represents more than 50% of the investee's voting shares has control over the investee.

Question 49

When a business operates as a parent company with subsidiaries,the accounting records are combined into one set of consolidated records.

Question 50

Under both IFRS and ASPE,fair value through profit or loss can be used as the initial measurement of non-strategic investments.

Question 51

A company that owns 100% of the outstanding shares of a subsidiary is required to take over the subsidiary's assets,cancel the subsidiary's shares,and merge the subsidiary into the parent.

Question 52

Under IFRS,investments in associates are accounted for using the fair value through profit or loss method.

Question 53

On May 15,Kingswood Company purchased 30% worth of Pineview Ltd's common shares as a significant influence investment.On September 30,Pineview announced that net income for the year amounted to $650,000.Kingswood should record a debit to Investment in Pineview Common Shares of $195,000 and a credit to Earnings from Investment in Pineview of $195,000.

Question 54

When using the equity method,the receipt of cash dividends is recorded as revenue because the investor has earned a distribution of earnings by the investee.

Question 55

Consolidated financial statements show the financial position,results of operations,and cash flows of all companies under the parent's control.

Question 56

The equity method is used in accounting for significant influence investments in associates.

Question 57

A joint arrangement can be classified as either a joint operation or a joint venture.

Question 58

The receipt of cash dividends from a significant influence investment is recorded as a reduction to retained earnings by the investor.

Question 59

A joint arrangement requires the use of consolidation to account for the investment in the joint operation.

Question 60

When an investment in equity securities is sold,the gain or loss is calculated by comparing proceeds from the sale with the book value of the investment on the date of sale.

Question 61

Strategic investments that occur when the investor can significantly influence the strategic operating,investing,and/or financing policies of the investee are called:

A) Joint arrangement.
B) Investments in associates.
C) Business combinations.
D) Non-strategic investment in bonds.
E) Proportionate investment.

Question 62

Non-strategic investments that are intended to be held longer than one year are reported on the balance sheet in the:

A) Current asset section.
B) Intangible asset section.
C) Non-current section called long-term investments.
D) Plant and equipment section.
E) Same section as held-for-trading investments.

Question 63

Investments in associates:

A) Can be either debt or equity securities.
B) Are not actively managed.
C) Are purchased to earn interest,dividends,or for appreciation in value.
D) Are accounted for using the equity method.
E) All of these answers are correct.

Question 64

Strategic investments:

A) Are investments in associates.
B) Are business combinations.
C) Are joint arrangements.
D) Have significant influence or control over the investee.
E) All of these answers are correct.

Question 65

Debt investments:

A) Are cash equivalents.
B) Are usually accounted for using the amortized cost method.
C) Can be converted to cash within 3 months or less.
D) Reflect an ownership relationship.
E) Are cash equivalents and reflect a creditor relationship.

Question 66

Identify the reason(s)why investments are made in other corporations.

A) To participate in new markets and technologies.
B) To gain insider information on the corporation.
C) To build a favourable business relationship with a major customer or supplier.
D) To participate in new markets and technologies and to build a favourable business relationship with a major customer or supplier.
E) None of these answers is correct.

Question 67

World Co.purchased 500 Romeo Corporation common shares at $50 per share plus $100 commission.World Co.intends to hold these shares for six to twelve months for the purpose of realizing gains in share price fluctuation.The entry to record this purchase is:

A)

B)

C)

D)

E) No entry

Question 68

A decrease in the fair value of a security that has not yet been confirmed by the sale of the security is called a(n):

A) Contingent loss.
B) Realizable loss.
C) Unrealized holding loss.
D) Capital loss.
E) Market loss.

Question 69

The sale of a short-term equity investment includes a debit to:

A) Short-term investments.
B) Gain on sale of short-term investment.
C) Long-term equity investments.
D) Cash.
E) All of these answers are correct.

Question 70

Investments in non-strategic equity investments:

A) Include purchase costs and any transaction costs.
B) Are always reported as long-term assets.
C) Are accounted for using amortized cost.
D) Are held for long-term gains.
E) Are held to recognize long-term changes in fair valuE.

Question 71

Investments in which an investor cannot significantly influence or control the operations of the investee company are called:

A) Investments in associates.
B) Joint arrangements.
C) Non-strategic investments.
D) Strategic investments.
E) Business combination.

Question 72

Non-strategic equity investments are accounted for using the:

A) Cost method.
B) Equity method.
C) Consolidation method.
D) Amortized cost method.
E) Fair value method.

Question 73

IFRS requires the fair value through profit and loss method for:

A) Investments in associates.
B) Joint arrangements.
C) Significant influence investments.
D) Strategic investments.
E) Non-strategic equity investments.

Question 74

Dax purchased 200 of the 500 outstanding Minisoft Corporation common shares at $55 per share plus a $100 brokerage fee as an investment in an associate.If Minisoft has net income for the year of $50,000 and pays a dividend of $5/share,what information should Dax report on its income statement relating to the investment?

A) $20,000 for earnings from the investment in Minisoft.
B) $50,000 in investment revenue.
C) $1,000 dividend revenue.
D) $20,000 for earnings from the investment in Minisoft and dividend revenue of $1,000.
E) $50,000 in investment revenue and dividend revenue of $1,000.

Question 75

You are referred to as an investor when you:

A) Purchase shares of company.
B) Issue shares of a company.
C) Purchase bonds of a company.
D) Issue bonds of a company.
E) Both purchase shares and purchase bonds of a company.

Question 76

Non-strategic investments usually:

A) Are purchased for the short-term.
B) Include investments in associates.
C) Include shares not intended to be converted into cash.
D) Include bonds intended to be held-to-maturity.
E) Include shares not intended to be converted into cash and include bonds intended to be held-to-maturity.

Question 77

Under IFRS,non-strategic debt investments are initially recorded using:

A) Consolidation method.
B) Amortized cost method.
C) Fair value through profit and loss method.
D) Amortized cost method.
E) Both C & D are correct.

Question 78

Non-strategic investments are usually:

A) Current assets.
B) Expected to be converted into cash within one year.
C) Expected to provide profits through short-term changes in price.
D) Subject to frequent buying and selling.
E) All of these answers are correct.

Question 79

Non-strategic debt investments are accounted for at:

A) Proportionate consolidation.
B) Fair value through profit or loss.
C) Unamortized cost.
D) Amortized cost.
E) Fair value through profit or loss or amortized cost.

Question 80

After initial recognition,using ASPE,an entity should measure debt securities at:

A) Fair value through profit and loss.
B) Cost.
C) Future cash flows.
D) Amortized cost.
E) Present valuE.