Deck 11: Investments in Other Companies

Question 1

What is a company that controls the common shares of another company known as?

A)The investee company
B)The subsidiary company
C)The parent company
D)The consolidated company

Answer 1

C

Question 2

What type of investment is it, if the managers of the investor corporation can set the key policies of the investee corporation?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Answer 2

A

Question 3

On the consolidated balance sheet, at what value are the subsidiary's assets and liabilities recorded?

A)At the historical cost of the subsidiary
B)At their book value
C)At the amount the parent paid
D)At their replacement cost

Answer 3

C

Question 4

Which of the following statements is true if a company owns more than 50% of the common shares of another company?

A)The cost method should be used to account for the investment.
B)A partnership exists.
C)A parent-subsidiary relationship likely exists.
D)The investment must be accounted for using the equity method.

Question 5

Branch Inc.is a subsidiary of Tree Corporation.What level of influence must Tree Corporation have over Branch Inc.?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Question 6

If a parent company has three wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? $\begin{array}{lll}&\text { Legal }&\text { Economic }\\\text { A) } & 4 & 4 \\\text { B) } & 4 & 1 \\\text { C) } & 1 & 4 \\\text { D) } & 1 & 1\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 7

Tree Corporation can influence the decisions of Root Ltd., but Root is not a subsidiary of Tree Corporation.What level of influence must Tree Corporation have over Root Ltd.?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Question 8

Branch Inc.is a subsidiary of Tree Corporation.What method of accounting must Tree Corporation use for Branch Inc.?

A)Consolidation method
B)Equity method
C)Cost method
D)Fair value method

Question 9

A strategic investment would normally be used for all of the following reasons except:

A)to generate dividends.
B)to eliminate a competitor.
C)to widen the market for their products.
D)to expand their presence in the market.

Question 10

When one company controls another company, IFRS requires that their financial statements to be:

A)combined.
B)aggregated.
C)consolidated.
D)segmented.

Question 11

All of the following statements about a consolidated group of companies are true, except:

A)the financial statements include all of the assets and liabilities of the parent and all the subsidiary companies.
B)each company is a separate legal entity.
C)the group files a single tax return.
D)the consolidated group is an accounting creation.

Question 12

A non-strategic investment would normally be used for all of the following reasons except:

A)to generate dividends.
B)as a stepping stone to a strategic investment.
C)as a place to put excess cash.
D)to counteract cyclicality in the business.

Question 13

If an investor company buys the majority of the voting shares of an investee company what is the effect on the investee's accounting records?

A)The assets and liabilities are re-valued to fair market value.
B)The assets and liabilities are re-valued to the investor's cost.
C)The transaction is recorded at the investee's historical cost.
D)There is no effect on the investee's accounting records.

Question 14

What type of investment is it, if the investor corporation has no ability to influence the investee corporation?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Question 15

Tree Corporation bought shares of Leaf Ltd.in order to earn a return on some excess cash it had on hand.Tree Corporation is not involved in any way in the decision-making of Leaf Ltd.What level of influence must Tree Corporation have over Leaf Ltd.?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Question 16

For accounting purposes, what determines the method used to account for investments in common shares?

A)The amount the investor paid for the shares.
B)The extent of an investor's influence over the operating and financial affairs of the investee.
C)Whether the investor's acquisition of the shares was through a private placement or through a public exchange.
D)Whether the investing corporation wants to prepare consolidation or individual financial statements.

Question 17

When the management of a company invests any excess cash available, they could expect to generate all of the following except:

A)interest income.
B)dividend income.
C)capital gains.
D)sales income.

Question 18

Which of the following users are consolidated financial statements most useful for?

A)For the bankers and creditors only
B)For the tax authorities only
C)The stakeholders of the subsidiary companies
D)The stakeholders of the parent company

Question 19

If a company owns more than 50 percent of the voting shares of an investee company, the investee company is also known as:

A)partner company.
B)parent company.
C)separate company.
D)subsidiary company.

Question 20

What is prepared when a company controls the voting common shares of another company?

A)Affiliated financial statements
B)Consolidated financial statements
C)Equity financial statements
D)Combined financial statements

Question 21

Which of the following is a limitation of consolidated financial statements?

A)They focus on the resources under the control of the management of the parent company.
B)They do not include the transactions between the parent and its subsidiaries.
C)They communicate the "big picture" about the corporate group to users.
D)They limit the usefulness of ratio analysis.

Question 22

Parent Company owns 80% of Subco Ltd.Subco sells almost one-half of its output to Parent Company.How would these sales be reported in Subco's financial statements and Parent's consolidated financial statements? $\begin{array}{ll}\text { Subco's } & \text { Parent's Consolidated } \\\text { Statements } & \text { Statements }\\\text { A) Included } & \text { Included } \\\text { B) Included } & \text { Eliminated } \\\text { C) Eliminated } & \text { Included } \\\text { D) Eliminated } & \text { Eliminated }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 23

Which of the following statements about intercompany transactions in a corporate group is true?

A)They are not permitted when a parent-subsidiary relationship exists.
B)They are eliminated when consolidated financial statements are prepared.
C)They are recorded as revenue in the consolidated financial statements.
D)They are added to the combined shareholders equity when consolidation occurs.

Question 24

Goodwill represents the excess of the cost of an acquired company over the:

A)book value of the acquired company.
B)sum of the fair market values assigned to intangible assets acquired less liabilities assumed.
C)sum of the fair market values assigned to tangible assets acquired less liabilities assumed.
D)sum of the fair market values assigned to all identifiable assets acquired less liabilities assumed.

Question 25

Patel Company paid $5 million for 100% of the voting shares of Satel Company.On the date of acquisition the book value of Satel's net assets was $4 million and the fair value was $4.4 million.What would be the value of goodwill reported on the consolidated balance sheet at the date of acquisition?

A)$0
B)$400,000
C)$600,000
D)$1,000,000

Question 26

Which of following can a user determine by using consolidated financial statements?

A)The revenue and profit from transactions between the parent and its subsidiaries.
B)The amount of dividends the subsidiary paid to the parent.
C)The cost to the parent of their original investment in the subsidiary.
D)The resources that are under the management of the corporate group.

Question 27

What is the purpose of segmented disclosure?

A)To provide users with information about the different business activities within a corporate group.
B)To provide users with information about the assets and liabilities of each subsidiary.
C)To help lenders determine the ability of a company to repay its loans.
D)To help the non-controlling shareholders of the subsidiary determine potential dividend payments.

Question 28

In which of the following situations would the account "Non-controlling interest" appear on the consolidated financial statements of Parent Company?

A)When Parent owns 10% of an investee company.
B)When Parent owns 40% of an investee company.
C)When Parent owns 80% of an investee company.
D)When Parent owns 100% of an investee company.

Question 29

To prepare a consolidated balance sheet on the date of acquisition, all of the following information is required except:

A)the cost of the assets and liabilities on the parent's balance sheet.
B)the historic cost of the assets and liabilities appearing on the subsidiary's balance sheet.
C)the fair value of the subsidiary's assets and liabilities.
D)the value of goodwill arising from the acquisition.

Question 30

A parent company that owns 90% of the shares of a subsidiary must present its interest in the subsidiary using which of the following?

A)A consolidation of 90% of the assets and liabilities of the subsidiary.
B)A full consolidation with a 10% non-controlling interest reported in the consolidated statements.
C)The equity method assuming 90% ownership.
D)The equity method using 100% ownership with an offsetting liability for the 10% non-controlling interest.

Question 31

On the date of acquisition, the parent's investment (in subsidiary account) is:

A)revalued to fair market value.
B)replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
C)replaced with 100% of the assets and liabilities of the subsidiary at book value.
D)replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at book value.

Question 32

How should the investment account related to the subsidiary be shown when preparing consolidated financial statements?

A)It is shown separately on the balance sheet.
B)It is combined with any goodwill that arose from the investment.
C)It is eliminated to prevent double accounting.
D)It must be reclassified as equity.

Question 33

How are the portion of the assets and liabilities of the subsidiary company that are not owned by the parent company reported?

A)As a non-controlling interest on the subsidiary's balance sheet.
B)As a non-controlling interest on the parent's balance sheet.
C)As a component of assets on the parent's balance sheet.
D)They are not reported anywhere.

Question 34

On the date of acquisition, consolidated shareholder equity is equal to:

A)the sum of the parent and subsidiary's shareholders' equity.
B)the sum of the parent's shareholder equity plus its pro rata share of the subsidiary's shareholders' equity on the date of acquisition.
C)the parent's shareholders' equity.
D)the subsidiary's shareholders equity.

Question 35

How is the portion of net income of the subsidiary company that does not accrue to the parent company reported?

A)As a non-controlling interest expense on the subsidiary's income statement.
B)As a non-controlling interest loss on the parent's income statement.
C)As a non-controlling interest expense on the parent's income statement.
D)It is not reported anywhere

Question 36

One commonly cited weakness of consolidated financial statements is that:

A)they lack completeness.
B)they are of little use to end-users.
C)different accounting practices between parent and its subsidiary may often yield misleading results.
D)a poor performance by one or more subsidiaries can be hidden through the aggregation process.

Question 37

Goodwill is:

A)the difference between the total fair value of the subsidiary and the amounts assigned to identifiable assets and liabilities.
B)the amount paid for the customer lists, patents and other intangibles.
C)never recognized for accounting purposes.
D)the difference between the amount paid and the book value of the net assets acquired.

Question 38

If a parent company owns 80% of a subsidiary company, which of the following best describes how the assets and liabilities of the combined entity are valued on the consolidated financial statements?

A)All at fair value.
B)All at historical cost.
C)The parent at its book value and the subsidiary at its fair value.
D)The parent at its book value and the subsidiary's at a combination of historical cost and book value.

Question 39

Where on the consolidated balance sheet would you find the non-controlling interest account?

A)In assets
B)In liabilities
C)In shareholders' equity
D)In-between liabilities and shareholders' equity

Question 40

Which of the following accounts would be found on the consolidated financial statements of a company?

A)Investment in subsidiary
B)Subsidiary's share capital
C)Subsidiary's retained earnings
D)Goodwill

Question 41

On January 1, 2014, Grange Corporation purchased 25% of the common shares of Butler Limited for $200,000.During 2014, Butler Corporation reported net earnings of $80,000 and paid cash dividends of
$40,000.How much investment income from its investment in Butler Limited did Grange report on its income statement ending December 31, 2014?

A)$10,000
B)$20,000
C)$40,000
D)$80,000

Question 42

Young Company owns 30% of the voting shares of Grill Corporation.During the year, Grill paid $20,000 in dividends and reported $100,000 in net earnings.How much will Young Company's net earnings increase as a result of their investment in Grill Corporation?

A)$6,000
B)$24,000
C)$30,000
D)$36,000

Question 43

Target Company's share capital consists of Class A common shares-unlimited authorized, 100,000 outstanding, 1 vote per share and Class B common shares- 100,000 authorized, 90,000 outstanding, 2 votes per share.If Parent Company bought 75,000 Class A shares, how should they account for their investment in Target Company?

A)Consolidation method
B)Equity method
C)Cost method
D)Fair value method

Question 44

Which of the following statements is true if an investor owns more than 20% but less than 50% of the common shares of another corporation as an investment?

A)The cost method should be used to account for the investment.
B)It is likely that the investor has relatively little influence on the investee.
C)It is likely that the investor has significant influence in the investee.
D)Consolidated financial statements must be prepared.

Question 45

Under the equity method of accounting for investments, when will the investor recognize its share of the earnings?

A)When the investor sells the investment.
B)When the investee declares a dividend.
C)When the investee pays a dividend.
D)When the earnings are reported by the investee in its financial statements.

Question 46

Parent Company has two subsidiaries, Alpha Inc.and Beta Inc.Beta Inc.has approached a bank for a loan for which Parent is going to provide a guarantee.Which of the following would be the most useful to the bank?

A)The consolidated financial statements of Parent Company.
B)The financial statements of Beta Inc.and Parent Company's unconsolidated financial statements.
C)The financial statements of Beta Inc.and Parent Company's consolidated financial statements.
D)The financial statements of Beta Inc.

Question 47

If an investor company is adjusting its investment account each period by their share of the investee's net income less dividends declared, what influence does the investor company have over the investee?

A)Control
B)Significant influence
C)Passive investment
D)Active investment

Question 48

DSI Company recently completed a deal with one of its main suppliers, Microchips Ltd., wherein it purchased 15% of Microchips' voting shares.The deal also gave DSI the right to appoint two of the members of Microchips Ltd for the six-person board of directors.Which of the following methods should DSI use to account for its investment in Microchips Ltd.?

A)Consolidation
B)Equity
C)Fair value
D)Cost

Question 49

When are consolidated financial statements not required?

A)When a company buys the assets of another company.
B)When a company pays the book value for the shares of another company.
C)When a company owns less than 100% of a subsidiary.
D)When a company pays more than the book value for the shares of another company.

Question 50

On January 1, 2014, Grange Corporation purchased 25% of the common shares of Butler Limited for $200,000.During 2014, Butler Corporation reported net earnings of $80,000 and paid cash dividends of
$40,000.What is the balance of the Investment in Butler account on the books of Grange Corporation at
December 31, 2014?

A)$190,000
B)$200,000
C)$210,000
D)$220,000

Question 51

Which of the following statements concerning the equity method is true?

A)The equity method is used to account for investments in other companies when the investor purchases less than 20% of the voting shares of the investee.
B)The adjustments made using the equity method are the same as those when consolidated financial statements prepared, except the effect is summarized in a single line.
C)The investment account on the balance sheet will reflect the market value of the investee.
D)The investment income account on the income statement is a good predictor of future dividends to be received.

Question 52

StarTech Company bought 40% of AML Company on January 2, 2014, for their book value of $400,000.During 2014, AML earned net income of $60,000 and paid dividends of $16,000; there were no transactions between the two companies.What would be the balance in the Investment in AML Company account on StarTech Company's balance sheet on December 31, 2014?

A)$400,000
B)$406,400
C)$417,600
D)$424,000

Question 53

Parent Company has two subsidiaries, Alpha Inc.and Beta Inc.Beta Inc.has approached a bank for a loan.Which of the following would be the most useful to the bank?

A)The consolidated financial statements of Parent Company.
B)The unconsolidated financial statements of Parent Company.
C)The financial statements of all three companies.
D)The financial statements of Beta Inc.

Question 54

Under the equity method of accounting for investments in the shares of another company, when a dividend is received from the investee company which of the following occurs?

A)The equity investment account is decreased.
B)The equity investment account is increased.
C)The dividend revenue account is credited.
D)The investment income account is credited.

Question 55

StarTech Company bought 40% of AML Company on January 2, 2014, for their book value of $400,000.During 2014 AML earned net income of $60,000 and paid dividends of $16,000; there were no transactions between the two companies.What amount of investment income would StarTech Company report in 2014 with respect to its investment in AML Company?

A)$6,400
B)$16,000
C)$17,600
D)$24,000

Question 56

Roddick Holdings Inc.accounts for its investment in the common shares of Henry Ltd.using the equity method.Roddick should ordinarily record a cash dividend received from Henry as:

A)a reduction of the carrying value of the investment.
B)contributed surplus.
C)an addition to the carrying value of the investment.
D)dividend income.

Question 57

Tree Corporation can influence the decisions of Root Ltd.but Root is not a subsidiary of Tree Corporation.What method of accounting must Tree Corporation use for Root Ltd.?

A)Consolidation method
B)Equity method
C)Cost method
D)Fair value method

Question 58

If an investor company is adjusting its investment account each period by their share of the investee's net income less dividends declared, what method of accounting for its investment is it using?

A)Consolidation
B)Equity
C)Cost
D)Fair value

Question 59

Under the equity method, when is the investment account on the balance sheet credited?

A)When the investee reports net earnings.
B)When the investee declares a dividend.
C)When the investment is originally acquired and the investee reports net earnings.
D)The equity account is never credited.

Question 60

Young Company owns 30% of the voting shares of Grill Corporation.During the year, Grill paid $20,000 in dividends and reported $100,000 in net earnings.By how much did Young Company's investment account increase on their balance sheet?

A)$6,000
B)$24,000
C)$30,000
D)$36,000

Question 61

Livint Company bought 50% of the outstanding bonds of Goodner Company, one of Livint's major suppliers.For accounting purposes what type of investment is Livint Company's investment in Goodner Company?

A)Control
B)Significant Influence
C)Passive
D)Active

Question 62

For which of the following types of investments are unrealized gains and losses recognized in comprehensive income?

A)FVTPL
B)Amortized cost
C)FVTOCI
D)Significant influence

Question 63

The amortized cost method requires that:

A)investments are measured as revenue.
B)transaction costs are expensed when incurred.
C)transaction costs are capitalized.
D)transaction costs are amortized over the period of the investment.

Question 64

Finnegan's Financial is a small investment boutique that manages money for several wealthy individuals.They pool the funds of the clients and use that to invest in various stocks and bonds.They recently purchased 12,000 common shares, or 4% of the outstanding total, of Flannigan Ltd.to hold in their investment accounts.For accounting purposes how should Finnegan's investment in Flannigan Ltd.be treated?

A)FVTPL
B)Amortized cost
C)FVTOCI
D)Significant influence

Question 65

Hopkins Company regularly invests in securities with the intention to earn income.As part of their investment portfolio they bought 20,000 shares of Stern Ltd.for $12.50 per share on March 1, 2014.Hopkins designated the investment as FVTPL At their year-end, December 31, 2014; the shares were trading at $15.00.They sold the shares on January 5, 2015, for $14.50 each.What is the impact of the investment in Stern Ltd.on Hopkins Company's income statement for 2015?

A)No effect
B)$10,000 realized loss
C)$40,000 realized gain
D)$40,000 unrealized gain

Question 66

Halpern Ltd.bought 10,000 of the 50,000 preferred shares that Titleman Company had outstanding.For accounting purposes what type of investment is Halpern Ltd.'s investment in Titleman Company?

A)Control
B)Significant Influence
C)Passive
D)Active

Question 67

Under the fair value through other comprehensive income method, unrealized gains and losses:

A)are recognized in the operating income.
B)are accumulated in other comprehensive income.
C)are recognized in net income.
D)are charged directly to retained earnings.

Question 68

Victoria Company is planning to start the construction of a new manufacturing facility in 2016, two years from now.In 2011 Victoria put aside $250,000 in surplus cash for this project by purchasing a government bond that matures in 2016.They expect to be able to purchase more bonds in 2015.For accounting purposes how should Victoria Company's investment in the government bonds be classified?

A)FVTPL
B)Amortized cost
C)FVTOCI
D)Restricted cash

Question 69

Hopkins Company regularly invests in securities to supplement its income.As part of their investment portfolio they bought 20,000 shares of Stern Ltd.for $12.50 per share on March 1, 2014.Hopkins designated the investment as FVTPL At their year-end, December 31, 2014; the shares were trading at $15.00.They sold the shares on January 5, 2015, for $14.50 each.What is the impact of the investment in Stern Ltd.on Hopkins Company's net income for 2014?

A)No effect
B)$30,000 realized gain
C)$40,000 unrealized gain
D)$50,000 unrealized gain

Question 70

Under the fair value through other comprehensive income method, investments are can be reported as long term assets:

A)depending on marketability and management intent.
B)depending on the value and risk of the investment.
C)depending on the balance in the accumulated comprehensive income account.
D)depending on whether they are to be held for more than three years.

Question 71

Hopkins Company had some surplus cash and bought 20,000 shares of Stern Ltd.for $12.50 per share on March 1, 2014.Hopkins designated the investment as FVTOCI.At their year-end, December 31, 2014, the shares were trading at $15.00.They sold the shares on January 5, 2015, for $14.50 each.What is the impact of the investment in Stern Ltd.on Hopkins Company's net income for 2014?

A)No effect
B)$30,000 realized gain
C)$40,000 unrealized gain
D)$50,000 unrealized gain

Question 72

Which of the following is the correct match concerning an investor's ownership and an investor's influence on the operations and financial affairs of an investee?
$\underline{\% \text { of Investors Ownership }} \quad \underline{\text { Presumed Influence }}$
A. $\quad$ Less than $20 \%$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Passive
B. $\text { Between } 20 \%-50 \% \quad\quad\quad \text { Passive }$
C. $\text { More than } 50 \% \quad\quad\quad\quad\quad \text { Significant }$
D. $\text { Between } 20 \%-50 \% \quad\quad\quad \text { Controlling }$

A)Option A
B)Option B
C)Option C
D)Option D

Question 73

Roddick Holdings Inc.owns 40% of Manatuk Corporation.During the calendar year 2014, Manatuk had net earnings of $300,000 and paid dividends of $30,000.Roddick's book keeper erroneously recorded these transactions using the cost method rather than the equity method of accounting.What effect would this have on the following?
$\begin{array}{lll}&\text { Investment acct } & \text { Net income } & \text { Retained earnings } \\A.&\text { Overstate } & \text { Overstate } & \text { Overstate } \\B.&\text { Understate } & \text { Understate } & \text { Understate } \\C.&\text { Understate } & \text { Overstate } & \text { Overstate } \\D.&\text { Overstate } & \text { Understate } & \text { Understate }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 74

Which of the following types of investments is carried on the balance sheet at cost?

A)Investments in stock options
B)Investments in debt securities
C)Investments in the share of other companies
D)Significant influence investments

Question 75

Victoria Company is planning to start the construction of a new manufacturing facility in 2016, two years from now.In 2011 Victoria invested $250,000 of surplus cash by purchasing a government bond that matures in 2016.They may need to use some of this cash to finance next year's working capital needs.For accounting purposes how should Victoria Company's investment in the government bonds be treated?

A)FVTPL
B)Amortized cost
C)FVTOCI
D)Restricted cash

Question 76

For which of the following types of investments are unrealized gains and losses recognized in net income?

A)FVTPL
B)Amortized cost
C)FVTOCI
D)Significant influence

Question 77

During 2014, National Tire Company bought 5,000 share of Ontario Tire for $22.50.They received dividends of $1.50 per share during the year.At National Tire's year-end the shares had increased in value to $24.50.What would be the effect on National Tire's net income for the year if the shares were classified as
FVTPL or as FVTOCI?
$\begin{array}{ll}&\text { FVTOCI }&\text { Amortized cost }\\A.&\$ 12,500 & \$ 12,500 \\B.&\$ 12,500 & \$ 17,500 \\C.&\$ 17,500 & \$ 12,500 \\D.&\$ 17,500 & \$ 12,500\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 78

The fair value through profit and loss method requires that:

A)investments are measured as revenue.
B)transaction costs are expensed when incurred.
C)transaction costs are capitalized.
D)transaction costs are amortized over the period of the investment.

Question 79

When the cost method is applied to an investment in debt securities, such as bonds, it is referred to as:

A)the equity method.
B)the fair value to net income model.
C)the fair value to other comprehensive income model.
D)the amortized cost model.

Question 80

Which of the following types of investments is carried on the balance sheet at fair value?

A)Subsidiary
B)Investments in bonds
C)FVTOCI
D)Significant influence