Intermediate accounting 5E

Chapter 11 Investments in Debt and Equity Securities

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1

Copyright © 2011 McGraw-Hill Ryerson Limited.

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition, Volume 1 – Test BankChapter 11 – Financial Instruments: Investments in Debt and Equity Securities

1. It is not possible to have control over another company without owning at least half of the outstanding voting shares.

Ans: FalseDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1, 7

2. It is not possible to have significant influence over another corporation without owning at least 25 % of the outstanding voting shares.

Ans: FalseDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 7

3. Fair-value-through-profit-and-loss (FVTPL) investments are usually held for the purpose of resale.

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1

4. Amortized cost investments must have contractual terms that give rise to cash flows on specific dates.


5. Amortized cost investments may include common shares.


6. Investments designated as FVTPL may be debt or equity instruments, while FVTOCI may include only equity instruments.

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1, 5, 6

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Chapter 11 – Financial Instruments: Investments in Debt and Equity Securities



7. Only FVTPL and amortized cost investments are considered passive investments.


8. Accounts receivable are an example of a financial instrument.


9. Joint ventures are considered strategic investments.


10. Once an investment is designated as FVTOCI, this designation may be changed at will by management.


11. Under ASPE, management may choose to account for any strategic investments using either the cost or equity methods.

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1, 9

12. Under ASPE, all passive investments must be accounted for using only FVTPL, Cost or Amortized Cost methods.


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13. Under IFRS, Investments in Associates may be accounted for using either the Cost or Equity Methods.

Ans: FalseDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1, 7, 9

14. Proportionate Consolidation must be used to account for Joint Ventures under IFRS.


15. Over time, the total gain or loss flowing through income will be the same, regardless of whether an investment is designated as FVTPL or FVTOCI.

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1, 5, 6

16. Unrealized holding gains flow through income for FVTPL investments.


17. Unrealized holding gains flow through income or OCI for FVTOCI investments.


18. All investments are recorded at fair value upon acquisition.


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19. Gains and losses realized from the sale of FVTOCI investments are transferred from OCI to earning when the sale occurs.


20. When fair-value is not determinable, investments may be carried at cost.


21. Accrued interest on investments in bonds classified as amortized cost investments increases cost on the adjusting entry to record market value changes


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


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


24. 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.


25. When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as dividend income.

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26. 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.


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

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1-9

28. 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.

Ans: TrueDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1-9

29. 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.


30. There is no separate impairment test for FVTPL and FVTOCI investments.


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31. 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.


32. 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.

Ans: FalseDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1-9

33. 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.

Ans: FalseDifficulty: EasyLevel of Learning: KnowledgeTopic: LO 1-9

34. 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.


35. 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.


36. 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.


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


38. 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?

Cost Method Equity Method1 No effect No effect2 No effect Decrease3 Decrease No effect4 Decrease Decrease

A) Choice 1B) Choice 2C) Choice 3D) Choice 4

Ans: BDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 4, 7

39. Dividends received on an investment in equity shares held as an Investment in Associate causes which of the following effects?A) The investment account is decreasedB) The valuation account is increasedC) Income of the investor is increasedD) The unrealized loss is decreased or the unrealized gain is increased

Ans: ADifficulty: MediumLevel of Learning: KnowledgeTopic: LO 7

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40. 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:A) Dividend income.B) A deduction from the investor's share of the investee's profits.C) A deduction from the investment account.D) A deduction from the stockholders' equity account, dividends to shareholders.

Ans: CDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 7

41. When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as:A) A deduction from the investor's share of the investee's profit.B) A deduction from the investment account.C) Dividend income.D) An addition to the investor's share of the investee's profit.


42. ABC owned the following equity securities held as long-term investments on December 31, 2003. All are traded over the counter.

Security Percent OwnedM, Common Stock 15 percentN, Common Stock 25 percent with significant influenceO, Common Stock 5 percent

ABC should account for these securities by applying the:A) Equity method for all of these securities.B) Equity method for securities M and N, and the LCM value method for security O.C) Cost method for the securities of M and O and the equity method for security N.D) Fair value method for all of these securities.E) Cost method for all these securities.

Ans: CDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 3, 7

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43. The equity method has all the following characteristics except:A) Treats all dividends as liquidatingB) Values investments at market valueC) Treats the investor and the portion of investee owned by investor as a single economic

entityD) Removes the incentive for investor to force investee dividends in order to increase investor

income

Ans: BDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 7

44. When 30% of another company's common shares are purchased for a price in excess of 30% of the market value of its net assets, why is the excess of market value of a building over its book value amortized by the investor over its remaining useful life?A) That part of the investment is overstated in value at acquisition dateB) The investee's income is understated with respect to the price paid by the investor for the

sharesC) The investee's income is overstated with respect to the price paid by the investor for the

sharesD) To correct errors in the investee's accounting


45. The equity method of accounting for a consolidated company probably will be used when the proportion of its voting shares held is as low as:A) 18 percent.B) 20 percent.C) 50 percent.D) Any percent, as long as there is demonstrated significant influence.E) 23 percent.

Ans: DDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 7

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46. The equity method causes the balance in the investment account to approximate:A) Original cost of the investment.B) Market value of the investment.C) Original cost of the investment minus any dividends declared and paid by the other

company.D) Original cost of the investment plus a proportionate share of subsequent undistributed

earnings of the investee company.


47. Drabble, Inc. owns 40 percent of the outstanding stock of Gilliam Company. During 2001, Drabble received a $4,000 cash dividend from Gilliam. What effect did this have on Drabble's 2001 financial statements?A) Increased total assetsB) Decreased total assetsC) Increased incomeD) Decreased investment accountE) Decreased income


48. A parent corporation that uses the equity method of accounting for its investment in a 40 percent owned subsidiary, which earned $20,000 and paid $5,000 in dividends, made the following entries:

Investment in Associate....................... 8,000 Investment revenue.......................... 8,000Cash............................................ 2,000 Dividend revenue............................ 2,000

What effect will these entries have on the parent's balance sheet?A) Overstate investment, overstate retained earningsB) Understate investment, understate retained earningsC) Overstate investment, understate retained earningsD) Financial position will be fairly statedE) Understate investment, overstate retained earnings


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49. If an investment is accounted for by using the equity method, a stock dividend received on the investment will:A) Decrease the investment account and have no effect on the investment revenue account.B) Increase the investment account and the investment revenue account.C) Decrease the investment account and increase the investment revenue account.D) Have no effect on the investment account or on the investment revenue account.


50. If an investment is accounted for by using the equity method, a cash dividend received on the investment will:A) Decrease the investment account and have no effect on the investment revenue account.B) Increase the investment account and the investment revenue account.C) Decrease the investment account and increase the investment revenue account.D) Have no effect on the investment account or on the investment revenue account.


51. The equity method differs from the cost method in the treatment of:A) The investment account.B) Dividends.C) Income of the investee.D) All of the other answers listed.


52. Investor Inc. owns 40 percent of Ailmand Corporation. During the calendar year, Ailmand had net earnings of $100,000 and paid cash dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?A) Understate, overstate, overstateB) Overstate, understate, understateC) Overstate, overstate, overstateD) Understate, understate, understate


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53. FGH purchased a $100,000, 6 percent bond at 104 plus $2,000 accrued interest. The bond pays semi-annual interest on each 6/30 and 12/31. FGH paid a brokerage fee of $1,500. What entry should FGH make to record this long-term investment? FGH adheres to ASPE.

(1) Investment in FVTPL securities ... 101,500 Cash........................................ 101,500

(2) Investment in FVTPL securities...... 104,000

Brokerage expense............................ 1,500

Cash........................................ 105,500(3) Investment in FVTPL securities.... 105,500

Investment receivable......................... 2,000 Cash........................................ 107,500

(4) Investment in FVTOCI securities.............. 105,500Interest receivable........................... 2,000 Cash........................................ 107,500


Ans: CDifficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

54. On September 1, 2003, WXY bought twenty $1,000, 9 percent bonds at 94 plus $300 total accrued interest. The bonds were to be sold to finance a new machine to be purchased in the following year. Therefore, the bonds will be sold during 2004. Interest is paid each June 30 and December 31. The bonds were designated as FVTPL investments. On the purchase date, WXY paid a brokerage fee of $340. WXY should record the cost of this investment at:A) $18,800B) $19,140C) $19,740D) $20,000

Ans: BDifficulty: MediumLevel of Learning: ApplicationTopic: LO 3

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55. MNO Company purchased ten $1,000, 9 percent bonds on February 28, 2002, at 105 plus $300 total accrued interest. MNO intends to sell the bonds to finance office remodelling in 2003. Interest is paid each April 30 and October 31. MNO paid $120 in broker's fees at the date of purchase. MNO's reporting year ends December 31. MNO should report this FVTPL investment on its 2002 balance sheet at:A) $10,500B) $10,620C) $10,800D) $10,920


57. On February 1, 2001, ABC purchased ten $1,000, 12 percent bonds at 96 as a short-term investment. Interest is payable semi-annually on July 1 and January 1 of each year. How much cash did ABC spend on February 1, 2001? What amount should be debited to the investment account?

Total Cash Spent Debit to Investment Account1) $10,100 $10,0002) $ 9,600 $ 9,7003) $ 9,700 $ 9,6004) $10,000 $10,100


Ans: CDifficulty: MediumLevel of Learning: ApplicationTopic: LO 3

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58. The data below pertains to the values of various FVTPL investments held by a client company:

Stock Shares Cost Market Value (12/31/2011)

X 500 $30 = $15,000 $24 = $12,000 Y 1,000 20 = 20,000 30 = 30,000 Z 750 24 = 18,000 30 = 22,500

The company’s entire FVTPL portfolio should be valued at which amount on December 31st, 2011?A) $50,000B) $53,000C) $64,500D) $67,500


57. On February 1, 2001, ABC purchased ten $1,000, 12 percent bonds at 96 as a short-term investment. Interest is payable semi-annually on July 1 and January 1 of each year. How much cash did ABC spend on February 1, 2001? What amount should be debited to the investment account?

Total Cash Spent Debit to Investment Account1) $10,100 $10,0002) $ 9,600 $ 9,7003) $ 9,700 $ 9,6004) $10,000 $10,100



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59. The data below pertains to the values of various FVTOCI investments held by a client company:

Stock Shares Cost Market Value (12/31/2011)

X 500 $30 = $15,000 $24 = $12,000 Y 1,000 20 = 20,000 30 = 30,000 Z 750 24 = 18,000 30 = 22,500

The company’s entire FVTOCI portfolio should be valued at which amount on December 31st, 2011?A) $50,000B) $53,000C) $64,500D) $67,500


60. On January 1, 2001, HJ paid $600,000 for 20,000 shares of MN's common shares, which represents a 15 percent investment in MN. HJ does not have the ability to exercise significant influence over MN. MN declared and paid a dividend of $1 a share to its stockholders during 2001. MN reported net income of $520,000 for the year ended December 31, 2001. The balance in HJ's balance sheet account "Investment in MN" at December 31, 2001 under the cost method, should be:A) $560,000B) $600,000C) $638,000D) $678,000


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61. WXC incurred the following costs during 2001 to purchase LXT shares:(a) 1,000 shares of LXT at $6 per share:

January 1 payment.......................... $2,000March 1 payment............................ 1,000May 1 payment.............................. 1,000July 1 payment............................. 1,000September 1 payment........................ 1,000(b) Interest paid.............................. 400(c) Brokerage fee paid......................... 600(d) Excise tax paid............................ 300

Assuming the cost method is used, WXC should record this 2001 investment at:A) $6,000B) $6,600C) $6,900D) $7,300


62. TBC purchased 10,000 shares in ETC for $12 per share. However, TBC's broker arranged for TBC to pay only $4 cash per share now with the remaining balance to be paid in monthly instalments. TBC should record the investment by:A) Debiting the investment account for $40,000B) Debiting the investment account for $120,000C) Debiting the investment account for $100,000 and crediting a contra account for $60,000D) No entry should be made until the securities are fully paid for


63. ZTC purchased shares of W common on the following dates:

Purchases CashJanuary 1, 500 shares at $3................ $1,500March 30, 200 shares at $2................. 400June 20, 100 shares at $5.................. 500August 30, 50 shares at $7................. 350

The shares were designated FVTPL securities. ZTC then sold 150 of the March 30 shares that were purchased on September 9. The sale price was $7.00 per share. This sale should be recorded as follows:

(1) Cash................................... 1050 Investment in W stock................ 1000

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Gain on sale of investment........... 50(2) Cash................................... 1050

Investment in W stock................ 486 Gain on sale of investment........... 564

(3) Cash................................... 1050 Investment in W stock................ 1050

(4) Cash................................... 1050 Investment in W stock.............. 400 Gain on sale of investment........... 650



64. On January 1, 2001, XYC purchased 100 shares (1 percent) of AB common shares at $120 per share. XYC uses the cost method to account for the AB shares. Subsequent to purchase, the following transactions and events happened: June 1, 2001, received a 20 percent stock dividend on the AB shares; March 31, 2002, XY sold half of the AB shares at $108 per share. At the date of the sale, XYC should recognize a gain (loss) on the sale of the AB shares of:A) $600 loss.B) $220 gain.C) $480 gain.D) $880 gain.


65. ABC owns a 35 percent interest in the voting common of XYZ and uses the equity method. For 2003, XYZ reported income of $120,000 and declared cash dividends of $40,000. If the carrying value of XYZ investment was $290,000 on January 1, 2003, ABC should (a) recognize investment revenue for 2003, and (b) report the carrying value of the investment, as follows:

(a) Investment Revenue (b) Carrying Value1) $14,000 $276,0002) $28,000 $290,0003) $42,000 $318,0004) $42,000 $332,000


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68. The Mon Corporation acquired a 30% interest in the Soon Company on 1/1/01 for $ 600,000. At that time, Soon had 2,000,000 shares of its common stock issued and outstanding. During 2001, Soon paid cash dividends of $ 20,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Soon's net income for 2001 was $ 120,000. What should be the balance in Mon's investment in Soon Co. account at the end of 2001?A) $ 570,000B) $ 600,000C) $ 630,000D) $ 636,000


69. On 1-1-07 we purchased 40% of Gull Corporation for $30,000. At that time, Gull's owners' equity was $4,000, and Gull had the following assets with market values exceeding book value by the following amounts:

Land $20,000Buildings 30,000 (10 years life remaining)Patent 10,000 (5 years life remaining)

Gull earned $10,000 in 2007 and paid $20,000 dividends. We amortize all intangibles over 5 years. What is the 2007 ending balance in the Investment in Gull account?A) $23,330B) $23,120C) $23,000D) $33,400


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70. On January 1, 2001, BCD paid $600,000 for 60,000 shares of MNO's common which represents a 25 percent investment in MNO. BCD has the ability to exercise significant influence over MNO. BCD received a cash dividend of $1 per share from MNO at the end of 2001. MNO reported net income of $320,000 for the year ended December 31, 2001. The balance in BCD's investment account, at December 31, 2001, should be:A) $540,000B) $600,000C) $620,000D) $680,000


71. KXC owned 45 percent of the common of ZBC. Therefore, KXC used the equity method to account for the investment. At the beginning of the year, KXC had a debit balance of $50,000 in this investment account. Z declared and paid a $20,000 cash dividend during the year and reported net income of $80,000. KXC investment account at the end of the year would have a balance of:A) $50,000B) $77,000C) $86,000D) $95,000


72. On January 1, 2001, MNO purchased 30 percent of the 10,000 shares of the outstanding common shares, of RST for $60,000 cash (and properly computed goodwill of $5,000 amortizable over 10 years). On December 31, 2001, RST reported net income of $40,000 and declared a cash dividend of $2 per share.

Select the appropriate combination below for the December 31, 2001, account balances to be reported by MNO.

Balance sheet-Dec. 31, 2001 Income Statement-2001,Investment Account Investment Revenue

1) $60,000 $ 6,0002) $65,500 $ 5,5003) $65,500 $11,5004) $65,500 $12,000


Ans: C

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Difficulty: MediumLevel of Learning: ApplicationTopic: LO 7

73. When a company holds between 20% and 50% of the outstanding shares of an investee, which of the following statements appliesA) The investor should always use the equity method to account for its investmentB) 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 investeeD) The investor should always use the cost method to account for its investment


The following information applies to questions 74-84 inclusively:

ABC Inc purchased shares of DEF Inc as follows:

June 30th, 2009 4,000 shares @ $3 per share $12,000



The shares are considered to be passive investments. ABC Inc. has a December 31st, year-end.

The market value of the DEF shares at each year-end was as follows:

December 31st, 2009 $3.50 per shareDecember 31st, 2010 $5.00 per shareDecember 31st, 2011 $5.50 per share

On July 1st, 2011, ABC sold half its shares in DEF Inc. for $6.50 per share.

74. Assuming that the shares are designated an FVTPL investment, the effect on ABC’s 2009 income as a result of owning the DEF shares would be:

A) NilB) A $2,000 unrealized holding loss.C) A $2,000 unrealized holding gain.D) A $4,000 unrealized holding gain.


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75. Assuming that the shares are designated an FVTOCI investment, the effect on ABC’s 2009 financial statements as a result of owning the DEF shares would be:

A) NilB) A $2,000 unrealized holding loss.C) A $2,000 unrealized holding gain.D) A $2,000 credit to OCI.

Ans: DDifficulty: MediumLevel of Learning: ApplicationTopic: LO 6

76. Assuming that the shares are designated an FVTPL investment, the effect on ABC’s 2010 income as a result of owning the DEF shares would be:

A) NilB) A $2,000 unrealized holding loss.C) A $7,000 unrealized holding gain.D) A $9,000 unrealized holding gain.


77. Assuming that the shares are designated an FVTOCI investment, the effect on ABC’s 2009 financial statements as a result of owning the DEF shares would be:

A) NilB) A $7,000 unrealized holding loss.C) A $9,000 unrealized holding gain.D) A $9,000 credit to OCI.


78. The total gain or loss realized on the sale of the shares was:

A) NilB) A $16,000 realized gain.C) An $8,000 realized loss.D) An $8,000 realized gain.

Ans: DDifficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

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79. The balance in the Investment in DEF account immediately prior to the sale of the shares was:

A) $58,000.B) $29,000.C) $53,000.D) $55,000.

Ans: ADifficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

80. The balance in the Investment in DEF account immediately following the sale of the shares was:

A) $58,000.B) $29,000.C) $53,000.D) $55,000.

Ans: BDifficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

81. The balance in the OCI account related to the Investment in DEF account immediately prior to the sale of the shares was:

A) $16,000 Cr.B) $8,000 Cr.C) $16,000 Dr.D) $8,000 Dr.

Ans: ADifficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

82. The balance in the OCI account related to the Investment in DEF account immediately following the sale of the shares was:

A) $16,000 Cr.B) $8,000 Cr.C) $16,000 Dr.D) $8,000 Dr.

Ans: B

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Difficulty: MediumLevel of Learning: ApplicationTopic: LO 5, 6

83. The balance in the OCI account related to the Investment in DEF account on December 31st, 2011 was:

A) Nil.B) $8,000 Cr.C) $5,500 Cr.D) $3,000 Cr.


84. The balance in Investment in DEF account on December 31st, 2011 was:

A) Nil.B) $30,000.C) $27,500.D) $25,000.


The following information pertains to questions 85 through 90 inclusively:

On January 1st, 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC’s managerial involvement, for $600,000. On that date, DEF’s net assets had a fair value equivalent to their book values.

During 2011 and 2012, DEF Inc. earned income and paid dividends as follows:

Income Dividends

2011 $120,000 $20,000

2012 $180,000 $30,000

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85. Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABC’s 2011 income as a result of this investment?

A) No effect.B) $6,000 of dividend income.C) $6,000 of investment income.D) $20,000 of dividend income.E) $30,000 of investment income.


86. Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABC’s 2012 income as a result of this investment?



87. Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABC’s 2011 income as a result of this investment?



88. Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABC’s 2012 income as a result of this investment?


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89. Assuming that ABC adheres to IFRS, what would be the balance in the Investment in Associate -DEF Inc. account on December 31st, 2011?

A) $600,000.B) $700,000.C) $720,000.D) $630,000.


90. Assuming that ABC adheres to IFRS, what would be the balance in the Investment in Associate -DEF Inc. account on December 31st, 2011?

A) $600,000.B) $675,000.C) $720,000.D) $630,000.


91. Match the following by entering appropriate letters to the left.

MethodA. CostB. EquityC. Consolidated Statement basisD. Fair-value-through-profit-and-loss (FVTPL) investment.E. None of these.

Investor's Situation___ 1. Owns 30 percent of the common shares (voting) of another corporation and has

significant influence.___ 2. Owner adheres to ASPE and 15 percent of the preferred shares (nonvoting) and 10

percent of the common shares (nonvoting) of another corporation. Both shares are part of an actively traded portfolio.

___ 3. Owns 100 percent of the preferred shares (nonvoting) of another corporation. These shares are part of an actively traded portfolio.

___ 4. Owns 5 percent of the common shares (voting) of another corporation. The shares are not readily marketable.

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___ 5. Owns 25 percent of the outstanding bonds payable of another corporation.The bonds were purchased with the intention of being sold within 3 months.

___ 6. Owns 51 percent of the common shares (voting) of another corporation.___ 7. Owns 20 percent of the preferred shares (nonvoting) of another corporation. These

shares are part of an actively traded portfolio.

Ans: 1, B, 2. D, 3. D, 4. A, 5. D, 6. B, 7. DDifficulty: MediumLevel of Learning: KnowledgeTopic: LO 1, 2

92. (a) A company purchased a $20,000, 9 percent (payable annually on each June 30), bond on 10/31 2002. Give the entry to record this transaction, assuming purchase at par plus any accrued interest. The bond is accounted for using the cost method.(b) Give the adjusting entry (if any) that should be made on December 31, 2002, end of the accounting period.Ans:

a) Investment in Bonds.............................. 20,000Interest receivable ($20,000 x .09 x 4/12)....... 600 Cash................................... 20,600

b) Interest receivable ($20,000 x .09 x 2/12)....... 300 Interest revenue....................... 300


93. On April 1, 2004, a company purchased a $20,000, 7.2 percent bond; interest is payable annually each September 31. The bond is accounted for using the cost method and was purchased for $20,800 including accrued interest. The accounting period ends December 31. Give the adjusting entry at the end of 2004.

Ans:Interest receivable ($20,000 x .072 x 3/12)............ 360 Interest revenue............................... 360


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94. A company purchased a $20,000, 8.4 percent bond (interest payable each October 1) on March 31, 2004, as a short-term investment. The total cash paid was $20,300. The investment is to be classified as a FVTPL investment.(a) Give the entry required by the company on March 31, 2004.

(b) Give any adjusting entry the company required on December 31, 2004, end of reporting period. If none is required, so state.

Ans:a) Investment in Bond ($20,300 - $840)............... 19,460Interest receivable ($20,000 x .084 x 6/12)....... 840 Cash........................................ 20,300

b) Interest receivable (20,000 x .084 x 3/12)........ 420 Interest revenue............................ 420


95. A corporation purchased as an FVTPL investment 200 shares of preferred of Y Corporation that cost $50 per share.

In the same year, the preferred shares were exchanged for 400 shares of no-par common of Z Corporation. At the date of exchange, the preferred stock was selling at $37.50 per share. Give the entry to record this direct exchange of shares.Ans:

Investments No-par C/S Z Corp 7,500Loss on exchange ($50 $37.50)200. 2,500 Investment P/S Y Corp. 10,000


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96. For each situation, give the appropriate journal entry(s). Assume the cost method is used.

(a) On January 1, 2001, Investor A purchased (for cash) a long-term investment, 1,000 shares (1 percent) of 6 percent, cumulative, preferred shares of Corporation B at $48 per share, when one year of dividends was in arrears.

(b) On March 1, 2001, Investor A received a 100 percent stock split on the B stock.

(c) On December 31, 2002, Investor A received notice that the board of directors of Corporation B had declared cash dividends on the preferred stock sufficient to cover the arrears and the current year.

Ans: a) Investment-B Corp. P/S (1,000 x 48)........48,000 Cash......................................................................................48,000

b) Memo: Received 1,000 shares of B Corp. P/SNew cost basis per share: 48,000 / 2,000 = $24

c) Dividends receivable (2,000 x 15 x 6% x 3 years)....... 5,400 Dividend revenue......................................................................5,400


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97. SR Company acquired 40 percent of the voting common shares of DKM, Inc., on January 1, 2001, for $120,000 cash. Income reported and cash dividends declared and paid by DKM in 2001 and 2002 were as follows:

Income Dividends2001 $20,000 $12,0002002 (5,000) -0-

Give all of the 2001 and 2002 entries other than the acquisition, as they would appear in the accounts of SR. Assume that significant influence exists.

2001 entries:

2002 entries:

Ans: 2001 Entries:Investments-DKM, Inc. C/S (20,000 x .4).... 8,000 Investment revenue............................ 8,000Cash (12,000 x .4)................................... 4,800 Investments-DKM, Inc., C/S.......... 4,800

2002 Entries:Investment revenue (or loss) (5,000 x .4)............ 2,000 Long-term investments-DKM, Inc., C/S.......... 2,000


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98. On January 1, 2001, IB Corporation purchased 30 percent of the outstanding common shares, no-par, of CXT at $2 per share. CXT data on this date were as follows:

Book Value Market ValueAssets not subject to depreciation...... $20,000 $24,000Assets subject to depreciation (10 year life)........... 30,000 40,000Liabilities............................. 14,000 SameStockholders' equity (40,000 shares outstanding)... 36,000

Additional data for CXT, at end of accounting period December 31, 2001: (Significant influence is in existence)

2001 net income was $10,000; total 2001 cash dividends declared and paid was $4,000.

Required:1. The goodwill purchased was $_____________________.2. Give the required entries to account for this investment during 2001:

January 1, 2001:

December 31, 2001 Income: (Assume no entry is required for the assets not subject to depreciation):

3. The following amounts should be reported on the 2001 financial statements of IBC:

(a) Income statement: Investment revenue $____________________.

(b) Balance sheet: Investment, CXT $___________________.


Ans:(1) Purchase price (12,000 shares x $2)............. $24,000Market Value Purchased: ($24,000 + $40,000 - $14,000 = $50,000) x 30%. $15,000Goodwill........................................ $ 9,000

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(2) January 1, 2001:Investment in CXT.................... 24,000 Cash............................ 24,000

December 31, 2001: (Income)Investment in CXT ($10,000 x 30%)......... 3,000 Investment revenue........................... 3,000

Cash ($4,000 x 30%).......................... 1,200 Investment in CXT......................... 1,200

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Investment revenue ($10,000 x 30% / 10 yrs.). 300 Investment in CXT......................... 300

(3) (A) ($3,000 - $300)........................ $ 2,700(b) ($24,000 + $3,000 - $1,200 - $300)..... $25,500


99. At December 31, 2001, end of the reporting period, AB owned the following FVTPLinvestments:

Date AmountSecurity Acquired Owned Additional DataCommon shares 3/31/2001 600 shares Dividends of $1 per share

declared on Dec. 31, 2001; payable 3/15/2002

Debt security, 9% 8/31/2001 $10,000 purchase price

60¢ Preferred shares 10/30/2001 800 shares Noncumulative

AB should report 2001 dividend and interest revenue of: $_________Ans:

Comm. Stock 600 x $1 = $60Debt Security 10,000 x .09 x 4/12 = 300

$900====


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100. On December 1, 2008, CXC purchased 200,000 shares representing 45 percent of the outstanding shares of PTC for cash of $2,500,000. As a result of this purchase, CXC has the ability to exercise significant influence over the operating and financial policies of PTC. 45 percent of the net income of PTC amounted to $20,000 for the month of December and $350,000 for the year ended December 31, 2008. On January 15, 2009, cash dividends of $0.30 per share were paid to shareholders of record on December 31, 2008. Calculate CXC's Investment in PTC to be should be shown in CXC's December 31, 2008, balance sheet.

Ans:Purchase price of investment $2,500,000Proportionate income for Dec. 2008 20,000

Dividends received 2008 (200,000 X .30cents) (60,000)Balance of long-term investment account $2,460,000


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101. On March 1, 2002, ABC paid $10,000 for 500 shares of XTC and 600 shares of YTC. The XTC shares were quoted at $12 per share on March 1, 2002. There was no quoted selling price for the YTC shares; however, one year earlier it was selling for $8 per share.

Calculate the debits to the investment accounts for each share.

Ans:XTC 500 shares X market value of $ 12 = $6,000YTC allocate the balance of cost 4,000Total purchase price $10,000

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102. ABC paid $10,500 for 500 shares of ZTC common and 800 shares of WTC common. The ZTC shares were currently selling for $8 per share, and the WTC shares were selling for $10 per share. Calculate the debits to the investment accounts for each share.

Ans:ZTC 500 shares X market value of $ 8 = $ 4,000WTC 800 shares X market value of $ 10 = 8,000Total market value 12,000Allocated to ZTC is 4,000/12,000 X 10,500 = 3,500Allocated to WTC is 8,000/12,000 x 10,500 = $ 7,000

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103. On January 1, 2001, XYC purchased 100 shares (1 percent) of AB common shares at $120 per share. XYC uses the cost method to account for the AB shares. Subsequent to purchase, the following transactions and events happened: June 1, 2001, received a 20 percent stock dividend on the AB shares; March 31, 2002, XY sold half of the AB shares at $108 per share. Calculate XYC's recognize a gain (loss) on the sale of the AB shares.

Ans:Original cost of investment in shares $120,000Average cost per share after stock dividend = $120,000/120 shares = $ 100Sold half of shares or 60 shares at $108 per share = $6,480Cost of shares sold (60 X $100) 6,000Gain on sale of shares $ 480

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104. On 1-1-07 we purchased 40% of Gull Corporation for $30,000. At that time, Gull's owners' equity was $4,000, and Gull had the following assets with market values exceeding book value by the following amounts:

Land $20,000Buildings $30,000 (10 years life remaining)Patent 10,000 (5 years life remaining)

Gull earned $10,000 in 2007 and paid $20,000 dividends. We amortize all intangibles over 5 years. Calculate the 2007 ending balance in the Investment in Gull account.

Ans:Purchase price $30,000

Amortization of excess on building (30,000 X 40% /10) (1,200)Amortization of excess on patent (10,000 X 40% /5) ( 800)Proportionate income for 2007 (10,000 x 40 %) 4,000Less dividends received (20,000 x 40 %) (8,000)Ending balance in investment account $24,000

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105. MNO Company purchased ten $1,000, 9 percent bonds on February 28, 2002, at 105 plus $300 total accrued interest. MNO intends to sell the bonds to finance office remodelling in 2003. Interest is paid each April 30 and October 31. MNO paid $120 in broker's fees at the date of purchase. MNO's reporting year ends December 31. Calculate the amount MNO should report on its 2002 balance sheet for this investment.

Ans:Purchase price is 10 X 1,000 X 1.05 = $10,500(premium of $ 500)Brokerage fees 120Total cost $10,620

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106. Steens Corp. acquired a 30% interest in Proctor Co. on January 1, 2001, for $900,000. At that time, Proctor had 2 million of its no-par common shares issued and outstanding. During 2001, Proctor paid cash dividends of $340,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Proctor's net income for 2001 was $720,000. What should be the balance in Steen's investment account at the end of 2001?

Ans:Cost $ 900,000Share of net income (.3 x $720,000) 216,000Share of dividends (.3 x $340,000) (102,000)Balance in investment account $1,014,000

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107. Masters Inc. acquired 30% of Continental Corp.'s voting shares on January 1, 2001 for $100,000. During 2001, Continental earned $40,000 and paid dividends of $25,000. Master's 30% interest in Continental gives Masters the ability to exercise significant influence over Continental's operating and financial policies. During 2002, Continental earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2002, Masters sold half of its shares in Continental for $66,000 cash.

Calculate the gain on sale of this investment in Master's 2002 income statement?

Ans:Purchase price $ 100,0002001 Share of income (40,000 X 30 %) 12,0002001 Share of dividend (25,000 x 30 %) (7,500)2002 Share of income (50,000 X 6/12 X 30 %) 7,5002002 Share of April dividend (15,000 x 30 %) (4,500)Balance of investment before sale 107,500Sale of half of shares 53,750 53,750Proceeds on sale of half of shares 66,000Gain on sale of shares 12,250


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Calculate the carrying amount of this investment in Mater's December 31, 2001 balance sheet.

Ans:Purchase price $ 100,0002001 Share of income (40,000 X 30 %) 12,0002001 Share of dividend (25,000 x 30 %) (7,500)Balance in investment account $104,500

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Calculate the carrying amount of this investment in Mater's December 31, 2002 balance sheet.

Ans:Purchase price $ 100,0002001 Share of income (40,000 X 30 %) 12,0002001 Share of dividend (25,000 x 30 %) (7,500)2002 Share of income (50,000 X 30 %) 15,0002002 Share of April dividend (15,000 x 30 %) (4,500)Balance of investment before sale 115,000Sale of half of shares 57,500Balance of investment after sale $57,500

======(No reduction for Oct. dividends as Masters does not have significant influence)


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110. Masters Inc. acquired 30% of Continental Corp.'s voting shares on January 1, 2001 for $100,000. During 2001, Continental earned $40,000 and paid dividends of $25,000. Master's 30% interest in Continental gives Masters the ability to exercise significant influence over Continental's operating and financial policies. During 2002, Continental earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2002, Masters sold half of its shares in Continental for $66,000 cash. Assume a December 31 year-end.

Calculate the amount, before income taxes that Masters should include in its 2001 income statement as a result of the investment.

Ans: 2001 Share of income (40,000 X 30 %) = $ 12,000


111. On January 1, 2001, Snow Co. purchased 25% of Right Corp.'s common shares; no goodwill resulted from the purchase. Snow appropriately carries this investment at equity and the balance in Snow's investment account was $190,000 at December 31, 2001. Right reported net income of $120,000 for the year ended December 31, 2001, and paid common dividends totalling $48,000 during 2001.

Ans: Calculate how much Snow paid for its 25% interest in Right.Ending balance in investment account $ 190,000Less income (120,000 X 25 %) (30,000)Add dividends (48,000 X 25 %) 12,000Beginning balance in investment account $ 172,000

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112. On January 1st, 2011, ABC Inc. purchased a $1,000 bond which pays interest semi-annually on June 30th and December 31st each year at the stated rate of 8% per annum. The market rate was 6% on January 1st, 2011. The bond matures on December 31st, 2015. There is no active market for the bond, so ABC will account or it using the amortized cost method.

Required:

a) How much was the bond purchased for (ignore brokerage fees)?b) Provide all required journal entries for 2011.

Ans:a) Present Value of Bond on January 1st, 2011:

Principal=$1,000*(PV, 3%, 10 periods=0.74409) =$744.09Interest=$40*(PVA, 3%, 10 periods=8.5302) = $341.21

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Acquisition Cost: $1,085.30

b) Journal entries:

January 1st:

Investment in DEF Bonds $1,085.30Cash $1,085.30

June 30th, 2011

Cash $40Interest Revenue $32.56Investment in DEF Bonds $ 7.44

December 31st, 2011

Cash $40Interest Revenue $32.34Investment in DEF Bonds $ 7.66

Difficulty: HardLevel of Learning: ApplicationTopic: LO 3


Required:


Ans:

a) Present Value of Bond on January 1st, 2011:

Principal=$2,000*(PV, 3%, 10 periods=0.74409) =$1,488.18Interest=$80*(PVA, 3%, 10 periods=8.5302) = $ 682.42


b) Journal entries:

January 1st:


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June 30th, 2011

Cash $80Interest Revenue $65.12Investment in DEF Bonds $14.88

December 31st, 2011

Cash $80Interest Revenue $64.68Investment in DEF Bonds $15.32



Required:


Ans:


Principal=$1,000*(PV, 4%, 10 periods=0.67556) =$675.56Interest=$30*(PVA, 4%, 10 periods=8.1109) = $243.33

Acquisition Cost: $918.89

b) Journal entries:

January 1st:

Investment in DEF Bonds $918.89Cash $918.89

June 30th, 2011

Cash $30Investment in DEF Bonds $6.75

Interest Revenue $36.75

December 31st, 2011

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Required:


Ans:


Principal=$2,000*(PV, 4%, 10 periods=0.67556) =$1,351.12Interest=$30*(PVA, 4%, 10 periods=8.1109) = $ 486.66


b) Journal entries:

January 1st:


June 30th, 2011



December 31st, 2011



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116. ABC Inc. made the following share purchases during 2012:

123 Inc: 400 shares @ $50 per share $20,000456 Inc: 200 shares @ $60 per share $12,000

The 123 Inc shares were designated as FVTOCI while the 456 Inc shares were designated as FVTPL.

On December 31st, 2012, the market values of the 123 Inc. and 456 Inc. shares were $52 and $66 per share respectively.

Required:Prepare the required adjusting journal entries at December 31st, 2012.

Ans:

Investment in FVTPL securities $800Unrealized holding gain - FVTPL securities $800

Investment in FVTOCI securities $1,200OCI – FVTOCI securities $1,200


117. 123 Inc. made the following share purchases during 2012:

GHI Inc: 300 shares @ $60 per share $18,000JKL Inc: 300 shares @ $30 per share $9,000

The GHI Inc shares were designated as FVTOCI while the JKL Inc shares were designated as FVTPL.

On December 31st, 2012, the market values of the GHI Inc. and JKL Inc. shares were $63 and $34 per share respectively.

Required:Prepare the required adjusting journal entries at December 31st, 2012.

Ans:Investment in FVTPL securities $900

Unrealized holding gain - FVTPL securities $900Investment in FVTOCI securities $1,200

OCI – FVTOCI securities $1,200

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118. 456 Inc. made the following share purchases during 2012:

ABC Inc: 500 shares @ $60 per share $30,000XYZ Inc: 500 shares @ $30 per share $15,000

The ABC Inc shares were designated as FVTOCI while the XYZ Inc shares were designated as FVTPL.

On December 31st, 2012, the market values of the ABC Inc. and XYZ Inc. shares were $70 and $35 per share respectively.

Required:

Prepare the required adjusting journal entries at December 31st, 2012.

Ans:

Investment in FVTPL securities $5,000Unrealized holding gain - FVTPL securities $5,000

Investment in FVTOCI securities $2,500OCI – FVTOCI securities $2,500


119. ABC Inc. bought 1,000 shares of 678 Inc. at $10 per share on July 1st, 2012. On December 30th, 678 Inc. declared a dividend of $1.20 per share. The shares are designated as FVTPL by ABC’s management. The share price was $9 on December 31st, 2012.

Required:

a) Prepare all required journal entries for 2012.b) Suppose that early in 2013, a press release indicates that 678 Inc. will have going-concern

issues. As a result of the news, the share price on January 2nd drops to $3 per share. ABC Inc has determined that the likelihood of the shares ever rising above the $3 mark were minimal. Would this impact your journal entries in requirement 1? Explain.

Ans:

a) July 1st:

Investment in FVTPL securities $10,000Cash $10,000

December 31st

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Dividends Receivable $1,200Dividend Income $1,200

Unrealized Holding Loss- FVTPL securities* $1,000Investment in FVTPL securities $1,000

*Note that since a permanent impairment appears to have occurred in early 2013, ABC’s management may choose to be prudent and write the shares down to their $3 value on the 2012 financial statements.

b) Note that there is separate impairment test for FVTPL and FVTOCI securities since they re-valued to fair value at every reporting date. However, recording the investment at $9 per share may be misleading, since the share price decreased to $3 shortly after the year-end and this impairment appears to be permanent, a case can be made for writing the shares down to $3 on December 31st, particularly if the decline in market value was due to conditions which existed on the balance sheet – which is likely the case. Thus, management should probably choose to be prudent and write the shares down to $3.


120. On January 1st, ABC purchased 80% of the voting shares of DEF Inc. for $300,000.

On that date, DEF’s fair values approximated its book values with the exception of a Patent which was identified and estimated to have a value of $50,000, and DEF’s inventories, which had an estimated fair value $20,000 higher than book value. ABC adheres to IFRS.

The balance sheets of both companies immediately following the acquisition were as follows:

ASSETS ABC DEF

Cash $300,000 $120,000Accounts Receivable $120,000 $ 40,000Inventories $100,000 $20,000Plant & Equipment (net) $160,000 $40,000Investment in DEF Inc $300,000Patent $220,000TOTAL ASSETS $1,200,000 $220,000

LIABILITIES & EQUITY

Current Liabilities $200,000 $80,000Bonds Payable $800,000 $70,000Common Shares $100,000 $20,000Retained Earnings $100,000 $50,000LIABILITIES & EQUITY $1,200,000 $220,000

Required:Prepare ABC’s consolidated balance sheet immediately following the acquisition.

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Ans:

Consolidated Balance Sheet

ASSETS

Cash $420,000Accounts Receivable $160,000Inventories $140,000Plant & Equipment (net) $200,000Patent $270,000Goodwill $235,000*TOTAL ASSETS $1,425,000

LIABILITIES & EQUITY

Current Liabilities $280,000Bonds Payable $870,000Common Shares $100,000Retained Earnings $100,000Non-Controlling Interest** $ 75,000LIABILITIES & EQUITY $1,425,000

*Goodwill:

Purchase price: $300,000 for 80%

Imputed Value of 100%: $300,000/0.80=$375,000Less: Fair Value of Net Assets of DEF:Book Value $70,000Add:Patent $50,000Inventory $20,000 $140,000Goodwill $235,000

**Non-Controlling Interest:

$375,000*20%=$75,000


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Intermediate accounting 5E

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Transcript of Intermediate accounting 5E