Chapter 02 Investments in Equity Securities Multiple Choice Questions 1. 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-01 Describe the main changes in the reporting of equity investments over the past 15 years. Topic: 02-01 Equity Investments-The Big Picture 2. 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 3. What is the dominant factor used to distinguish non-strategic 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 operating relationship with the investee. D. The percentage of equity held by the investor. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-01 Describe the main changes in the reporting of equity investments over the past 15 years. Topic: 02-01 Equity Investments-The Big Picture 4. Which of the following statements is TRUE under IFRS 9? A. All unrealized gains and losses on equity investments flow through other comprehensive income (OCI). B. Unrealized gains and losses on fair value through profit and loss (FVTPL) securities are included in Other Comprehensive Income. C. Unrealized gains and losses on equity investments may be included in other comprehensive income (OCI) only if a decision to do so is made when the investment is acquired. D. Other comprehensive income (OCI) is included in net income. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 5. Gains and losses on fair value through profit or loss (FVTPL) 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 6. How are realized gains from the sale of fair value through other comprehensive income (FVTOCI) investments 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 from accumulated other comprehensive income to retained earnings without going through net income. D. They are transferred to contributed surplus. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 7. Which of the following statements is TRUE regarding the equity method? A. The equity method is used for reporting gains or losses for non-strategic investments. B. The investor's share of the associate's dividends declared is reported as revenue. C. The investor's investment in the associate changes in direct relation to the changes taking place in the associate's equity accounts. D. The equity method reports unrealized gains and losses on revaluations to fair value in net income. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-07 Illustration of Equity Method Basics Topic: 02-08 Complexities Associated with the Equity Method 8. What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures? A. 20% or more. B. Less than 20%. C. Between 20% and 50%. D. 25% or more. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 9. Which of the following methods uses procedures closest to those used in preparing consolidated financial statements? A. The fair value through profit or loss (FVTPL) approach B. The cost method C. The fair value through other comprehensive income (FVTOCI) approach D. The equity method Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-10 Example 10. 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 policy-making 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 11. Which of the following statements is CORRECT? A. Significant influence 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 possible even if the investor owns less than 20% of the voting shares of the associate. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 12. 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-11 Acquisition Costs Greater than Carrying Costs 13. 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-11 Acquisition Costs Greater than Carrying Costs 14. When are gains on intercompany transfers of assets between an investor an associate recognized as part of the investment income accounted for by the investor 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. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-12 Unrealized Profits 15. The ________ investment must be shown as a current asset, whereas the other investments could be current or non-current, depending on management's intention. A. fair value through profit or loss (FVTPL) B. cost method C. equity method D. fair value through other comprehensive income (FVTOCI) The FVTPL investment must be shown as a current asset, whereas the other investments could be current or non-current, depending on management's intention. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-05 Analyze and interpret financial statements involving investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 16. When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency, and profitability, the real economic situation is ________ for the four different methods. A. completely different B. identical C. almost similar except for the equity method D. almost similar except for the fair value methods When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency, and profitability, the real economic situation is identical for the four different methods. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-05 Analyze and interpret financial statements involving investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 17. Reporting in accordance with the Accounting Standards for Private Enterprises (ASPE) is permitted in certain instances for: A. privately held companies. B. publicly held companies. C. all Canadian companies. D. Canadian companies consolidating their foreign subsidiaries. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-06 Identify some of the differences between IFRS and ASPE for investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 18. When reporting under the Accounting Standards for Private Enterprises (ASPE) which method must be used to report investments where the investor has significant influence over the investee? A. It must use the cost method to report all such investments. B. It must use the equity method to report all such investments. C. It may use the cost method, equity method, or at fair value but must account for all such investments by the same method. D. It may use the cost method for some such investments and the equity method for other such investments. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-06 Identify some of the differences between IFRS and ASPE for investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 19. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's acquisition of Y's shares on January 1, 2019? A. Debit Credit Investment in Y $100,000 Cash $100,000 B. Debit Credit Investment in Y $12,000 Cash $12,000 C. Debit Credit Investment in Y $112,000 Cash $112,000 D. No entry required. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 20. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's net income for 2019? A. Debit Credit Investment in Y $6,000 Investment income $6,000 B. Debit Credit Investment in Y $50,000 Investment income $50,000 C. Debit Credit Investment in Y $12,000 Investment income $12,000 D. No entry required. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 21. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2019? A. Debit Credit Cash $2,400 Dividend income $2,400 B. Debit Credit Cash $2,400 Investment in Y $2,400 C. Debit Credit Investment in Y $2,400 Dividend income $2,400 D. No entry required. Share of dividends = $20,000  12% = $2,400. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 22. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2020? A. Debit Credit Cash $9,600 Dividend income $9,600 B. Debit Credit Cash $9,600 Investment in Y $9,600 C. Debit Credit Cash $9,600 Dividend income $8,400 Investment in Y $1,200 D. No entry required. Share of dividends = $80,000  12% = $9,600. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 23. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2021? A. Debit Credit Investment in Y $7,200 Dividend income $7,200 B. Debit Credit Cash $7,200 Investment in Y $7,200 C. Debit Credit Cash $7,200 Dividend income $7,200 D. No entry required. Share of dividends = $60,000  12% = $7,200. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 24. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 What would be the carrying value of X's Investment in Y at the end of 2021? A. $100,000 B. $98,800 C. $90,000 D. $91,200 Under the cost method, the carrying value of the Investment in Y will remain at $100,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 25. On January 1, 2019, 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: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's acquisition of Y's shares? A. Debit Credit Investment in Y $100,000 Cash $100,000 B. Debit Credit Investment in Y $12,000 Cash $12,000 C. Debit Credit Investment in Y $112,000 Goodwill $112,000 D. No entry required. On acquisition date, the only journal entry that is necessary is to record the share purchase. Subsequent to this date, changes to the Investment in Y will be recorded. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 26. On January 1, 2019, 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: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's net income for 2019? A. Debit Credit Investment in Y $12,500 Equity method income $12,500 B. Debit Credit Investment in Y $7,500 Equity method income $7,500 C. Debit Credit Investment in Y $12,000 Equity method income $12,000 D. No entry required. Share of net income = $50,000  25% = $12,500. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics