Deck 12: Reporting and Analyzing Investments

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Equity securities are always classified as long-term investments.

Question 14

Preferred shares are often purchased as strategic investments.

Question 15

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 Income.

Question 16

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 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Under both IFRS and ASPE, the investor must use the effective-interest method to amortize bond premium or discount.

Question 23

Corporations invest in other companies for all 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 24

Premiums and discounts must be amortized on all bond investments.

Question 25

Interest income is calculated by multiplying the carrying amount of the bond investment by the market rate of interest when the bond was purchased prorated by the portion of the payment period covered during the year.

Question 26

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 27

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 28

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

Question 29

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 30

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

Question 31

All 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 32

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

Question 33

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

Question 34

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

Question 35

If there is a bond premium on a long-term bond investment, the carrying amount of the investment is reduced by the amount of the amortization.

Question 36

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

Question 37

When investing excess cash for short periods of time,
(a)corporations generally invest in equity securities.
(b)corporations generally invest in debt securities that have both high liquidity and high risk.
(c)corporations generally invest in debt securities that have high risk and low liquidity.
(d)corporations generally invest in debt securities that have low risk and high liquidity.

Question 38

Securities that can be purchased for strategic purposes
(a)include only equity securities to influence relationships between companies.
(b)include only debt investments.
(c)include both equity securities and debt investments.
(d)exclude both equity securities and debt investments.

Question 39

When an investment in bonds is made, the investment account is debited for the face value of the bond less any premium or plus any discount.

Question 40

Short-term investments in bonds are accounted for using the fair value through profit or loss model.

Question 41

On September 15, 2022, Alonso Ltd.sells 150 common shares of Bandi Corp., which were being held as a trading investment.The shares were acquired six months ago at $75 a share.Alonso sells the shares for $60 a share.The entry to record the sale is

Question 42

Which of the following is false?
(a)The cost model is used only for equity investments.
(b)The cost model reports realized gains and losses on the statement of income.
(c)The cost model is used to account for equity investments where there is significant influence.
(d)The cost model is very similar to the amortized cost model.

Question 43

All the following investments are generally shown at 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 44

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable Trading Investments intended to generate net income 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 Losses for $450.
(b)Unrealized Loss for $750.
(c)No entry is required.
(d)Unrealized Losses of $450.

Question 45

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 statement of income.
(c)Under the amortized cost model, no unrealized gains or losses are reported.
(d)Non-strategic investments are purchased to generate investment income.

Question 46

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

Question 47

Hankers Corporation buys 1,500 shares of Viggo Ltd.'s common shares as a trading investment.The shares are purchased for $45 a share.At year end the shares are trading at $48.The adjusting entry at year end is .

Question 48

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable Trading Investments intended to generate net income 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 Income for $1,500.
(c)credit to Dividend Income for $1,500.
(d)credit to Strategic Investments for $1,500.

Question 49

When investing excess cash for short periods of time, corporations generally invest in debt securities that have
(a)high risk and low liquidity.
(b)low risk and high liquidity.
(c)high risk and high liquidity.
(d)low risk and low liquidity.

Question 50

Under the equity method,
(a)the receipt of dividends from the investee results in an increase in the investment account.
(b)the receipt of dividends from the investee results in a credit to the Dividend Income account.
(c)the receipt of dividends from the investee results in an increase in the investment account and a credit to the Dividend Income account.
(d)the receipt of dividends from the investee reduces the carrying amount of the investment account.

Question 51

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

Question 52

Which of the following is not a model used for valuing non-strategic investments?
(a)fair value through profit or loss
(b)cost model through other comprehensive income
(c)fair value through other comprehensive income
(d)amortized cost

Question 53

On June 1, 2022, Mango Corp.purchased Papaya Corp.common shares for $12,100 as a trading investment.Three months later, Mango sold these shares for $13,000.The entry to record the sale would include a
(a)debit to Cash of $12,100.
(b)credit to Interest Income of $900.
(c)credit to Trading Investments of $13,000.
(d)credit to Realized Gain on Trading Investments of $900.

Question 54

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 55

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 56

Which one of the following statements is false?
(a)Under the equity method, revenue is recognized when net income is earned by the associate.
(b)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.
(c)Under the equity method, the investment account is adjusted annually for a portion of associate's net income and for dividends received.
(d)Under the equity method, revenue is recognized when net income is earned by the investor which may not be when it is earned by the investee.

Question 57

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable Trading Investments intended to generate net income 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 58

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 statement of income.
(c)They are valued at fair value.
(d)Unrealized gains and losses are reported on the statement of comprehensive income.

Question 59

Use the following information to answer questions
Wells Inc.reported these transactions relating to marketable Trading Investments intended to generate net income 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 60

On October 1 of last year, Hand Tools Corp.purchased 1,500 shares of the Bindo Bank for $72,000 as a trading investment.At year end, December 31, the fair value of these shares was $75,000.On February 1 of this year, Hand Tools sold all these shares for $73,000.The realized gain (loss) that Hand Tools will report this year is
(a)a gain of $2,000.
(b)a gain of $1,000.
(c)a loss of $1,000.
(d)a loss of $2,000.

Question 61

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 62

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

Question 63

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

Question 64

Eurythmics Ltd.owns 20% interest in the shares of Sydney Corporation.During the year, Sydney pays $10,000 in dividends to Eurythmic and reports a net loss of $50,000.Eurythmic's investment in Sydney will affect Eurythmics's net income by
(a)$2,000 increase.
(b)$10,000 decrease.
(c)$10,000 increase.
(d)$12,000 decrease.

Question 65

Republic Corp.owns a 15% interest in the common shares of Wholesome Ltd.During this year, Wholesome pays a total of $25,000 in dividends and reports $160,000 net income.Republic's investment in Wholesome will increase Republic's net income by
(a)$25,000.
(b)$24,000.
(c)$27,750.
(d)$ 3,750.

Question 66

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 67

If the equity method is used to account for an investment in common shares
(a)it is presumed that the investor has no significant influence on the investee.
(b)net income of the investee is ignored by the investor.
(c)net income of the investee is recorded as realized gains, but dividends received are credited to the investment account.
(d)the investment account may be at times greater than the acquisition cost.

Question 68

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 69

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

Question 70

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

Question 71

If the equity method is being used, the Income from Associates account is
(a)another name for a Dividend Income account.
(b)credited when dividends are declared by the investee.
(c)credited when net income is reported by the investee.
(d)debited when net income is reported by the investee.

Question 72

If a company acquires a 40% interest in another company
(a)the equity method is usually applicable.
(b)it would always have a controlling interest.
(c)one of the fair value models is usually applicable.
(d)the investor does not have the ability to exert significant influence over the investee.

Question 73

Aroma Limited owns a 25% interest in the shares of Baltic Corporation.During the year, Baltic pays $10,000 in dividends to Aroma and reports $100,000 net income.Aroma's investment in Baltic will increase Aroma's net income by
(a)$25,000.
(b)$27,500.
(c)$10,000.
(d)$ 2,500.

Question 74

Which of the following is the correct match concerning an investor's influence on the operations and financial affairs of an investee?

Question 75

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 76

On January 1, 2022, Coastal Corp.purchased 30% of the common shares of Mansbridge Corp.for $600,000.During 2022, Mansbridge Corp.reported net income of $75,000 and paid total cash dividends of $15,000.The balance in the Investment in Associates (Mansbridge) account on Coastal's books at December 31, 2022 is
(a)$675,000.
(b)$622,500.
(c)$618,000.
(d)$600,000.

Question 77

Frisbee Inc.owns a 30% interest in the shares of California Corp.During the year, California pays $10,000 in dividends to Frisbee and reports a net loss of $80,000.Frisbee's investment in California will affect Frisbee's net income by
(a)$10,000 increase.
(b)$3,000 increase.
(c)$24,000 decrease.
(d)$21,000 decrease.

Question 78

Which of the following is the correct match concerning the appropriate accounting for strategic investments?

Question 79

If the equity method is being used, cash dividends received
(a)are credited to the Dividend Income account.
(b)do not require an entry because the investee's net income have already been recorded at the proper proportion on the investor's books.
(c)are credited to the Investment in Associates account.
(d)are credited to the Income from Associates account.

Question 80

Under the equity method, the Investment in Associates account is increased when the
(a)associate reports net income.
(b)associate pays a dividend.
(c)associate reports a loss.
(d)investment is sold at a gain.