Question 1

On January 1,20X1,Belle Ltd.purchased 100% of the common shares of Dominique Corporation for $700,000.Dominique's net income was $30,000 for 20X1 and $50,000 for 20X2.DA paid dividends of $20,000 on its common shares during 20X1 and $100,000 during 20X2.As such,total dividends paid by Dominique exceeded income earned by Dominique since it was acquired by Belle.What is the balance in the investment in Dominique's account at the end of 20X2 under the cost and equity methods?

Accepted Answer

Under the cost method, the investment balance would remain at its original cost of $700,000, and any dividends received would be recorded as dividend income. Therefore, the balance in the investment in Dominique's account at the end of 20X2 would remain at $700,000.
Under the equity method, the investment balance would be adjusted for the investor's share of the earnings or losses of the investee, as well as for any dividends received. Belle Ltd.'s share of Dominique Corporation's earnings for 20X1 and 20X2 would be $15,000 and $25,000, respectively, assuming Belle Ltd. acquired the shares on January 1, 20X1. Belle Ltd.'s share of the dividends paid by Dominique Corporation would be $10,000 and $50,000 for 20X1 and 20X2, respectively. Therefore, the investment balance under the equity method would be calculated as follows:
Beginning Investment Balance: $700,000
Share of Earnings:
20X1: $30,000 x 100% = $30,000 x 50% = $15,000
20X2: $50,000 x 100% = $50,000 x 50% = $25,000
Share of Dividends:
20X1: $20,000 x 100% = $20,000 x 50% = $10,000
20X2: $100,000 x 100% = $100,000 x 50% = $50,000
Ending Investment Balance: $700,000 + $15,000 + $25,000 - $10,000 - $50,000 = $680,000
Therefore, the correct answer is C.

Question 2

Forest Ltd.reports its investment in Leeds Co.using the cost method.During the year,Forest received $10,000 in dividends from Leeds.How should Forest report these dividends?

Accepted Answer

Under the cost method, dividends received from an investment are recognized as dividend income in the statement of comprehensive income.

Question 3

Which of the following statements about the direct approach to consolidation is true?

Accepted Answer

The direct approach starts with the financial statements for each of the parent and subsidiary companies and directly consolidates them into a single set of financial statements. It is typically used for more complex consolidations, such as when the subsidiary has multiple layers of its own subsidiaries. The worksheet approach is typically more intuitive and is used for simpler consolidations. The trial balance is not the starting point for the direct approach.

Question 4

At the beginning of 20X1,Anwar Ltd.acquired 15% of the voting shares of Cruz Co.for $150,000.Anwar does not have any significant influence over Cruz.Anwar reports the investment using the cost method.In 20X1,Cruz earned net income of $70,000 and paid dividends of $40,000.In 20X2,Cruz earned net income of $80,000 and paid dividends of $100,000.At the end of 20X2,what journal entry should Anwar make to record its share of Cruz's net income?

Accepted Answer

The answer of At the beginning of 20X1,Anwar Ltd.acquired 15%...

Question 5

Passive investments can be classified as fair value through profit or loss (FVTPL)or as fair value through other comprehensive income (FVTOCI).Which of the following statements is true?

Accepted Answer

Under both FVTPL and FVTOCI, dividends received from the investee are reported under the net income section on the statement of comprehensive income. The main difference between FVTPL and FVTOCI is that changes in fair value under FVTPL are recognized in net income, while changes in fair value under FVTOCI are recognized in other comprehensive income.

Question 6

What is securitization?

Accepted Answer

Securitization is the process of transferring receivables to a special purpose entity and issuing bonds to finance those receivables. This allows the receivables to be converted into tradable securities and sold to investors to raise funds. This technique is commonly used in the finance industry to manage credit risk and raise capital.

Question 7

How do joint ventures differ from private corporations?

Accepted Answer

One key way joint ventures differ from private corporations is that venturers cannot make unilateral decisions. In a joint venture, decisions must be made jointly by all parties involved, whereas in a private corporation, decisions are often made by a board of directors or executive team. While joint venturers do share risks and profits, there can be more than two parties involved and some joint ventures may still have a board of directors.

Question 8

Bela Ltd.has invested in several domestic manufacturing corporations.Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?

Accepted Answer

The answer of Bela Ltd.has invested in several domestic manufacturing...

Question 9

At the beginning of 20X1,Anwar Ltd.acquired 15% of the voting shares of Cruz Co.for $150,000.Anwar does not have any significant influence over Cruz.Anwar reports the investment using the cost method.In 20X1,Cruz earned net income of $70,000 and paid dividends of $40,000.In 20X2,Cruz earned net income of $80,000 and paid dividends of $100,000.At the end of 20X2,what journal entry should Anwar make to record the dividends from Cruz?

Accepted Answer

Since Anwar reports the investment using the cost method, dividends from Cruz should be recorded when received. Anwar received dividends of $100,000 in 20X2, so the journal entry should be:

Debit: Cash $100,000
Credit: Investment in Cruz $100,000

Therefore, the correct answer is choice C.

Question 10

At the beginning of 20X1,Anwar Ltd.acquired 15% of the voting shares of Cruz Co.for $150,000.Anwar does not have any significant influence over Cruz.Anwar reports the investment using the cost method.In 20X1,Cruz earned net income of $70,000 and paid dividends of $40,000.In 20X2,Cruz earned net income of $80,000 and paid dividends of $100,000.At the end of 20X2,what is the balance of Anwar's "Investment in Cruz" account?

Accepted Answer

The answer of At the beginning of 20X1,Anwar Ltd.acquired 15%...

Question 11

Townsend Ltd.has the following shareholders:
Palermo Co.- 60%
Nix Ltd.- 30%
Riley Ltd.- 10%
Nix has two seats on Townsend's five-person board of directors.Which of the following statements is true?

Accepted Answer

Nix's 30% ownership and two seats on the board give them significant influence over Townsend's decisions, but they do not have full control (which would require at least 50% ownership). Townsend is a separate entity and not a special purpose entity to Nix. Nix should not treat Townsend as a passive investment, as they have a significant ownership stake and board representation.

Question 12

How are most significant influence investments in equity securities actually recorded on the investors books?

Accepted Answer

The answer of How are most significant influence investments in...

Question 13

Which of the following is not an indicator of significant influence?

Accepted Answer

Indicators of significant influence typically involve active participation in financial and operating policy decisions, such as board representation (A), material transactions (B), or providing essential services (D). Sharing office space and using the same accounting firm (C) do not inherently imply an ability to influence financial or operating policies.

Question 14

O'Reilly Ltd.incorporated O'Reilly R&D Co.to conduct research and development activities.O'Reilly R&D is a(n)________.

Accepted Answer

O'Reilly R&D is a special purpose entity, which is a subsidiary created solely for a specific purpose such as carrying out research and development activities. It is not an associated company, joint venture, or passive investment.

Question 15

Rudd Ltd.has a passive investment in Burke Ltd.Rudd has elected to treat Burke as a fair value through other comprehensive income (FVTOCI)investment under IFRS 9 Financial Instruments.Which of the following statements is true?

Accepted Answer

The answer of Rudd Ltd.has a passive investment in Burke...

Question 16

Townsend Ltd.has the following shareholders:
Palermo Co.- 60%
Nix Ltd.- 30%
Riley Ltd.- 10%
Nix does not conduct any business with Townsend,nor has it been able to secure a seat on the Board of Directors.Which of the following statements is true?

Accepted Answer

Since Nix does not conduct any business with Townsend and has no representation on the board, it cannot exercise significant influence over the operations of Townsend. Therefore, Nix should treat Townsend as a non-strategic investment.

Question 17

In Canada,what subsidiaries must be included in consolidated financial statements?

Accepted Answer

The answer of In Canada,what subsidiaries must be included in...

Question 18

On January 1,20X1,Best Décor Ltd.started Chic Styles Ltd.by contributing $500,000 and received 100% of the common shares of Chic Styles.Chic Styles reported net income of $50,000 in 20X1 and $75,000 in 20X2 and paid out 40% of its net income as dividends in each year.Under the equity method,what amount should be reported as Investment in Chic Styles on Best Décor's separate-entity 20X2 financial statements?

Accepted Answer

The answer of On January 1,20X1,Best Décor Ltd.started Chic Styles...

Question 19

On whose books are the consolidating adjusting entries recorded?

Accepted Answer

Consolidating adjusting entries are recorded only on the consolidated worksheet to eliminate intercompany transactions and balances for the purpose of preparing consolidated financial statements. They are not recorded in the general journals of the parent or subsidiary companies.

Question 20

Carr Co.owns 100% of the common shares of Ice Tops Ltd.Carr records its investment in Ice Tops using the cost method.Carr and Ice Tops have transactions with each other.In preparing Carr's consolidated financial statements,which of the following should be done?

Accepted Answer

In consolidated financial statements, intercompany transactions, such as dividends received from a subsidiary, should be eliminated to avoid double counting.

Quiz 2: Intercorporate Equity Investments: an Introduction

Forest Ltd.reports its investment in Leeds Co.using the cost method.During the year,Forest received $10,000 in dividends from Leeds.How should Forest report these dividends?

Which of the following statements about the direct approach to consolidation is true?

Passive investments can be classified as fair value through profit or loss (FVTPL) or as fair value through other comprehensive income (FVTOCI) .Which of the following statements is true?

What is securitization?

How do joint ventures differ from private corporations?

Bela Ltd.has invested in several domestic manufacturing corporations.Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?

Townsend Ltd.has the following shareholders: Palermo Co.- 60% Nix Ltd.- 30% Riley Ltd.- 10% Nix has two seats on Townsend's five-person board of directors.Which of the following statements is true?

How are most significant influence investments in equity securities actually recorded on the investors books?

Which of the following is not an indicator of significant influence?

O'Reilly Ltd.incorporated O'Reilly R&D Co.to conduct research and development activities.O'Reilly R&D is a(n) ________.

Rudd Ltd.has a passive investment in Burke Ltd.Rudd has elected to treat Burke as a fair value through other comprehensive income (FVTOCI) investment under IFRS 9 Financial Instruments.Which of the following statements is true?

Townsend Ltd.has the following shareholders: Palermo Co.- 60% Nix Ltd.- 30% Riley Ltd.- 10% Nix does not conduct any business with Townsend,nor has it been able to secure a seat on the Board of Directors.Which of the following statements is true?

In Canada,what subsidiaries must be included in consolidated financial statements?

On whose books are the consolidating adjusting entries recorded?

Carr Co.owns 100% of the common shares of Ice Tops Ltd.Carr records its investment in Ice Tops using the cost method.Carr and Ice Tops have transactions with each other.In preparing Carr's consolidated financial statements,which of the following should be done?