Question 1

Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.

Accepted Answer

Under the equity method, the investor recognizes its share of the investee's profits or losses in its own income statement and records any dividends received as a reduction of the investee's net assets. This reflects the fact that the investor has a significant influence over the investee's operations and should not treat dividends as revenue.

Question 2

All securities considered available for sale should be reported as current assets in a classified balance sheet.

Accepted Answer

Securities considered available for sale can be either classified as current or non-current assets based on their maturity dates. If the securities are expected to be sold or mature within one year, they are classified as current assets. Otherwise, they are classified as non-current assets.

Question 3

All investments in debt securities whose fair values are not readily determinable are carried at historical cost.

Accepted Answer

Investments in debt securities whose fair values are not readily determinable are typically carried at fair value using a valuation model, not historical cost.

Question 4

Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates.

Accepted Answer

Securities classified as held to maturity are reported as either current or long-term assets on a classified balance sheet based on their maturity dates. If the maturity date is within one year (or the operating cycle, if longer), they are classified as current assets. If the maturity date is beyond one year, they are classified as long-term assets.

Question 5

Both debt and equity securities can be categorized as trading securities.

Accepted Answer

The answer of Both debt and equity securities can be...

Question 6

Under IAS No. 39, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.

Accepted Answer

Under IAS No. 39, investments for which the investor lacks significant influence use the same reporting classifications as U.S. GAAP.

Question 7

Net unrealized holding gains (losses) are reported in the income statement for trading securities.

Accepted Answer

Net unrealized holding gains (losses) for trading securities are reported in the income statement as they reflect changes in fair value that affect net income.

Question 8

If an investment is accounted for under the equity method, the investor reduces investment income and the investment account for amortization of goodwill acquired in the investment.

Accepted Answer

Under the equity method, the investor does not amortize goodwill acquired in the investment. Goodwill is not separately amortized but is tested for impairment.

Question 9

Both trading securities and securities available for sale are reported at their fair values.

Accepted Answer

Both trading securities and securities available for sale are reported at their fair values on the balance sheet. However, the treatment of unrealized gains and losses differs between the two categories. Unrealized gains and losses on trading securities are reported as part of net income, while unrealized gains and losses on securities available for sale are reported as part of other comprehensive income until they are sold.

Question 10

Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

Accepted Answer

Purchases and sales of securities can be classified as either investing activities or operating activities depending on the nature of the business. If the business is engaged in buying and selling securities as its regular course of business (e.g. a securities dealer), then such transactions are reported as operating activities. However, if the business is investing excess cash in securities as a form of investment, then such transactions are reported as investing activities in the statement of cash flows.

Question 11

The fair value option cannot be elected for significant-influence investments because those must be accounted for under the equity method.

Accepted Answer

The fair value option can be elected for significant-influence investments, allowing them to be measured at fair value instead of using the equity method.

Question 12

When available-for-sale securities are sold, the amount of unrealized holding gain or loss realized from the date of purchase is included in before-tax net income.

Accepted Answer

When available-for-sale securities are sold, the amount of unrealized holding gain or loss realized from the date of purchase is included in before-tax net income. This is in contrast to held-to-maturity securities, where unrealized gains and losses are not recognized in income until the securities are sold or impaired.

Question 13

Under IFRS No. 9, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.

Accepted Answer

The answer of Under IFRS No. 9, investments for which...

Question 14

When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost.

Accepted Answer

When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its carrying amount on the investor's books, not its original cost. The carrying amount includes the investor's share of the investee's earnings and losses over time, adjusted for any dividends received.

Question 15

Routine transfers of debt investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements.

Accepted Answer

Routine transfers of debt investments among the trading, available for sale, and held to maturity portfolios are considered significant and must be disclosed in the financial statements. Disclosure of the reasons for the transfer, the nature and amount of securities transferred, and the accounting treatment for any resulting gains or losses is required.

Question 16

Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

Accepted Answer

The equity method is generally used when an investor has significant influence over the investee, typically indicated by ownership of 20% to 50% of the voting stock. However, the decision to use the equity method also depends on the actual ability to exercise significant influence, not just the percentage ownership. Other methods may be used if significant influence is not present.

Question 17

Under IFRS No. 9, debt investments are classified as either "available for sale" or "fair value through profit and loss (FVPL)."

Accepted Answer

Under IFRS 9, debt investments are classified as "amortized cost," "fair value through other comprehensive income (FVOCI)," or "fair value through profit or loss (FVPL)," not "available for sale." The "available for sale" category was used under the previous standard, IAS 39.

Question 18

Unrealized holding gains and losses are included in other comprehensive income for securities that are classified as available for sale.

Accepted Answer

Unrealized holding gains and losses for securities that are classified as available for sale are included in other comprehensive income. This means that any changes in the fair value of the security that have not yet been realized through a sale or disposition are reported as part of comprehensive income rather than as a realized gain or loss on the income statement. This treatment helps to provide a more accurate picture of the overall financial health and performance of a company by accounting for the potential risks and benefits associated with its investment portfolio.

Question 19

The equity method is in many ways a partial consolidation.

Accepted Answer

The equity method is used to account for investments in which the investor has significant influence over the investee, but does not have control. Under the equity method, the investor records its share of the investee's earnings or losses on its income statement. This is similar to consolidation, where the financial statements of the parent and its subsidiaries are combined as if they were a single entity. However, under the equity method, only the investor's share of the investee's earnings or losses is included in the investor's financial statements, whereas in consolidation, the entire subsidiary's financial statements are included in the parent's financial statements. Therefore, the equity method can be seen as a partial consolidation.

Question 20

Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security.

Accepted Answer

When an available-for-sale investment is reclassified as a trading security, it is recorded at fair value with changes in fair value recognized in net income. The same treatment occurs when the fair value option is selected for an available-for-sale investment, making the two equivalent.

Quiz 12: Investments