Question 1

The equity method of accounting for long-term investments in equity securities is based on the presumption that the investor owns a sufficient number of the outstanding voting shares of another company to exercise significant influence over the operating and financing policies of the other company.

Accepted Answer

The statement is true. The equity method of accounting is used when an investor has the ability to exercise significant influence over another company with a long-term equity investment. This is typically considered to be ownership of 20% to 50% of the outstanding voting shares of the company.

Question 2

There is no separate impairment test for FVTPL investments.

Accepted Answer

FVTPL (Fair Value Through Profit or Loss) investments are measured at fair value with changes in fair value recognized in profit or loss, thus eliminating the need for a separate impairment test as any decline in value is immediately recognized.

Question 3

Non-controlling interest (NCI) is a separate equity account which appears on the consolidated financial statements which is used to account for any portion of the subsidiary that is not owned by the parent.

Accepted Answer

Non-controlling interest (NCI) is a separate equity account which appears on the consolidated financial statements which is used to account for any portion of the subsidiary that is not owned by the parent.

Question 4

Under the equity method of accounting for an investment,an investor recognizes its share of earnings in the period in which the investee declares a dividend.

Accepted Answer

Under the equity method of accounting, an investor recognizes its share of earnings in the period in which they are earned by the investee, regardless of whether a dividend is declared or not.

Question 5

When the equity method is used by an investor to account for investments in common stock,the investment account will be increased when the investor recognizes cash dividend received from investee.

Accepted Answer

Under the equity method, the investment account is decreased for the receipt of dividends, as these are considered a return on investment, not income.

Question 6

The accounting approach for recording a stock dividend received on a long-term equity investment is the same whether the cost or the equity method is used by the investor.

Accepted Answer

The accounting approach for recording a stock dividend received on a long-term equity investment is the same whether the cost or the equity method is used by the investor. In both cases, the stock dividend received is considered a return on the investment and is recorded as an increase in the investment account and a corresponding increase in the dividend income account.

Question 7

Cash dividends declared out of current earnings are distributed to an investor.How will the investor's investment account be affected by those dividends under each of the following accounting methods? $$\begin{array} { | l | l | l | } 
\hline & \text { Cost Method } & \text { Equity Method } \
\hline 1 & \text { No effect } & \text { No effect } \
\hline 2 & \text { No effect } & \text { Decrease } \
\hline 3 & \text { Decrease } & \text { No effect } \
\hline 4 & \text { Decrease } & \text { Decrease } \
\hline
\end{array}$$

Accepted Answer

Under the cost method, dividends do not affect the investment account. Under the equity method, dividends decrease the investment account as they are considered a return on investment.

Question 8

Under the equity method of accounting for Investments in Associates,the investor's investment account is decreased by all dividends received from the investee.

Accepted Answer

Under the equity method, dividends received from the investee are deducted from the investor's share of the investee's profits, which decreases the investment account.

Question 9

Dividends received on an investment in equity shares held as an Investment in Associate causes which of the following effects?

Accepted Answer

The answer of Dividends received on an investment in equity...

Question 10

If an investor company does not have a controlling interest in another company,it must use either the cost method or the equity method to account for that investment in equity securities.

Accepted Answer

The answer of If an investor company does not have...

Question 11

Under IFRS,discounts or premiums on amortized cost investments may be amortized using either the straight line or effective interest methods.

Accepted Answer

The answer of Under IFRS,discounts or premiums on amortized cost...

Question 12

The book value of a bond purchased at a premium or discount and classified,as an investment in marketable securities must be adjusted each period for amortization of the premium or discount.

Accepted Answer

The book value of a bond purchased at a premium or discount and classified as an investment in marketable securities must be adjusted each period for amortization of the premium or discount. This is required by generally accepted accounting principles (GAAP) to reflect the true cost of the bond over its life. Amortization is the process of systematically reducing the premium or discount to its original value at maturity, either by taking a portion of the premium into income each period for bonds purchased at a premium, or by adding a portion of the discount to interest expense each period for bonds purchased at a discount.

Question 13

A change from the equity method to the cost method is a prospective accounting change.

Accepted Answer

A change from the equity method to the cost method is a change in accounting principle, which should be applied prospectively to future accounting periods. The prior periods are not adjusted, and any cumulative effect of the change should be recognized in the period of the change.

Question 14

A publicly quoted share price would be an example of a Level 2 input in determining fair value.

Accepted Answer

A publicly quoted share price is considered a Level 1 input, as it is a quoted price in an active market for an identical asset or liability that the entity can access at the measurement date.

Question 15

Using the cost method,an investment in a subsidiary is shown as an asset,while using the equity method,it is shown as part of shareholders' equity.

Accepted Answer

Using the cost method, an investment in a subsidiary is shown as an asset on the balance sheet. Using the equity method, it is shown as an investment on the asset side of the balance sheet and as part of shareholders' equity on the liability side of the balance sheet.

Question 16

When shares are not actively traded on open markets,it is impossible to estimate their fair value.

Accepted Answer

Shares not actively traded can still have their fair value estimated through other valuation methods such as discounted cash flows, comparisons with similar companies, or asset-based valuations.

Question 17

When an investor uses the equity method to account for investments in common stock,cash dividends received by the investor from the investee should be recorded as:

Accepted Answer

Under the equity method, cash dividends received by the investor from the investee are recorded as a deduction from the investment account, reflecting the receipt of assets distributed from the investee's equity.

Question 18

In a lump-sum purchase of the shares of two or more companies,their relative par values are used as the basis of the allocation of cost to each.

Accepted Answer

In a lump-sum purchase of the shares of two or more companies, their fair market values are used as the basis of the allocation of cost to each, not their par values.

Question 19

During Consolidation,the net assets of the subsidiary are revalued to fair value at acquisition.

Accepted Answer

During consolidation, the net assets of the subsidiary are revalued to fair value at acquisition. This is done to ensure that the financial statements of the parent company and the subsidiary are presented on a consistent basis.

Question 20

When two or more classes of equity securities are purchased for a lump sum,and the market value of neither security can be reliably determined,the lump sum payment should be allocated between the classes of securities based on the number of shares of each security purchased.

Accepted Answer

The lump sum payment should be allocated between the classes of securities based on their relative fair values at the time of purchase. If the market value cannot be reliably determined, other methods of estimating fair value must be used, not simply the number of shares.

Quiz 11: Financial Instruments: Investments in Debt and Equity Securities

The equity method of accounting for long-term investments in equity securities is based on the presumption that the investor owns a sufficient number of the outstanding voting shares of another company to exercise significant influence over the operating and financing policies of the other company.

There is no separate impairment test for FVTPL investments.

Non-controlling interest (NCI) is a separate equity account which appears on the consolidated financial statements which is used to account for any portion of the subsidiary that is not owned by the parent.

Under the equity method of accounting for an investment,an investor recognizes its share of earnings in the period in which the investee declares a dividend.

When the equity method is used by an investor to account for investments in common stock,the investment account will be increased when the investor recognizes cash dividend received from investee.

The accounting approach for recording a stock dividend received on a long-term equity investment is the same whether the cost or the equity method is used by the investor.

Under the equity method of accounting for Investments in Associates,the investor's investment account is decreased by all dividends received from the investee.

Dividends received on an investment in equity shares held as an Investment in Associate causes which of the following effects?

If an investor company does not have a controlling interest in another company,it must use either the cost method or the equity method to account for that investment in equity securities.

Under IFRS,discounts or premiums on amortized cost investments may be amortized using either the straight line or effective interest methods.

The book value of a bond purchased at a premium or discount and classified,as an investment in marketable securities must be adjusted each period for amortization of the premium or discount.

A change from the equity method to the cost method is a prospective accounting change.

A publicly quoted share price would be an example of a Level 2 input in determining fair value.

Using the cost method,an investment in a subsidiary is shown as an asset,while using the equity method,it is shown as part of shareholders' equity.

When shares are not actively traded on open markets,it is impossible to estimate their fair value.

When an investor uses the equity method to account for investments in common stock,cash dividends received by the investor from the investee should be recorded as:

In a lump-sum purchase of the shares of two or more companies,their relative par values are used as the basis of the allocation of cost to each.

During Consolidation,the net assets of the subsidiary are revalued to fair value at acquisition.

When two or more classes of equity securities are purchased for a lump sum,and the market value of neither security can be reliably determined,the lump sum payment should be allocated between the classes of securities based on the number of shares of each security purchased.