Deck 9: Investments

Question 1

Equity investments that are accounted for under the cost model will result in

A)recognition of dividend income only when actually received.
B)expensing transaction costs when incurred.
C)recognition of a gain or loss in net income at disposal.
D)recognition of a gain or loss in other comprehensive income at disposal.

Answer 1

C

Question 2

The price of a debt instrument is quoted as a percentage of its

A)face or par value.
B)fair market value.
C)book value.
D)present value.

Answer 2

A

Question 3

An investment in an entity's debt instruments makes that investor a(n)

A)owner of the issuing entity.
B)creditor of the issuing entity.
C)parent company.
D)subsidiary.

Answer 3

B

Question 4

Under the cost/amortized cost model, holding gains are

A)recognized in net income only when realized.
B)recognized in other comprehensive income.
C)recognized depending on management's intention.
D)not recognized at all.

Question 5

To calculate the amount of interest to recognize each period for a bond investment (unless it held for trading purposes),

A)ASPE requires the use of the effective-interest method.
B)IFRS requires the use of the effective-interest method.
C)IFRS allows the use of either the effective-interest or the straight-line method.
D)ASPE requires the use of the straight-line method.

Question 6

The premium or discount on bonds accounted for under the cost/amortized cost model is

A)amortized over the expected holding period.
B)amortized over the life of the bond.
C)not amortized.
D)treated as a transaction cost.

Question 7

How investments are accounted for does NOT usually depend on

A)the type of investment.
B)whether the investments are bought on margin.
C)management intent.
D)company strategy.

Question 8

An interest-bearing investment is sold mid-way through the year.At the time of sale, how is the accrued interest typically treated?

A)The seller forfeits the right to any interest payment, and loses on the investment sale.
B)The original issuer (investee)must settle the interest owing before the sale can be completed.
C)The purchaser pays the seller an amount equal to the accrued interest since the last payment date.
D)At the next interest payment date, the original issuer (investee)splits the interest payments amongst anyone who held the investment over the period.

Question 9

Regarding the reporting of investment income under the FV-NI method, for companies reporting in accordance with ASPE, which of the following statements is true?

A)Interest income must be separated from net gains or losses recognized on financial instruments.
B)Holding gains and losses are always tracked separately from interest and dividend income.
C)Interest income must be separated from dividends recognized on financial instruments.
D)None of these are true.

Question 10

A bond is purchased at a discount and will be accounted for under the amortized cost model.The entry to record the amortization of the discount includes a

A)debit to the investment account.
B)debit to "Gain from Discount."
C)debit to Interest Revenue.
D)credit to the investment account.

Question 11

Generally, transaction costs are

A)capitalized when investments are accounted for using a cost-based model.
B)capitalized when investments are accounted for using a fair value model.
C)always expensed.
D)never expensed.

Question 12

Which of the following is NOT a motivation for investment in debt and equity instruments issued by other companies?

A)to assist those companies in meeting financial obligations
B)the returns provided by the investments
C)to have a special relationship, with a supplier, for example
D)to exercise influence or control over the operations of the investee

Question 13

The fair value through net income (FV-NI)model is sometimes referred to as

A)the fair value through profit or loss (FVTPL).
B)held for Trading.
C)discontinued Operations.
D)available for sale.

Question 14

When it comes to measuring investments, which of the following statements is true?

A)Companies are required to measure at cost/amortized cost.
B)Companies are required to measure at fair value.
C)Both cost/amortized cost and fair value are permitted in appropriate circumstances.
D)The company may report using whichever method best aligns with their financial reporting objectives.

Question 15

In practice, under the cost/amortized cost method and ASPE, any discount or premium on a bond investment is

A)required to be recognized and reported separately, and amortized using the effective-interest rate method.
B)not recognized or reported separately; amortized using either the straight-line or effective-interest method.
C)not recognized or reported separately; amortized using the effective-interest method.
D)required to be recognized and reported separately, and amortized using the straight-line method.

Question 16

Under ASPE, for accounting for investments in associates,

A)the cost method must be used for all such investments.
B)the fair value method can be used for shares quoted in an active market.
C)the investor may use the cost method for one investment and the fair value for another.
D)the fair value method must be used for all such investments.

Question 17

Which of the following is NOT an equity instrument?

A)common shares
B)preferred shares
C)convertible bonds
D)put options

Question 18

Any contract that is evidence of a residual interest in an entity's assets is called a(n)

A)debt security.
B)liability.
C)derivative.
D)equity security.

Question 19

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

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

Question 20

Which of the following is NOT a debt security?

A)convertible bonds
B)commercial paper
C)loans receivable
D)government treasury bills

Question 21

Accumulated Comprehensive income is included as part of

A)retained earnings.
B)net income.
C)shareholders' equity.
D)unearned revenue.

Question 22

Application of the cost model to the investment one company makes in another entity's shares is straightforward and includes all of the following EXCEPT

A)recognize the cost of the investment at the fair value of shares acquired.
B)unless impaired, report the investment at its fair value at each balance sheet date.
C)recognize dividend income when the entity has a claim to the dividend.
D)when the shares are disposed of, derecognize them and report a gain or loss on disposal in net income.

Question 23

Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the incurred loss impairment model uses which discount rate?

A)the investor's internal rate of return
B)the historical interest rate
C)the current market rate
D)either the historical rate or the current market rate

Question 24

Under the fair value through net income model, holding gains are

A)recognized in other comprehensive income only.
B)recognized in either net income or other comprehensive income.
C)recognized in net income only.
D)ignored.

Question 25

Which of the following situations would NOT necessarily indicate the potential impairment of the underlying securities?

A)The issuing entity is experiencing major financial difficulties.
B)The issuing entity is unable to pay its liabilities.
C)The issuing entity has temporarily halted dividend payments in order to retain cash for future expansion.
D)The issuing entity is undergoing a major reorganization.

Question 26

Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the expected loss impairment model uses which discount rate?

A)the investor's internal rate of return
B)the historical interest rate
C)the current market rate
D)either the historical rate or the current market rate

Question 27

Salmon Corporation purchased an investment in 2017 (an equity investment without significant influence).The purchase price of $94,000 included transaction costs of $1,000.Assuming the transaction costs were capitalized and Salmon follows IFRS, which accounting method did Salmon use to account for this investment?

A)amortized cost
B)fair value through net income (FV-NI)
C)fair value through other comprehensive income (FV-OCI)
D)equity

Question 28

When one corporation has a controlling interest in another corporation whose shares are not actively traded, under ASPE, the investment is accounted for using

A)either the consolidation method or the equity method or the cost method.
B)the consolidation method.
C)either the consolidation method or the equity method.
D)either the consolidation method or the equity method or the cost method or the FV-OCI method.

Question 29

Accumulated other comprehensive income includes

A)current year's net income.
B)all previous debits to other comprehensive income.
C)all previous credits to other comprehensive income.
D)all previous debits and credits to other comprehensive income.

Question 30

Accounting of impairment losses is required for investments that are measured using the

A)cost/amortized cost model.
B)FV-NI model.
C)FV-OCI model.
D)All of these (all of these models require a method of accounting for impairment).

Question 31

The fair value through net income model requires that

A)investments are measured at fair value.
B)transaction costs are expensed.
C)investments are measured at fair value and transaction costs are capitalized.
D)investments are measured at fair value and transaction costs are expensed.

Question 32

Other comprehensive income does NOT include

A)comprehensive income.
B)net income.
C)unrealized gains resulting from the application of the fair value through other comprehensive income model.
D)unrealized losses resulting from the application of the fair value through other comprehensive income model.

Question 33

Under the fair value through other comprehensive income model, unrealized gains and losses are

A)recognized in net income.
B)recognized in other comprehensive income.
C)recognized in either net income or other comprehensive income.
D)ignored.

Question 34

Realized gains and losses on investment disposals are recognized in net income for all investment instruments EXCEPT those classified as

A)FV-NI.
B)FV-OCI with recycling.
C)cost/amortized cost.
D)FV-OCI without recycling.

Question 35

The concept of recycling within the context of investments

A)refers to the transfer of previously unrealized gains or losses to net income.
B)refers to the switch of income between different investments categories.
C)should be used in the fair value through net income model.
D)should not be used in the fair value through other comprehensive income model.

Question 36

Under the fair value through other comprehensive income model, with recycling, previously unrealized holding gains and/or losses to the date of disposal are

A)ignored.
B)transferred to retained earnings.
C)transferred to net income.
D)transferred to "Unrealized Gain or Loss - OCI."

Question 37

In January 2017, Haddock Ltd.had purchased an investment for $150,000.By December 31, 2017, the fair market value of that investment had increased by $20,000.Assuming this gain was included in the company's 2017 net income, which accounting method did Haddock use to account for this investment?

A)cost
B)fair value through other comprehensive income (FV-OCI)
C)fair value through net income (FV-NI)
D)equity

Question 38

The accounting for investments in another entity's equity instruments depends mainly on

A)the level of influence the investor is able to exert.
B)the level of influence the investor actually exerts.
C)the quality of earnings of the investee.
D)whether the investee pays dividends.

Question 39

The fair value through other comprehensive income (FV-OCI)model is sometimes referred to as

A)the fair value through profit or loss (FVTPL).
B)held for trading.
C)discontinued operations.
D)available for sale.

Question 40

The fair value loss impairment model

A)is used for all investments that are not accounted for as FV-NI.
B)requires a separate impairment test.
C)calculates the impairment loss as the difference between the asset's fair value and its current carrying amount.
D)calculates the impairment loss as the difference between the asset's original cost and its current carrying amount.

Question 41

An investor who owns 15% of an entity's voting shares can

A)potentially have influence over the investee if the shares are widely held.
B)always be assumed to have little or no influence over the investee.
C)be assumed to be using the cost model.
D)be assumed to always use the equity method.

Question 42

Olde Corp.accounts for its investment in the common shares of Young Inc.under the equity method.Olde Corp.should record a cash dividend received from Young as

A)a reduction of the carrying value of the investment.
B)additional paid-in capital.
C)an addition to the carrying value of the investment.
D)dividend income.

Question 43

The standards relating to consolidation differ under ASPE and IFRS.Which of the following statements best describes the difference?

A)IFRS requires consolidation whereas ASPE offers a choice of methods.
B)ASPE requires consolidation whereas IFRS offers a choice of methods.
C)Consolidation is specifically excluded as one of the choices under ASPE.
D)Consolidation is specifically excluded as one of the choices under IFRS.

Question 44

When one corporation acquires control of another entity, the investor corporation is referred to as the parent and the investee corporation as the

A)subsidiary.
B)joint venture.
C)associate.
D)child.

Question 45

Jabba Inc.owns 35% of Hutt Corp., and has significant influence over Hutt.During the calendar year 2017, Hutt reported net income of $300,000 and paid dividends of $30,000.Jabba mistakenly recorded these transactions using the cost method rather than the equity method of accounting.What effect would this have on Jabba's investment account, net income, and retained earnings, respectively?

A)understate, overstate, overstate
B)overstate, understate, understate
C)understate, understate, understate
D)overstate, overstate, overstate

Question 46

Current IFRS rules for equity investments that are traded in an active market require that they

A)can be accounted for under the cost model.
B)can be accounted for under the fair value through net income model.
C)should generally be accounted for under the fair value through other comprehensive income model.
D)cannot be accounted for under the fair value through net income model.

Question 47

The disclosure requirements for private entities are usually less extensive as compared to those for public entities because

A)investors in private entities are expected to have less information about the company.
B)investors in private entities are expected to have more information about the company.
C)investors in private entities tend to be more sophisticated.
D)investors in private entities tend to be less sophisticated.

Question 48

When an investor is using the equity method and receives dividends from the investee, the journal entry will include a

A)credit to Dividend Income.
B)credit to Retained Earnings.
C)credit to the Investment account.
D)debit to the Investment account.

Question 49

When one corporation has control over another corporation, the investor corporation

A)is referred to as an associate.
B)is referred to as the subsidiary.
C)can determine the investee's strategic operating and financing policies.
D)must have obtained at least 50% of the investee's issued common shares.

Question 50

The objectives of disclosures required for investments in debt and equity investments do NOT include

A)how significant the investments are to the investor's financial position and performance.
B)whether the investments are classified as current or long-term.
C)the nature and extent of the risks that the investor faces as a result of the investments.
D)how the risks that the investor faces as a result of the investments are managed.

Question 51

If a parent company owns 90% of a subsidiary's outstanding shares, the parent should generally account for the subsidiary's income under the

A)cost/amortized cost model.
B)fair value through net income model.
C)fair value through other comprehensive model.
D)consolidation method.

Question 52

Under IFRS, which of the following is NOT a condition for an investment to be classified as current?

A)It is held primarily for trading purposes.
B)It is a cash equivalent.
C)It must be expected to be sold or realized within 12 months from the balance sheet date.
D)It must be accounted for under the cost model.

Question 53

When a public company holds between 20% and 50% of the outstanding common shares of an investee, which of the following statements applies?

A)The investor should always use the equity method to account for its investment.
B)The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
C)The investor must use the cost method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D)The investor should always use the cost method to account for its investment.

Question 54

An investor who owns 11% of an entity's voting shares

A)must use the equity method.
B)would be likely to prepare consolidated statements.
C)may have significant influence over the investee if the shares are closely held.
D)may have significant influence over the investee if the shares are widely held.

Question 55

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

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

Question 56

When an investor is using the equity method and the investee reports a net loss, the journal entry will include a

A)debit to the Investment account.
B)debit to Retained Earnings.
C)credit to the Investment account.
D)credit to Investment Income or Loss.

Question 57

When an investor, using the equity method, pays more than its share of the investee's book value, the difference is

A)ignored.
B)accounted for on the investor's books by a debit to Goodwill.
C)accounted for on the investee's books by a debit to Goodwill.
D)requires that the investor's Investment account and any investment income from the associate be adjusted over time.

Question 58

Which of the following is NOT required to report for associates accounted for using the equity method?

A)the fair value of any of these investments that has a price quoted in an active market
B)separate disclosure of income related to equity-accounted associates
C)the investor's strategy and motivation for holding equity ownership in the associate
D)information about associates' year ends that are different from the investor's year end

Question 59

When the investor has control over the investee, the reporting model to be used is the

A)cost model.
B)consolidation model.
C)market value model.
D)equity method.

Question 60

An investor who has subsidiaries

A)is required to prepare consolidated financial statements under IFRS.
B)is required to prepare consolidated financial statements under ASPE.
C)does not have to prepare consolidated financial statements under IFRS.
D)ignores the noncontrolling interest on the consolidated financial statements.

Question 61

Which of the following is a reason for the differences in the disclosure requirements for investments in associates under IFRS and ASPE?

A)ASPE requires that the associate must be a private entity.
B)ASPE does not include an "associates" category.
C)ASPE allows the use of methods other than the equity method.
D)ASPE does not allow the equity method.

Question 62

On October 1, 2017, Moray Ltd.purchased 500 of the $1,000 face value, 8% bonds of Eel Ltd.for $585,000, including accrued interest of $10,000.The bonds, which mature on January 1, 2021, pay interest semi-annually on January 1 and July 1.Moray used the straight-line method of amortization and appropriately recorded the bonds as long-term.On Moray's December 31, 2018 balance sheet, the carrying value of the bonds would be

A)$575,000.
B)$570,000.
C)$568,000.
D)$560,000.

Question 63

During 2017, Brandon Inc.purchased 2,000, $1,000, 9% bonds.The bonds mature on March 1, 2019, and pay interest on March 1 and September 1.The carrying value of the bonds at December 31, 2017 was $1,960,000.On September 1, 2018, after the semi-annual interest was received, Brandon sold half of these bonds for $988,000.Brandon uses straight-line amortization and has accounted for the bonds under the amortized cost model.The gain on the sale is

A)$11,200.
B)$8,000.
C)$4,800.
D)$0.

Question 64

On October 1, 2017, Barrick Corp.purchased 800, $1,000, 9% bonds for $792,000, which included $12,000 accrued interest.The bonds, which mature on February 1, 2023, pay interest semi-annually on February 1 and August 1.The bonds will be held to maturity.Barrick uses the straight-line method of amortization.The bonds, which are accounted for under the amortized cost model, should be reported in the December 31, 2017 balance sheet at a carrying value of

A)$792,240.
B)$780,000.
C)$780,600.
D)$792,000.

Question 65

On October 1, 2017, Berlin Corp.purchased 250, $1,000, 9% bonds for $260,000.An additional $7,500 was paid for the accrued interest, which is paid semi-annually on December 1 and June 1.The bonds mature on December 1, 2018 and will be held to maturity.Berlin uses the straight-line method of amortization and the amortized cost model for these bonds.Ignoring income taxes, the amount to be reported in Berlin's 2017 income statement as a result of this investment is

A)$3,750.
B)$5,025.
C)$5,625.
D)$6,225.

Question 66

On November 1, 2017, Fluck Corp.purchased 10-year, 9%, bonds with a face value of $360,000, for $324,000.An additional $10,800 was paid for the accrued interest, which is paid semi-annually on January 1 and July 1.The bonds mature on July 1, 2021 and will be held to maturity.Fluck uses the straight-line method of amortization and the amortized cost method for these bonds.Ignoring income taxes, the amount to be reported in Fluck's 2017 income statement as a result of this investment is

A)$6,300.
B)$6,000.
C)$5,400.
D)$4,800.

Question 67

Kipper Corp.began operations in 2017.An analysis of Kipper's equity securities portfolio acquired in 2017 shows the following totals at the end of the year.Kipper accounts for these investments using the fair value through net income (FV-NI)model. Based on this information, what amount should Kipper report in its 2017 income statement for "Investment Income or Loss"?

A)$16,000 loss
B)$20,000 gain
C)$36,000 gain
D)$36,000 loss

Question 68

Use the following information for questions.
On July 1, 2017, Harry Ltd.purchased $200,000 (par value)of Prince's 8% bonds.Because the market rate was 9%, Harry purchased them for $186,992.The bonds pay interest semi-annually on December 31 and June 30.Harry uses the amortized cost model and the effective-interest method to recognize interest income on bond investments.
Rounding values to the nearest dollar (if necessary), the bond discount to be amortized on December 31, 2017 is

A)$8,415.
B)$8,000.
C)$7,585.
D)$415.

Question 69

The standards relating to the treatment of transaction costs differ under ASPE and IFRS.Which of the following statements best describe the difference?

A)ASPE requires that transaction costs are capitalized, except for those investments that are accounted for under the fair value through net income model.
B)ASPE requires that transaction costs are expensed whenever cost-based measures are used.
C)IFRS requires that transaction costs are capitalized except for those investments that are accounted for under the fair value through net income model.
D)IFRS requires that all transaction costs are capitalized.

Question 70

On its December 31, 2017 balance sheet, Holly Corp.reported a short-term investment in equity securities, under the fair value through net income model, at $660,000.At December 31, 2018, the fair value of the securities was $700,000.What should Holly report on its 2018 income statement as a result of the increase in fair value of the investments during 2018?

A)$0.
B)loss on investments of $40,000.
C)unrealized gain of $40,000.
D)investment income of $40,000.

Question 71

Use the following information for questions.
On July 1, 2017, Harry Ltd.purchased $200,000 (par value)of Prince's 8% bonds.Because the market rate was 9%, Harry purchased them for $186,992.The bonds pay interest semi-annually on December 31 and June 30.Harry uses the amortized cost model and the effective-interest method to recognize interest income on bond investments.
Rounding values to the nearest dollar (if necessary), the entry to recognize receipt of the first interest payment on December 31, 2017 will include a

A)debit to Cash of $9,000.
B)credit to Interest Income of $8,415.
C)debit to Cash of $8,415.
D)credit to Interest Income of $8,000.

Question 72

On August 1, 2017, Cochrane Corp.acquired 20, $1,000, 9% bonds at 97 plus accrued interest.The bonds were dated May 1, 2017, and mature on April 30, 2020, with interest paid semi-annually on October 31 and April 30.The bonds will be held to maturity.Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2017 is

Question 73

George Inc.owns bonds that are accounted for under the fair value through net income model.On December 31, 2017, the bonds have a carrying value of $124,365.The fair value at that date is $123,000.The entry to record the year-end adjustment is

Question 74

On November 1, 2017, Jepson Ltd.purchased 300 of the $1,000 face value, 9% bonds of Carly Corp., for $316,000, which included accrued interest of $4,500.The bonds, which mature on January 1, 2019, pay interest semi-annually on March 1 and September 1.The bonds will be held to maturity.Assuming that Jepson uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the carrying value of the bonds should be shown on Jepson's December 31, 2017 balance sheet at

A)$316,000.
B)$300,000.
C)$311,500.
D)$311,040.

Question 75

The standards relating to the treatment of interest and dividend income differ under ASPE and IFRS.Which of the following statements is INCORRECT?

A)IFRS requires the use of the effective-interest method when interest income is to be reported separately.
B)IFRS requires certain dividends to be recognized in other comprehensive income.
C)ASPE allows the use of either the straight-line or effective-interest method.
D)When using the equity method, IFRS allows a dividend from an investee to be recorded as income, while ASPE does not.

Question 76

At December 31, 2017, Morgan Corp.'s stock investment portfolio, which is being accounted for by the fair value through net income (FV-NI)model, shows a general ledger balance of $214,500.It is determined that the fair value of the securities is actually $225,400.The entry to adjust the portfolio to fair value will include a

A)debit to Investment Income or Loss of $10,900.
B)credit to Cash of $10,900.
C)debit to FV-NI Investments of $10,900.
D)credit to FV-NI Investments of $10,900.

Question 77

Financial disclosures required regarding acquisitions require that

A)reader's are able to relate the investment category on the SFP to the investment income reported on the income statement.
B)reader's are able to understand the effects of the accounting methods that are used for different categories of investments.
C)major acquisition dates are disclosed, as the SFP contains all assest, and the P&L only contains income earned by the subsidiary after it was acquired.
D)all of these describe financial disclosures required regarding acquisitions.

Question 78

At December 31, 2017, Escargot Corp.has the following equity securities (no significant influence)that were purchased earlier in 2017, its first year of operation: If the investments are being accounted for under the fair value through net income (FV-NI)model, the total book value of the investment accounts should

A)be decreased by $7,500.
B)be increased by $7,500.
C)be decreased by $16,000.
D)remain unchanged.

Question 79

On January 2, 2017, Hull Corp.purchased 200 of the 1,000 outstanding common shares of Gatineau Ltd.for $120,000.During 2017, Gatineau declared total cash dividends of $20,000 and reported net income for the year of $80,000.If Hull uses the cost model to account for its investment in Gatineau, Hull's Investment in Gatineau Ltd.account at December 31, 2017 should be

A)$136,000.
B)$132,000.
C)$120,000.
D)$116,000.

Question 80

On August 1, 2017, Harley Inc.acquired $180,000 (face value)10% bonds of Davidson Corporation at 104 plus accrued interest.The bonds were dated May 1, 2017, and mature on April 30, 2020, with interest payable each October 31 and April 30.The bonds will be held to maturity.Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2017 is