Deck 15: Accounting for Debt and Share Investments

Question 1

Investments in debt securities are always current assets.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Investments in shares are the same as debt investments.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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 20

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

Question 21

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

Question 22

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

Question 23

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 24

Tool Co. received cash dividends of $3.5 per share on 300 Sharp Systems Inc. shares. The journal entry to record the transaction is a debit to Cash of $1,050 and a credit to Dividend Income of $1,050.

Question 25

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

Question 26

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 Income for $2,800.

Question 27

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

Question 28

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

Question 29

Halifax Company purchased $50,000 worth of bonds par value) and held them tomaturity. 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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Repeat Inc. purchased $60,000 40%) worth of Quiet Corp. common shares. Thejournal 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 37

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 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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 43

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

Question 44

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

Question 45

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

Question 46

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 47

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 48

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 besignificantly influenced by Erin Ridge. The investment should be accounted for as a non-equity investment using the fair value method.

Question 49

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

Question 50

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

Question 51

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

Question 52

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 profit for the year amounted to $650,000. Kingswood should record a debit toInvestment in Pineview Common Shares of $195,000 and a credit to Earnings from Investment in Pineview of $195,000.

Question 53

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

Question 54

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 55

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 56

On January 1, 2015, Parris Corporation purchased 75% of Samitz Corporation for$100,000. On November 17, 2015, Samitz Corporation declared total dividends of$12,000. At year-end, Samitz Corporation reported profit of $60,000. The balance in the Parris Corporation's Investment in Samitz Corporation at December 31, 2015 should be:

A) $91,000.
B) $148,000.
C) $100,000.
D) $109,000.
E) $136,000.

Question 57

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

Question 58

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

Question 59

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 recordreceipt of the dividends includes a debit to Cash for $6,500 and a credit to Investment in JVT Shares for $6,500.

Question 60

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 61

A controlling influence over the investee is based on the investor owning voting shares exceeding:

A) 50%.
B) 30%.
C) 20%.
D) 10%.
E) 40%.

Question 62

The method used to account for non-strategic investments is the:

A) Equity method.
B) Effective interest method.
C) Fair value method.
D) Cost method.
E) All of these answers are correct.

Question 63

Strategic investments:

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

Question 64

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value. Music City intends to hold the bonds to maturity. The proceeds Music City receives at maturity will be:

A) $40,525.
B) $37,800.
C) $38,325.
D) $40,000.
E) $43,200.

Question 65

Micron owns 16% of JVT as an investment in an associate. JVT paid $78,000 in total dividends to its shareholders. Micron should record a:

A) Credit to Cash for $12,480.
B) Debit to Dividend Income for $12,480.
C) Debit to Investment in JVT Common Shares for $12,480.
D) Credit to Investment in JVT Common Shares for $12,480.
E) Debit to Dividend Income for $78,000.

Question 66

Micron purchased 40,000 Martok Corp common shares. This represents 40% of the outstanding shares. The purchase price was $232,000. The entry to record thetransaction includes a:

A) Credit to Investment in Martok Common Shares for $232,000.
B) Debit to Investment in Martok Common Shares for $232,000.
C) Credit to Investment in Martok Common Shares for $92,800.
D) Debit to Investment in Martok Common Shares for $92,800.
E) Debit to Investment in Martok Common Shares for $40,000.

Question 67

Investments in non-strategic equity investments:

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

Question 68

Debt investments:

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

Question 69

On January 1, X Corporation purchased 80% of Y Corporation for $250,000. On May 20, Y Corporation declared total dividends of $30,000. At year-end Y Corporationreported profit of $150,000. The balance in X Corporation's Investment in Y Corporation account at December 31 should be:

A) $370,000.
B) $226,000.
C) $346,000.
D) $220,000.
E) $250,000.

Question 70

The balance in the "Investment Income" account on Ildiko's Income Statement for the year ended December 31, 2017 is:

A) $29,750
B) $60,000
C) $5,250
D) $43,750
E) None of the above

Question 71

As an investment in associates, Music City purchased 2,000 Asta Corp common shares for $143,000. Music City also paid $375 in commissions on the transaction. The entry to record the transaction would include a:

A) Credit to Common Shares for $2,000.
B) Debit to Investment in Associates for $143,000.
C) Credit to Common Shares for $143,375.
D) Debit to Investment in Asta Common Shares for $143,375.
E) Credit to Common Shares for $143,000.

Question 72

The balance in the "Investment in Associate - Rance Ltd" account on Ildiko's balance sheet at December 31, 2017 is:

A) $60,000
B) $61,750
C) $103,750
D) $64,750
E) None of the above

Question 73

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

Question 74

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value. Music City intends to hold the bonds to maturity. Thejournal entry to record acquisition of the bonds includes a debit to Long-Term Investment in Airport Bonds for:

A) $38,325.
B) $37,800.
C) $41,525.
D) $40,000.
E) $40,525.

Question 75

Micron owns 40% of the outstanding Martok Corp common shares. Martok paid$97,000 in total cash dividends to its shareholders. Micron's entry to record the transaction should include a:

A) Credit to Investment in Martok Common Shares for $38,800.
B) Debit to Dividends for $38,800.
C) Debit to investment in Martok Common Shares for $97,000.
D) Debit to Dividends for $97,000.
E) Debit to Cash for $97,000.

Question 76

Non-strategic investments are usually:

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

Question 77

Music City owns Airport Corp bonds as a short-term equity investment with a carrying value of $65,000. The current market value is $68,500. Music City should record a:

A) Credit to Investment Income for $3,500.
B) Debit to Investment Income for $3,500.
C) Credit to Held-for-Trading Investment for $3,500.
D) Debit to Investment Loss for $3,500.
E) Credit to Held-for-Trading Investment Gain for $3,500.

Question 78

Non-strategic equity investments are accounted for using the:

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

Question 79

Investments in associates:

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

Question 80

Micron owns 35% of Martok Corp common shares, and is considered to havesignificant influence. Martok paid a total of $47,000 in common dividends. Micron would record the dividend transaction with a:

A) Debit to Investment in Martok Common Shares for $16,450.
B) Credit to Investment in Martok Common Shares for $16,450.
C) Credit to Investment in Martok Common Shares for $16,450 and Debit to Cash for $16,450.
D) Debit to Cash for $16,450.
E) Credit to Dividends Earned for $16,450.