Deck 12: Investments and Shareholders Equity

Question 1

XYZ buys a 24 per cent share in ABC for $80 million. ABC's total net profit is $50 million and it pays $4 million in dividends to XYZ. Using the equity method, the value of the investment in ABC would be recorded at year-end as:

A) $80 million.
B) $88 million.
C) $92 million.
D) $19 million.

Answer 1

B

Question 2

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the equity basis, what would the balance sheet value of investment in Down Ltd be at 31 December 2019?

A) $880 000
B) $600 000
C) $510 000
D) $790 000

Answer 2

D

Question 3

XYZ Limited paid $2 million for 100 per cent of the voting shares of ABC Limited and determined the assets to be worth $3 million and the liabilities $800 000. What was the goodwill on consolidation at the date of acquisition?

A) $100 000
B) $200 000
C) $300 000
D) None of the above

Answer 3

B

Question 4

A debit balance in the retained profits account indicates that:

A) the company has made a loss in the current period.
B) the company has made a loss in at least one period.
C) total losses are greater than total profits across all year.
D) None of the above.

Question 5

An issue of 50 000 shares at $3 required $2.20 per share to be paid at the time of application. On allotment, another $0.30 was due and a further $0.50 when determined by the board of directors. The application money in respect of the 50 000 shares was received on 8 July. On 26 July, the shares were issued with the amount due on allotment received on 15 August. The remaining $0.50 was called up on 20 September and received on 10 October. What was the balance of share capital at 11 October?

A) $25 000
B) $125 000
C) $150 000
D) $110 000

Question 6

ABC buys a 25 per cent share in XYW for $80 million. XYW's total net profit is $50 million and it pays $4 million in dividends to ABC. Using the equity method, the revenue recognised for this investment during the year would be:

A) $4 million.
B) $15 million.
C) $60 million.
D) None of the above

Question 7

Investments appear on the balance sheet under the heading of:

A) assets.
B) shareholders' equity.
C) retained profits.
D) None of the above.

Question 8

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the cost basis, which of the following accounting records would it make on 30 June 2019 in response to Down Ltd's earnings announcement?

A) It would increase dividend revenue by $150 000.
B) It would increase investment in Down Ltd by $150 000.
C) It would decrease investment in Down Ltd by $150 000.
D) No record would have been made.

Question 9

The directors of Behrens Ltd decided to issue 300 000 ordinary shares at $1 each. 25 cents per share was payable on application, 25 cents per share on allotment and the balance through two equal calls. Applications were received for 250 000 shares, which were duly issued and allotment money was paid in full. The journal entries to record the allotment would include a:

A) credit to allotment, $75 000.
B) credit to cash, $62 500.
C) debit to share capital, $62 500.
D) debit to allotment, $75 000.

Question 10

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the cost basis, what was the balance sheet value of investment in Down Ltd at 31 December 2019?

A) $510 000
B) $600 000
C) $690 000
D) $880 000

Question 11

Which of the following statements about the equity method is NOT true?

A) The investment asset is valued at cost on acquisition.
B) The investment asset is increased for the investing company's share of the investee company's profit.
C) When the investee company pays a dividend, the investing company credits dividend revenue.
D) The investment asset is decreased for the investing company's share of the investee company's loss.

Question 12

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the equity basis, which of the following accounting records would it make on 31 December 2019 in response to Down Ltd's earnings announcement?

A) It would increase investment in Down Ltd by $130 000.
B) It would increase cash by $130 000.
C) It would increase dividend revenue by $130 000.
D) It would increase investment in Down Ltd by $130 000 and increased dividend revenue by $130 000.

Question 13

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the cost basis, what dividend revenue did it record for the year ended 31 December 2019 in respect of its investment in Down Ltd?

A) Nil
B) $90 000
C) $190 000
D) $280 000

Question 14

XYZ buys a 24 per cent share in ABC for $80 million. ABC's total net profit is $50 million and it pays $4 million in dividends to XYZ. Using the cost method, what would be the revenue and investment amounts at year-end for this investment?

A) $4 million and $80 million
B) $4 million and $84 million
C) $12 million and $80 million
D) $12 million and $92 million

Question 15

Gargantua Ltd paid $1 000 000 for 75 per cent of the voting shares of Dwarf Ltd, and evaluated Dwarf's assets to be worth $1 500 000 and its liabilities $300 000. What was the goodwill on consolidation at the date of acquisition?

A) $100 000
B) $200 000
C) $300 000
D) None of the above

Question 16

Which of the following is NOT omitted from the consolidated accounts?

A) Interest owing to parent company by subsidiary company
B) Intercompany sales
C) Management fees charged to the subsidiary by the parent company
D) None of the above - they are all omitted

Question 17

When the cost method of accounting for long-term investment in shares is employed, the receipt of a dividend on those shares is recorded as a credit to:

A) the investment asset.
B) dividend revenue.
C) retained profits.
D) None of the above.

Question 18

P Limited has control over another entity called Q Limited. Q Limited is referred to as the:

A) subsidiary entity.
B) economic entity.
C) associate entity.
D) minority interest.

Question 19

Which of the following are NOT eliminated in the preparation of consolidated financial statements?

A) Intercompany sales
B) The account for the parent company's investment in the subsidiary
C) Loans from the parent to the subsidiary
D) Assets of the subsidiary

Question 20

On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the equity basis, what revenue would it record for the year ended 31 December 2019 in respect of its investment in Down Ltd?

A) $90 000
B) $150 000
C) $190 000
D) $280 000

Question 21

Share splits increase:

A) total assets.
B) total shareholders' equity.
C) debt to equity ratio.
D) the number of shares on issue.

Question 22

LMN Ltd declared an interim dividend on 12 February 2018 of 10 cents per share (500 000 issued shares) and paid it on 3 March 2018. The journal entry on 12 February 2018 would include:

A) DR Interim dividend declared, $50 000.
B) CR Cash, $50 000.
C) CR Retained profits, $50 000.
D) None of the above

Question 23

Which of the following statements about a 2:1 share split is NOT true?

A) The number of shares is doubled.
B) The unit market price of each share is reduced.
C) The value of share capital is increased.
D) No journal entry is required.

Question 24

Which of the following statements about bonus issues is NOT true?

A) Bonus issues can be a useful takeover defence.
B) Bonus issues reduce shareholders' equity.
C) Bonus issues do not affect cash.
D) Shareholders may receive more dividends when bonus shares are issued.

Question 25

Which of the following statements about a bonus issue is NOT true?

A) Shareholders will only gain if the market value of the combined shares is greater than it was before the bonus issue.
B) Total shareholders' equity remains constant.
C) Net assets increase.
D) If a shareholder owned 10 per cent of the company before the bonus issue, she or he would still own 10 per cent after the bonus issue.

Question 26

LMN Ltd declared an interim dividend on 12 February 2018 of 5 cents per share (500 000 issued shares) and paid it on 3 March 2018. The journal entry on 3 March 2018 would include:

A) DR Interim dividend declared, $25 000.
B) CR Cash, $25 000.
C) CR Interim dividend payable, $25 000.
D) CR Retained profits, $25 000.