Deck 2: Investments in Equity Securities

Question 1

The difference between the investor's cost and the investor's percentage of the carrying value of the net identifiable assets of the associate is known as:

A) goodwill.
B) the Acquisition Differential.
C) the Fair Value Increment.
D) the Excess Book Value.
Bloom's

Answer 1

B

Question 2

Gains and losses on fair-value-through-profit-or-loss securities:

A) are included in net income, regardless of whether they are realized or not.
B) are included in net income only when the investment has become permanently impaired.
C) are included in net income only when realized.
D) are never recorded until the securities are sold.
Bloom's

Answer 2

A

Question 3

What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28?

A) 20% or more.
B) Less than 20%.
C) Between 20% and 50%.
D) 25% or more.
Bloom's

Answer 3

C

Question 4

Which of the following is NOT a possible indicator of significant influence?

A) The investor has the ability to elect members to the Board of Directors.
B) The investor has the right to participate in the policymaking process.
C) The investor has engaged in numerous intercompany transactions with the Associate.
D) The Associate's new CEO was previously CEO of the investor company.
Bloom's

Question 5

Which of the following methods uses procedures closest to those used in preparing consolidated financial statements?

A) Fair Value Through Profit or Loss.
B) The Cost Method.
C) Fair Value Through Other Comprehensive Income.
D) The Equity Method.
Bloom's

Question 6

When an investment is accounted for using the Equity Method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor?

A) Any such gains or losses are to be charged directly to Retained Earnings net of tax.
B) Any such gains or losses are combined with revenue and expenses from operations. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
C) Any such gains or losses are shown separately, net of tax below income from operations on the investor's Income statement. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
D) No specific accounting treatment is required. These items simply have to be disclosed in a note to the financial statements.
Bloom's

Question 7

On January 1, 2010, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: What would be the carrying value of X's Investment in Y at the end of 2012?

A) $100,000
B) $97,500
C) $98,800
D) $91,200
Bloom's

Question 8

Reporting in accordance with the Accounting Standards for Private Enterprises is permitted in certain instances for:

A) privately held companies.
B) publicly held companies.
C) all Canadian companies.
D) Canadian companies consolidating its foreign subsidiaries.
Bloom's

Question 9

When are gains on intercompany transfers of assets between an investor and a significant influence investment recognized as part of the investment income accounted for by the parent under the equity method?

A) In the period when the intercompany transfer takes place.
B) In the period(s) when the assets are sold to third parties or consumed.
C) They are never recognized.
D) They are recognized only when the investment is sold.
Bloom's

Question 10

Which of the following statements pertaining to joint ventures is TRUE?

A) A joint venture must have a contractual arrangement establishing joint control over the venture.
B) It must be accounted for using the Cost Method.
C) It must be reported at fair value with revaluations through net income.
D) One of the parties of the joint venture must have unilateral control over the venture.
Bloom's

Question 11

Under which of the following scenarios would a Foreign Currency translation definitely NOT be required?

A) The investee is located in a different country.
B) The investee prepares its financial statements in a foreign currency.
C) The investing company has borrowings denominated in a foreign currency.
D) The investee prepares its financial statements using the same currency as the investing company.
Bloom's

Question 12

Which of the following statements is TRUE under IFRS 9?

A) All unrealized gains and losses on equity investments flow through Other Comprehensive Income.
B) Unrealized gains and losses on FVTPL securities are included in Other Comprehensive Income.
C) Unrealized gains and losses on equity investments may be included in Other Comprehensive Income only if a decision to do so is made when the investment is acquired.
D) Other Comprehensive Income is included in Retained Earnings.
Bloom's

Question 13

A significant influence investment is one that:

A) allows the investor to exercise significant influence over the strategic operating and financing policies of the Associate.
B) allows the investor to exercise significant influence over only the financing policies of the Associate.
C) allows the investor to exercise significant influence over only the operating policies of the Associate.
D) allows the investor to exercise significant influence over the strategic and operating policies of the Associate.
Bloom's

Question 14

Any unallocated positive acquisition differential is normally:

A) pro-rated across the Associate's identifiable net assets.
B) charged to Retained Earnings.
C) recorded as Goodwill.
D) expensed during the year following the acquisition.
Bloom's

Question 15

What is the dominant factor used to distinguish portfolio investments from significant influence investments?

A) Use of the Cost Method to account for and report the investment.
B) Use of the Equity Method to account for and report the investment.
C) The investor's intention to establish or maintain a long term relationship with the investee.
D) The percentage of equity held by the investor.
Bloom's

Question 16

Which of the following statements is CORRECT?

A) Control is only possible if the Investor owns more than 50% of the voting shares of the Associate.
B) An ownership interest between 20% and 50% always implies significant influence.
C) An ownership interest between 0 and 10% can never imply significant influence.
D) Significant influence is still possible if the Investor owns less than 20% of the voting shares of the Associate.
Bloom's

Question 17

When using the cost method of accounting, which method should be used to determine the carrying value of shares sold when a portion of the shares making up an investment is sold?

A) Average cost.
B) Specific cost.
C) Last in, first out.
D) First in, first out.
Bloom's

Question 18

How are realized gains from the sale of investments accounted for at fair value through Other Comprehensive Income accounted for under IFRS 9?

A) They are transferred to net income in the period of the sale.
B) They remain in Accumulated Other Comprehensive Income.
C) They are transferred to Retained Earnings without going through net income.
D) They are transferred to Contributed Surplus.
Bloom's

Question 19

A) Changes from the Equity Method are to be handled prospectively, while changes to the Equity Method are to be handled retroactively.
B) Changes from the Equity Method are to be handled retroactively, while changes to the Equity Method are to be handled prospectively.
C) Any change is to be handled retroactively.
D) Any change is to be handled prospectively.
Bloom's

Question 20

Which of the following types of share investment does NOT qualify as a strategic investment?

A) Significant influence investments.
B) Joint Control investments.
C) Investments without significant influence.
D) Controlled investments.
Bloom's

Question 21

Under which method of accounting for investments are investments required to be included in current assets?

A) Fair value through profit or loss.
B) Fair value through other comprehensive income.
C) Equity method.
D) Cost method.
Bloom's

Question 22

Under which standards is it appropriate to record losses in excess of the investor's interest in an associate company because the associate is imminently expected to return to profitability?

A) Only under IFRS.
B) Only under US GAAP.
C) Only under ASPE.
D) Under US GAAP and ASPE, but not IFRS.
Bloom's

Question 23

How does the accounting for Other Comprehensive Income differ between the International Financial Reporting Standards (IFRS) and the Accounting Standards for Private Enterprises (ASPE)?

A) Under IFRS, realized gains are transferred from Other Comprehensive Income to net income when realized; under ASPE realized gains are transferred from Other Comprehensive Income directly to Retained Earnings.
B) Under ASPE, realized gains are transferred from Other Comprehensive Income to net income when realized; under IFRS realized gains are transferred from Other Comprehensive Income directly to Retained Earnings.
C) There is no difference between accounting for Other Comprehensive Income under IFRS and under ASPE.
D) The Accounting Standards for Private Enterprises do not recognize Other Comprehensive Income.
Bloom's

Question 24

On January 1, 2009, Black Corporation purchased 15 per cent of the outstanding shares of White Corporation for $498,000. From Black's perspective, White was a FVTPL investment. The fair value of Black's investment was $520,000 at December 31, 2009. On January 1, 2010, Black purchased an additional 30 per cent of White's shares for $1,040,000. The second share purchase allows Black to exert significant influence over White. During the two years White reported the following results: With respect to this investment, prepare Black's journal entries for both 2009 and 2010.

Question 25

If an investor is reporting in compliance with the International Financial Reporting Standards and has an investment with significant influence over the investee, what are the reporting requirements for the investor if the investment is in shares which are actively traded on an exchange?

A) The investment must be reported at fair value through profit and loss.
B) The investment must be reported at fair value through other comprehensive income.
C) The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements.
D) The investment must be reported using the equity method; disclosure of the fair value of the investment is at the discretion of the investor.
Bloom's

Question 26

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what will the balance in the Investment in Stamp Company be at December 31, 2010?

A) $200,000.
B) $208,000.
C) $220,000.
D) $240,000.
Bloom's

Question 27

Telnor Corporation (whose year end is December 31 of each year) has made a series of investments in Pineapple Corp., one of their major customers. The management of Telnor has been impressed by the products produced and sold by Pineapple and their market success. These investments are only going to be held for a short period of time. The market price of Pineapple stock on December 31, 2008 and 2009 was $200 and $250 respectively per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the purchases and sales that Telnor entered into in 2008 and 2009: Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through other comprehensive income a) Prepare the journal entries to record the transactions in 2008 and 2009 with respect to Telnor's investment in Pineapple. b) How would Telnor disclose the investment in Pineapple on its balance sheet?

Question 28

If an investment accounted for using the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, what accounting entry should be made?

A) None; once an investment has been written down, it cannot subsequently be written up.
B) It may be written up in value but not more than the amount of the impairment loss that was recorded at the time of impairment.
C) It may be revalued to fair value with the revaluation gain going to net income, even if the recorded gain will exceed the original impairment loss.
D) It may be revalued to fair value with the revaluation gain going to other comprehensive income, even if the recorded gain will exceed the original impairment loss.
Bloom's

Question 29

Telnor Corporation (whose year end is December 31 of each year) has made a series of investments in Pineapple Corp., one of their major customers. The management of Telnor has been impressed by the products produced and sold by Pineapple and their market success. These investments are only going to be held for a short period of time. The market price of Pineapple stock on December 31, 2008 and 2009 was $200 and $250 respectively per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the purchases and sales that Telnor entered into in 2008 and 2009: Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through profit and loss. a) Prepare the journal entries to record the transactions in 2008 and 2009 with respect to Telnor's investment in Pineapple. b) How would Telnor disclose the investment in Pineapple on its balance sheet?

Question 30

On January 1, 2011, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc's outstanding voting shares. Joyce has significant influence over Mark. Mark's earnings for 2011 and 2012 were $100,000 and $200,000 respectively. Mark paid dividends in the amount of $20,000 and $10,000 during 2011 and 2012, respectively. Required: Calculate the balance in Joyce's Investment account as at December 31, 2012.

Question 31

Dragon Corporation acquired a 7% interest in the outstanding shares of Slayer Inc. on January 1, 2010 at a cost of $200,000. Dragon Corporation was a private company and reported in compliance with the Accounting Standards for Private Enterprises and accounted for Slayer Inc., whose shares were not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders at noted below. On December 31, 2012 Slayer declared bankruptcy as a result of a series of losses as noted. a) Prepare the journal entries that Dragon would make in each year. b) Prepare the general ledger account for Dragon's investment in Slayer.

Question 32

If the Investor sells part of its stake in an Associate, accounted for using the equity method, which method is used to calculate the gain or loss on the sale of these shares?

A) The average carrying value of the Investment.
B) FIFO.
C) LIFO.
D) Specific Identification.
Bloom's