Deck 12: Statement of Cash Flows

Question 1

Only equity securities can be purchased for the strategic purpose of influencing relationships between companies.

Answer 1

True

Question 2

Account for strategic investments.

Answer 2

When an investor company makes a strategic investment, it is usually done to influence or control the investee.Significant influence is usually achieved when at least 20% of the investee's shares are acquired, although qualitative factors should also be evaluated to determine the existence of significant influence.If the investor is not able to exert significant influence over the investee company, the investment is accounted for as if it were a non-strategic equity investment.When significant influence exists (there is share ownership of usually 20% or more along with qualitative evidence of influence), the equity method should be used.The equity method records investment revenue from an associate (a significantly influenced investee) based on the investor's proportion of the associate's income.If the investor receives dividends from the associate, they reduce the carrying amount of the investment account because that company's equity has fallen.

Question 3

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

Answer 3

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

Question 4

Identify reasons to invest, and classify investments.

Question 5

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

Question 6

Account for non-strategic investments.

Question 7

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

Question 8

The cost model is used only for equity investments.

Question 9

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

Question 10

When investing excess cash for short periods of time, corporations generally invest in equity securities.

Question 11

Preferred shares are often purchased as strategic investments.

Question 12

Only debt investments can be purchased as strategic investments.

Question 13

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

Question 14

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

Question 15

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

Question 16

Equity securities are always classified as long-term investments.

Question 17

When investing excess cash for short periods, investors generally invest in debt securities that have both high liquidity and high risk.

Question 18

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

Question 19

Explain how investments are reported in the financial statements.

Question 20

Under both the fair value model and the amortized cost model, investments are adjusted upwards or downwards to reflect their fair value at year end.

Question 21

Unless there is evidence to the contrary, an investor owning at least 20% of the shares of an investee is assumed to have significant influence.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

When the equity method is used to account for an investment in shares, dividends received are accounted for as a reduction in the investment account.

Question 27

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

Question 28

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

Question 29

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

Question 30

The cost model is used to account for equity investments where there is significant influence.

Question 31

Under the equity method, the investment account is adjusted annually for a portion of associate's net profit and for dividends received.

Question 32

The cost model reports realized gains and losses on the income statement.

Question 33

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

Question 34

Under the equity method, the receipt of dividends from the investee results in a credit to the Dividend Revenue account.

Question 35

At acquisition, the investment account is debited for the cost of the shares under both the cost and equity methods of accounting for strategic investments.

Question 36

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

Question 37

Under the equity method, revenue is recognized when profit is earned by the associate.

Question 38

Under the equity method, the receipt of dividends from the investee results in an increase in the investment account.

Question 39

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

Question 40

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

Question 41

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

Question 42

Which of the following statements is not true?
(a)Under the fair value through other comprehensive income model gains and losses are critical to the evaluation of management.
(b)Under the fair value through profit or loss model, both realized and unrealized gains and losses are reported in the income statement.
(c)Under the amortized cost model, no unrealized gains or losses are reported.
(d)Non-strategic investments are purchased to generate investment income.

Question 43

Which of the following is not true about the accounting for trading investments?
(a)They are reported as current assets on the statement of financial position.
(b)Realized gains and losses are reported on the income statement.
(c)They are valued at fair value.
(d)Unrealized gains and losses are reported on the statement of comprehensive income.

Question 44

Which of the following statements is not correct regarding strategic investments?
(a)They are purchased with the purpose of influencing the investee company.
(b)They are generally classified as investments in associates.
(c)They are frequently debt securities.
(d)The degree of influence determines how a strategic investment is classified.

Question 45

If a trading investment in bonds is sold one month after its value was adjusted at year-end, the investment account is
(a)debited for the carrying amount of the bonds at the sale date.
(b)credited for the cost of the bonds at the sale date.
(c)credited for the carrying amount of the bonds at the sale date.
(d)debited for the cost of the bonds at the sale date.

Question 46

All of the following statements concerning strategic investments are true, except
(a)they include trading investments.
(b)they are purchased for the strategic purpose of influencing relationships between companies.
(c)they are generally long-term investments.
(d)they are equity securities.

Question 47

Debt investments include all of the following except
(a)common shares.
(b)guaranteed investment certificates.
(c)treasury bills.
(d)bonds.

Question 48

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

Question 49

Which one of the following would not be classified as a non-strategic investment?
(a)money-market securities
(b)idle cash in a chequing account
(c)trading investments
(d)long-term bonds

Question 50

Which of the following would never be classified as a long-term investment?
(a)strategic investments
(b)trading investments
(c)investments in associates
(d)bonds with a ten-year maturity

Question 51

Like profit (loss), other comprehensive income (loss) increases (decreases) retained earnings.

Question 52

Jaleem Corporation buys 1,000 shares of Samuel Ltd.'s common shares as a trading investment.The shares are purchased for $30 a share.At year-end the shares are trading at $32.The adjusting entry at year-end is
(d) No entry is required.

Question 53

Other comprehensive income (loss) increases (decreases) accumulated other comprehensive income.

Question 54

Trading investments are all of the following except
(a)debt or equity securities.
(b)securities purchased to generate a profit from short-term price fluctuations.
(c)securities held for the purpose of earning capital gains.
(d)strategic investments.

Question 55

When investing excess cash for short periods of time, corporations generally invest in any of the following, except
(a)money-market funds.
(b)bankers' acceptances.
(c)equity securities.
(d)treasury bills.

Question 56

All of the following investments are generally shown at their fair value except
(a)short-term debt investments.
(b)trading investments.
(c)bond investments intended to be held to maturity.
(d)shares purchased with the intention of achieving a capital gain on sale.

Question 57

Trading investments are always classified as current assets.

Question 58

Corporations invest in other companies for all of the following reasons except to
(a)use excess cash until needed.
(b)generate investment revenue.
(c)meet strategic goals.
(d)influence the market value.

Question 59

Debt investments are all of the following except
(a)low risk.
(b)classified according to maturity.
(c)equity securities.
(d)debt securities.

Question 60

One source of comprehensive income is created when unrealized gains and losses are recorded for trading investments.

Question 61

The ability of an investor to affect the operating and financial activities of another company, even though the investor does not control the company, is known as
(a)significant influence.
(b)control.
(c)a combination.
(d)influence and control.

Question 62

Behnke Corp.owns a 10% interest in the common shares of DeLonghi Ltd.During this year, DeLonghi pays a total of $15,000 in dividends and reports $130,000 profit.Behnke's investment in DeLonghi will increase Behnke's profit by
(a)$15,000.
(b)$13,000.
(c)$12,500.
(d)$ 1,500.

Question 63

The equity method should generally be used to account for an investment in shares when the level of ownership is
(a)less than 10%.
(b)between 10% and 20%.
(c)20% or more.
(d)10% or more.

Question 64

An advantage of using the fair value through other comprehensive income is that
(a)the effect on other comprehensive income is reported in the income statement.
(b)unrealized gains and losses are not used to evaluate management.
(c)unrealized losses must be reported on the income statement, but unrealized gains are reported in other comprehensive income.
(d)unrealized gains must be reported on the income statement, but unrealized losses are reported in other comprehensive income.

Question 65

On September 15, 2015, Spirit Ltd.sells 100 common shares of Ghoul Corp., which were being held as a trading investment.The shares were acquired six months ago at $100 a share.Spirit sells the shares for $80 a share.The entry to record the sale is

Question 66

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:

The entry to record the sale of the shares on Oct 1 would include a
(a)credit to Trading Investments for $3,800.
(b)credit to Realized Gain for $800.
(c)credit to Unrealized Gain for $800.
(d)debit to Unrealized Gain for $3,800.

Question 67

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:

The entry to record the receipt of the dividends on Jun 1 would include a
(a)debit to Trading Investments for $1,500.
(b)debit to Dividend Revenue for $1,500.
(c)credit to Dividend Revenue for $1,500.
(d)credit to Strategic Investments for $1,500.

Question 68

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:

The entry to record the purchase of the Taylor shares on Feb 1 would include a
(a)debit to Long- Term Trading Investments.
(b)debit to Trading Investments.
(c)debit to Strategic Investments.
(d)debit to Investment in Associates.

Question 69

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:

The entry, if any is required, to record the value of the investment on December 31 would include a debit to
(a)Realized Loss for $450.
(b)Unrealized Loss for $750.
(c)No entry is required.
(d)Unrealized Loss of $450.

Question 70

Jet Inc.owns a 25% interest in the shares of Winnipeg Corp.During the year, Winnipeg pays $5,000 in dividends to Jet and reports a net loss of $50,000.Jet's investment in Winnipeg will affect Jet's profit by
(a)$5,000 increase.
(b)$1,000 increase.
(c)$12,500 decrease.
(d)$11,250 decrease.

Question 71

Under the equity method of accounting for an investment
(a)Dividend Revenue is credited when dividends are received.
(b)an Unrealized Gain account is credited when the investee reports a profit.
(c)the Investment account is credited when the investee reports a profit.
(d)the Investment account is credited when dividends are received.

Question 72

Edmonton Ltd.owns 10% interest in the shares of Jasper Corporation.During the year, Jasper pays $5,000 in dividends to Edmonton and reports a net loss of $50,000.Edmonton's investment in Jasper will affect Edmonton's profit by
(a)$500 increase.
(b)$5,000 increase.
(c)$5,000 decrease.
(d)$4,500 decrease.

Question 73

The receipt of dividends from an investment affects the investment account when which of the following methods is used?
(a)cost method
(b)equity method
(c)fair value through profit or loss model
(d)fair value through other comprehensive income model

Question 74

When an investee can be significantly influenced, it is known as a(n)
(a)subsidiary.
(b)associate.
(c)trading investment.
(d)parent.

Question 75

Under the equity method of accounting for investments in common shares, when a dividend is received from the investee,
(a)the Dividend Revenue account is credited.
(b)the Investment account is increased.
(c)the Investment account is decreased.
(d)no entry is necessary.

Question 76

On October 1 of last year, Canadian Trader Corp.(CTC) purchased 1,000 shares of the Regal Bank for $50,000 as a trading investment.At year end, December 31, the fair value of these shares was $52,000.On February 1 of this year, CTC sold all these shares for $51,000.The realized gain (loss) that CTC will report this year is
(a)a gain of $1,000.
(b)a gain of $2,000.
(c)a loss of $2,000.
(d)a loss of $1,000.

Question 77

Greene Limited owns a 30% interest in the shares of Fields Corporation.During the year, Fields pays $20,000 in dividends to Greene and reports $120,000 profit.Greene's investment in Fields will increase Greene's profit by
(a)$36,000.
(b)$30,000.
(c)$20,000.
(d)$ 6,000.

Question 78

On June 1, 2015, Rock Corp.purchased Chan Corp.common shares for $9,300 as a trading investment.Three months later, Rock sold these shares for $10,000.The entry to record the sale would include a
(a)debit to Cash of $9,300.
(b)credit to Interest Revenue of $700.
(c)credit to Trading Investments of $10,000.
(d)credit to Realized Gain on Trading Investments of $700.

Question 79

If 30% of the common shares of an investee are purchased as a long-term investment, the appropriate classification for this investment is most likely
(a)trading investments.
(b)equity investments.
(c)non-strategic investments.
(d)investment in associates.

Question 80

When the cost method is used to account for an equity investment, the carrying amount of the investment is affected by
(a)the profit of the investee.
(b)dividend distributions of the investee.
(c)both the profit and the dividend distributions of the investee.
(d)neither the profit nor the dividend distributions of the investee.