Deck 8: Long-Term Investments and the Time Value of Money

Question 1

Why is understanding the extent to which ATCO Ltd. influences another company important for accounting purposes? What impact does the degree of influence ATCO Ltd. has over another company have on accounting?

Answer 1

The extent of influence of ATCO Ltd. has over another company (i.e. Canadian Utilities) determines how the investment is accounted for. If the influence is sufficient that ATCO makes the important decisions for the investee (control), that company is termed a subsidiary and the financial statements of both entities are aggregated to produce consolidated financial statements. When little or no influence can be exerted, the investment is accounted for at fair value. If the investor can influence decisions but not control them (significant influence), equity accounting is used.

Question 2

A short-term investment is not:

A) referred to as a temporary investment
B) referred to as a marketable security
C) a current asset
D) intended to be converted to cash in more than one year

Answer 2

D

Question 3

On January 1, 2013 Blue Cat Corporation purchased 1,000 shares (5%) of Mike Mouse Co. for $14,000 as a long term investment. On May 31, 2014 Mike Mouse pays a $0.70 dividend. At year end December 31, 2014 Mike Mouse shares are trading at $15 per share. Blue Cat then sells their investment in Mike Mouse Co for $13,500 on February 20, 2015. Prepare Blue Cat's journal entries for 2013, 2014 and 2015.

Answer 3

Jan 1 2013
May 31, 2014
Dec 31, 2014
Feb 4, 2015

Question 4

Prepare journal entries for the following transactions. Note that each item falls under the at fair value through other comprehensive income classification.
(Yellow-Snow Corporation had no prior investments to the investment in Dog-Dish Corporation)

Question 5

Prepare journal entries to record the following transactions associated with at fair value through other comprehensive income investments purchased by Spark Spread Corporation during 2015 Spark Spread Corporation had no investments prior to 2015.
a. Purchased 1,500 shares of Mercury Coal Corporation common shares for $27.50 per share.
b. Mercury Coal Corporation pays a $1.25 per share dividend to all common shareholders.
c. On December 31, 2015, the market price of Mercury Coal Corporation stock is $28.00 per share.

Question 6

An investment in common shares at fair value through other comprehensive income acquired during 2014 at a cost of $46,000 has a market value on December 31, 2014, of $46,721. The adjusting entry requires a debit to long term investments (at fair value through other comprehensive income) for $721.

Question 7

The adjusting entry for investments at fair value through other comprehensive income contains a credit to Investments for $651. The income statement will reflect:

A) revenue of $651
B) an extraordinary gain of $651
C) other comprehensive income/loss of ($651)
D) nothing, because gain/loss is not reported on the income statement

Question 8

The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

A) 0%-15%
B) 20%-50%
C) any percentage greater than 50%
D) any percentage greater than 60%

Question 9

On January 1, 2013 Blue Cat Corporation purchased 1,000 shares (5%) of Mike Mouse Co. for $10,000 as a long term investment. On March 31, 2014 Mike Mouse pays Blue Cat a $5,000 dividend. At year end December 31, 2014 Mike Mouse shares are trading at $12 per share. Blue Cat then sells their investment in Mike Mouse Co for $11,500 on February 4, 2015. Prepare Blue Cat's journal entries for 2013, 2014 and 2015.

Question 10

The journal entry to record the receipt of a cash dividend will include a credit to Retained Earnings.

Question 11

Investments at fair value through other comprehensive income with a cost of $22,000 have a current market value of $22,600. The adjusting entry will require a:

A) credit to Investments for $600
B) debit to Investments for $22,600
C) credit to Gain on Investment for $600
D) credit to other comprehensive income for $600

Question 12

Investments with a cost of $12,000 have a current market value of $11,612. The adjusting entry will require a:

A) credit to Investments for $388
B) debit to Investments for $388
C) credit to Loss on Investment for $388
D) no entry required

Question 13

The receipt of a cash dividend arising from an investment (5% ownership) held by a company requires a:

A) credit to Cash
B) debit to Retained Earnings
C) credit to Retained Earnings
D) credit to Dividend Revenue

Question 14

The journal entry to record the sale of an investment includes a loss on sale of investment for $500. The income statement will reflect:

A) nothing, since the entry impacts only asset accounts
B) other income/loss of $500
C) an extraordinary loss of $500
D) a decrease in net sales of $500

Question 15

With an investment in a subsidiary, under Accounting Standards for Private Enterprise, the investment can be accounted for using consolidation, or the equity or cost method.

Question 16

Investment in subsidiaries involves purchasing 25% of the organization's shares.

Question 17

Investments accounted for using the equity method are initially recorded at:

A) fair market value of the investee company multiplied by the percentage of ownership acquired
B) the total of the investee's equity accounts multiplied by the percentage of ownership acquired
C) cost
D) the lower of the cost or fair market value as of the balance sheet date

Question 18

Non-strategic investments are recorded at market value and are reported on the balance sheet at cost.

Question 19

A long-term investment in common shares acquired during 2014 at a cost of $45,000 has a market value on December 31, 2014, of $45,725. The year-end adjusting entry requires a:

A) credit to Allowance to Adjust Investment to Market for $725
B) debit to Unrealized Gain on Investment for $725
C) debit to Long-Term Investment for $725
D) no entry required

Question 20

The Gain/Loss on Investment account may appear on which financial statement?

A) the balance sheet under the "liabilities" section
B) the balance sheet as part of the shareholders' equity
C) the balance sheet under the "assets" section as a contra asset
D) the income statement under the "other income/expense" section

Question 21

Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting. The investment was made on January 1, 2014, at a cost of $625,000. Pipeline Corporation reported net income of $85,000 for the year ended December 31, 2014, and paid total dividends of $20,000 during 2014. On December 31, 2014, after making all appropriate entries, the balance in Barking Power Company's Long-Term Investment account will equal:

A) $647,750
B) $602,250
C) $583,000
D) $690,000

Question 22

If an investor company owns between 20% and 50% of the common shares of another business, cash dividends received from the investee company are generally recorded by the investor company by:

A) increasing the value of the investor's Investment account
B) increasing the Dividend Revenue account
C) decreasing the value of the investor's Investment account
D) decreasing the investor company's Common Shares account

Question 23

If a company owns between 20 and 50% of the voting share of an investee it must normally use the equity method to account for its investment.

Question 24

A gain or loss on sale of a long-term investment using the equity method is determined by comparing the cash received with the:

A) cost of the long-term investment
B) market value of the long-term investment
C) cost of the long-term investment adjusted for the investor's share of the investee's net income and cash dividends while the investment was held by the investor company
D) lower-of-cost-or-market value of the long-term investment

Question 25

Under the equity method of accounting for investments, dividends paid by the investee are recorded by the investor as:

A) a credit to Dividend Revenue of the investor company
B) a debit to the Investment account of the investor company
C) a credit to the Investment account of the investor company
D) no entry is made to record dividends in this accounting situation

Question 26

Under the equity method the investor's share of dividends is treated as a return of investment.

Question 27

Companies with investments accounted for by the equity method often refer to the investee as a(n):

A) affiliated company
B) wholly-owned company
C) subsidiary company
D) trading partner

Question 28

Brighton Beach Limited owns 40% of Alberta Based Inc. Total cash dividends paid by Alberta Based Inc. for the year ending December 31, 2014, amount to $47,919. The journal entry prepared by Brighton Beach Limited on December 31, 2014, includes a:

A) debit to Cash for $47,918
B) credit to Dividend Revenue for $19,168
C) credit to Long-Term Investment for $19,168
D) debit to Long-Term Investment for $19,168

Question 29

Power Generation Corp. owns 38% of Electric Limited. Net income for Electric Limited for the year ending December 31, 2014, is $450,000. The journal entry prepared by Power Generation Corp. on December 31, 2014, includes a:

A) debit to Cash for $171,000
B) credit to Long-Term Investment for $171,000
C) debit to Long-Term Investment for $450,000
D) debit to Long-Term Investment for $171,000

Question 30

An investor company with a 40% interest in an investee properly used the equity method to account for the investment. If the entries to the Investment account for the current year showed a debit of $45,000 and a credit of $22,000, the investee must have paid total dividends of:

A) $55,000
B) $22,000
C) $45,000
D) $100,000

Question 31

In 2015, Gigajoule Corporation used the equity method to account for a 25% ownership interest in Megawatt Corporation. If Megawatt Corporation reports $400,000 of income and pays $80,000 of dividends in 2015, the net effect of the entries made by Gigajoule Corporation in 2015 will be to:

A) reduce the Investment account by $320,000
B) reduce the Investment account by $80,000
C) increase the Investment account by $320,000
D) increase the Investment account by $80,000

Question 32

On January 1, 2014, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2014 and 2015 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2014 and 2015 were, respectively, $60,000 and $75,000. The long-term investment will appear on TXU Europe Corporation's December 31, 2015, balance sheet at:

A) $746,000
B) $864,000
C) $836,000
D) $890,000

Question 33

Under the equity method, the investor's share of dividends is treated as an increase in its investment.

Question 34

On January 1, 2014, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2014 and 2015 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2014 and 2015 were, respectively, $60,000 and $75,000. The long-term investment will appear on TXU Europe Corporation's December 31, 2014, balance sheet at:

A) $776,000
B) $840,000
C) $800,000
D) $816,000

Question 35

A company that owns less than 20% of another company's stock must use the consolidation method of accounting.

Question 36

Retail Energy Corporation paid $1,300,000 on January 1, 2015, to purchase 32% of the outstanding shares of Natural Gas Limited. In 2015 Natural Gas Limited reported $450,000 of net income and paid $100,000 in dividends. If this investment is accounted for using the equity method of accounting, what will be the impact on the books of Retail Energy Corporation?

A) income of $32,000 will be recorded
B) income of $144,000 will be recorded
C) the Investment account will be increased by $144,000
D) the Investment account will be decreased by $144,000

Question 37

On January 1, 2014, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2014 and 2015 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2014 and 2015 were, respectively, $60,000 and $75,000. Assume on December 31, 2015, TXU Europe Corporation sells 50% of its investment in Alberta Power Pool Corporation for $525,000. TXU Europe Corporation will report a:

A) gain on sale of investment of $107,000
B) gain on sale of investment of $80,000
C) loss on sale of investment of $152,000
D) loss on sale of investment of $321,000

Question 38

Under the equity method of accounting, the investor will:

A) reduce the Investment account for investee dividends and increase the Investment account to record investee income
B) increase the Investment account to record dividends and income of the investee
C) reduce the Investment account to record dividends and income of the investee
D) increase the Investment account for investee dividends, and reduce the Investment account to record investee income

Question 39

The equity method of accounting for a stock investment should generally be used when the investor owns 20%-50% of the investee's stock, because that level of stock ownership:

A) usually indicates a plan to acquire a controlling interest of the investee company
B) requires the investor to notify the government of any plans to acquire a controlling interest in the investee company
C) means the investor has a controlling interest in the investee company
D) gives the investor significant influence over the investee company

Question 40

If a company owns 49% of the stock of another business, cash dividends received from the investee company are generally recorded by decreasing the value of the Investment account.

Question 41

The amount paid to purchase all the outstanding shares of a subsidiary company is added to the existing assets of that subsidiary.

Question 42

When a parent acquires 100% of the voting stock of a subsidiary, that subsidiary:

A) automatically becomes part of one large legal entity that consists of the parent and the subsidiary together
B) lives on as a separate legal entity
C) continues to exist as an accounting entity, but it ceases to exist in any legal form
D) ceases to exist as a separate legal entity, but it is still accounted for as a separate accounting entity

Question 43

Non-controlling interest occurs when a company owns only 90% of a company they control.

Question 44

When preparing a consolidated balance sheet:

A) the shareholders' equity of the parent will be eliminated but investment in subsidiary will be presented
B) both investment in subsidiary and the shareholders' equity of the parent will be eliminated
C) neither investment in subsidiary nor the subsidiary's shareholders' equity will be presented
D) investment in subsidiary will be presented but the shareholders' equity of the subsidiary will be eliminated

Question 45

An investor owns 40% of the voting common shares in an investee and has the ability to exercise significant influence over the investee. How should the investor account for the investment?

Question 46

Energy Direct Corp. acquired 32% of Edmonton Limited for $2,000,000 on January 1, 2015. During 2015, Edmonton Limited earned $480,000 and paid dividends of $225,000.
a. Prepare the journal entries required to record the acquisition, and the transactions during 2015.
b. Determine the carrying value on Energy Direct Corp. of the investment in Edmonton Limited as at December 31, 2015.

Question 47

PET Corporation purchased 225,000 shares of SOX Corporation on January 1, 2015, for $540,000. SOX Corporation has 600,000 shares outstanding. SOX Corporation earned net income of $360,000 and paid dividends of $106,000 during 2015.
Required:
a. What method should be used to account for the SOX Corporation investment?
c. What is the balance in PET's investment account at the end of 2015?

Question 48

A non controlling interest will appear on the consolidated balance sheet when the parent company owns more than 40% but less than 100% of the subsidiary's stock.

Question 49

If 100% of a subsidiary's voting stock is acquired in the purchase of the subsidiary, goodwill is defined as the amount by which the purchase price paid by the parent company exceeds the:

A) market value of the net assets of the subsidiary
B) book value of the net assets of the subsidiary
C) total shareholders' equity of the subsidiary
D) balance in the investment in subsidiary account

Question 50

When the equity method is used to account for a stock investment, dividends received are recorded as a reduction to the Investment account and the investor's share of income reported by the investee is treated as an increase in the Investment account. Explain why the investment is accounted for in this fashion.

Question 51

Goodwill is a(n) ________ on the ________.

A) current asset, subsidiary's balance sheet
B) intangible asset, subsidiary's balance sheet
C) intangible asset, consolidated balance sheet
D) long-term investment, consolidated balance sheet

Question 52

Goodwill arises when a parent company:

A) pays less to acquire a subsidiary company than the market value of the subsidiary's net assets
B) pays more to acquire a subsidiary company than the market value of the subsidiary's net assets
C) pays less to acquire a subsidiary company than the book value of the subsidiary's net assets
D) pays more to acquire a subsidiary company than the book value of the subsidiary's net assets

Question 53

A non-controlling interest arises only when a parent company purchases:

A) less than 20% of the stock of a subsidiary company
B) between 20% and 50% of the stock of a subsidiary company
C) more than 50% but less than 100% of the stock of a subsidiary company
D) all of the stock of a subsidiary company

Question 54

The DEML Corporation reported the following transactions for the year 2014:
This is a long-term investment giving DEML significant influence over the operations of Utilities Board.
Prepare journal entries to record all the above events for the DEML Corporation.

Question 55

If a parent company and its subsidiary have accounts receivable from mutually exclusive external sources in the amounts of $35,000 and $20,000, respectively, the consolidated balance sheet for the parent and its subsidiary will show:

A) one accounts receivable balance of $55,000
B) only the parent's accounts receivable balance
C) net accounts receivable of $15,000
D) both amounts, but it will list them in two separate accounts

Question 56

The parent and subsidiary relationship that is established in consolidation accounting is an example of the entity concept.

Question 57

Yukon Electrical Company owns all of the stock of Simmons Corporation and 80% of the stock of I-Tek Corporation. In 2015, Yukon earned net income of $450,000, Simmons earned $120,000, and I-Tek earned $180,000. Yukon's consolidated income statement would report consolidated net income of:

A) $450,000
B) $570,000
C) $750,000
D) $714,000

Question 58

On January 1, 2014, Red Deer Corporation paid $360,000 to purchase 32% of the outstanding voting stock of English Court Corporation. The equity method is used to account for the investment. The following data relate to this investment.
2014
Prepare all journal entries for 2014 and 2015 relating to Red Deer Corporation's investment in English Court Corporation.

Question 59

When a parent-subsidiary relationship exists between two companies:

A) the parent company must use the cost method to account for the subsidiary
B) the parent company will keep one set of accounting records covering both companies
C) the subsidiary company will keep one set of accounting records covering both companies
D) both the parent and the subsidiary will continue to keep their own separate accounting records as if the parent-subsidiary relationship does not exist

Question 60

A controlling interest is normally one where the investor:

A) owns more than 20% of the investee's voting stock
B) owns more than 50% of the investee's voting stock
C) uses the equity method to account for the investment
D) uses the market value method of accounting for the investment

Question 61

Amortization of a discount or premium on the bond affects all of the following except:

A) the carrying value of the bonds on the investor's books
B) retained earnings of the investor
C) the amount of cash received when interest payments are made
D) interest revenue of the investor

Question 62

Goodwill arises when a parent company must pay more to acquire a subsidiary company than the market value of the subsidiary's net assets.

Question 63

When a premium on a bond investment is amortized by the company holding the investment:

A) the amount of cash received as an interest payment will be increased
B) the amount of cash received as an interest payment will be reduced
C) Interest Revenue will be debited
D) companies normally credit a separate account called Premium on Investments

Question 64

On April 1, 2014, Transportation Imbalance Company (TIC) purchased $5,000 of 6% bonds as a long-term investment to be held to maturity. TIC is a private corporation that elects to report its financial results in accordance with ASPE. Its year end is December 31 an Interest dates are April 1 and October 1. The bonds mature 36 months from the purchase date. The purchase price of the bonds was $5,120, and the premium is amortized on the straight-line basis. Assume the proper adjusting entry was made on December 31, 2014, to record accrued interest receivable and amortization of the premium. The total interest revenue recorded by Transportation Imbalance Company on April 1, 2015 will be:

A) $150.00
B) $72.50
C) $75.00
D) $65.00

Question 65

As described in Chapter 8 of the textbook, hedging is a legal and ethical accounting method companies use to protect themselves from the effects of:

A) fluctuating foreign-currency exchange rates
B) fluctuating interest rates
C) fluctuating stock prices
D) fluctuating demand for the company's products

Question 66

Distribution Services Inc., a Canadian company, sold merchandise on account to Battle River Corporation, a British company, for 400,000 British pounds. The relevant exchange rates for the British pound were as follows: The exchange rate gain or loss for Distribution Services on this transaction was:

A) $4,000 loss
B) $8,000 loss
C) $4,000 gain
D) $8,000 gain

Question 67

A foreign-currency transaction gain/loss is reported on the:

A) balance sheet as an equity account
B) income statement as other revenues/expenses
C) income statement as an extraordinary item
D) not reported on the income statement but is adjusted by debiting or crediting Retained Earnings

Question 68

On March 1, 2015, Uncontracted Capacity Company (UCC) purchased $20,000 of Utility Service Corporation's 9% bonds at a purchase price of 90. Uncontracted Capacity Company, whose year end is December 31, expects to hold the bonds until their maturity date 5 years from the date of purchase. Interest on the bonds will be paid every March 1 and September 1 until maturity. Assuming that UCC is a private corporation that elects to amortize premium or discounts using straight-line amortization, how much total interest revenue will be recorded by UCC on September 1, 2015?

A) $800
B) $1,100
C) $900
D) $1,200

Question 69

A foreign-currency translation adjustment is reported on the:

A) balance sheet as an equity account
B) income statement as other revenues/expenses
C) income statement as an extraordinary item
D) Other comprehensive income

Question 70

Long-term bond investments are reported on the balance sheet at their:

A) historical cost
B) amortized cost
C) current market value
D) lower of cost or market

Question 71

The amortization of a discount on a long-term bond investment:

A) decreases the investor's Long-Term Investment account
B) decreases the investor's interest revenue
C) increases the investor's interest revenue
D) increases the investor's interest expense

Question 72

Suppose a Canadian company purchased merchandise on account from a British firm for 200,000 British pounds. Assume the exchange rates for the British pound were as follows: The exchange rate gain/loss for the Canadian company on this transaction was:

A) $8,000 loss
B) $2,000 loss
C) $2,000 gain
D) $8,000 gain

Question 73

Amortizing a discount on a long-term bond investment will cause:

A) the interest revenue reported on the income statement to exceed the cash received by the investor
B) the interest revenue reported on the income statement to equal the cash received by the investor
C) the cash received by the investor to exceed the interest revenue reported on the income statement
D) the interest revenue reported is not related to the cash received by the investor

Question 74

Amortizing a discount on a bond investment will cause the Investment account and interest revenue to respectively:

A) decrease and increase
B) increase and decrease
C) increase and increase
D) decrease and decrease

Question 75

Amortizing a premium on a bond investment will cause the Investment account and interest revenue to respectively:

A) increase and increase
B) decrease and decrease
C) decrease and increase
D) increase and decrease

Question 76

When referring to foreign-currency transactions, hedging is a process in which:

A) companies wager that the currency of one country will rise relative to their own
B) a company wagers that the currency of one country will fall relative to its own
C) a company protects itself from losing money in one transaction by engaging in a counterbalancing transaction
D) companies sell the same product in various countries at similar prices to minimize the currency risks associated with any one particular country

Question 77

Barking Power Corporation acquired 80% of the voting common shares of Brighton Beach Corporation on December 31, 2014. During the year ended December 31, 2015, Barking Power Corporation and Brighton Beach Corporation reported net income of $110,000 and $75,000 from their own operations, respectively.
a. How much income attributable to the equity holders of the parent corporation will be reported on the consolidated income statement for the year ended December 31, 2015?
b. Discuss the way in which non-controlling interests in the subsidiary might be presented on consolidated financial statements. What exactly does non-controlling interest represent?

Question 78

A foreign-currency transaction gain or loss on a credit purchase is calculated as the difference between the exchange rates on:

A) the date the merchandise is ordered and the date it arrives
B) the date of the purchase and the date of cash payment for the purchase
C) the date the merchandise is purchased and the date it is sold
D) the date the merchandise is ordered and the date payment is made for the merchandise

Question 79

How does a company such as ATCO Ltd. report the results of its diverse worldwide lines of business?

Question 80

What are consolidated financial statements? What are some of the benefits and limitations of them for ATCO Ltd.?