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Chapter 11 Investments in Debt and Equity Securities

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition, Volume 1 Test Bank Chapter 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: False Difficulty: Easy Level of Learning: Knowledge Topic: 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: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 7 3. Fair-value-through-profit-and-loss (FVTPL) investments are usually held for the purpose of resale. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

4. Amortized cost investments must have contractual terms that give rise to cash flows on specific dates. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

5. Amortized cost investments may include common shares. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

6. Investments designated as FVTPL may be debt or equity instruments, while FVTOCI may include only equity instruments. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: 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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1 8. Accounts receivable are an example of a financial instrument. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1 9. Joint ventures are considered strategic investments. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

10. Once an investment is designated as FVTOCI, this designation may be changed at will by management. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 6

11. Under ASPE, management may choose to account for any strategic investments using either the cost or equity methods. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 9

12. Under ASPE, all passive investments must be accounted for using only FVTPL, Cost or Amortized Cost methods. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 9

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

13. Under IFRS, Investments in Associates may be accounted for using either the Cost or Equity Methods. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 7, 9 14. Proportionate Consolidation must be used to account for Joint Ventures under IFRS. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 7, 9 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: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 5, 6

16. Unrealized holding gains flow through income for FVTPL investments. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 5

17. Unrealized holding gains flow through income or OCI for FVTOCI investments. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 65

18. All investments are recorded at fair value upon acquisition. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

19. Gains and losses realized from the sale of FVTOCI investments are transferred from OCI to earning when the sale occurs. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 6 20. When fair-value is not determinable, investments may be carried at cost. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1 21. Accrued interest on investments in bonds classified as amortized cost investments increases cost on the adjusting entry to record market value changes Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 3

22. Under IFRS, discounts or premiums on amortized cost investments may be amortized using either the straight line or effective interest methods. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1, 3, 9

23. During Consolidation, the net assets of the subsidiary are revalued to fair value at acquisition. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 8

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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 7 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.
Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 1 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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 3 27. A change from the equity method to the cost method is a prospective accounting change. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: 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: True Difficulty: Easy Level of Learning: Knowledge Topic: 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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 7

30. There is no separate impairment test for FVTPL and FVTOCI investments. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 5, 6

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 3, 7 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: False Difficulty: Easy Level of Learning: Knowledge Topic: 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: False Difficulty: Easy Level of Learning: Knowledge Topic: 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. Ans: False Difficulty: Easy Level of Learning: Knowledge Topic: LO 1

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.

Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 8

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. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 7
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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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. Ans: True Difficulty: Easy Level of Learning: Knowledge Topic: LO 7 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? 1 2 3 4 A) B) C) D) Cost Method No effect No effect Decrease Decrease Choice 1 Choice 2 Choice 3 Choice 4 Equity Method No effect Decrease No effect Decrease

Ans: B Difficulty: Medium Level of Learning: Knowledge Topic: 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 decreased B) The valuation account is increased C) Income of the investor is increased D) The unrealized loss is decreased or the unrealized gain is increased

Ans: A Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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: C Difficulty: Medium Level of Learning: Knowledge Topic: 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. Ans: C Difficulty: Medium Level of Learning: Knowledge Topic: LO 4

42. ABC owned the following equity securities held as long-term investments on December 31, 2003. All are traded over the counter. Security M, Common Stock N, Common Stock O, Common Stock Percent Owned 15 percent 25 percent with significant influence 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: C Difficulty: Medium Level of Learning: Knowledge Topic: LO 3, 7

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

43. The equity method has all the following characteristics except: A) Treats all dividends as liquidating B) Values investments at market value C) Treats the investor and the portion of investee owned by investor as a single economic entity D) Removes the incentive for investor to force investee dividends in order to increase investor income Ans: B Difficulty: Medium Level of Learning: Knowledge Topic: 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 date B) The investee's income is understated with respect to the price paid by the investor for the shares C) The investee's income is overstated with respect to the price paid by the investor for the shares D) To correct errors in the investee's accounting Ans: C Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

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: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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. Ans: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7 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 assets B) Decreased total assets C) Increased income D) Decreased investment account E) Decreased income Ans: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

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

What effect will these entries have on the parent's balance sheet? A) Overstate investment, overstate retained earnings B) Understate investment, understate retained earnings C) Overstate investment, understate retained earnings D) Financial position will be fairly stated E) Understate investment, overstate retained earnings Ans: A Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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. Ans: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7 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. Ans: A Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

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. Ans: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

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, overstate B) Overstate, understate, understate C) Overstate, overstate, overstate D) Understate, understate, understate Ans: D Difficulty: Medium Level of Learning: Knowledge Topic: LO 7

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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) (2) Investment in FVTPL securities ... Cash........................................ Investment in FVTPL securities...... Brokerage expense............................ Cash........................................ Investment in FVTPL securities.... Investment receivable......................... Cash........................................ Investment in FVTOCI securities.............. Interest receivable........................... Cash........................................ Choice 1 Choice 2 Choice 3 Choice 4 101,500 101,500 104,000 1,500 105,500 105,500 2,000 107,500 105,500 2,000 107,500

(3) (4)

A) B) C) D)

Ans: C Difficulty: Medium Level of Learning: Application Topic: 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) $18,800 B) $19,140 C) $19,740 D) $20,000

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 3

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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) $10,500 B) $10,620 C) $10,800 D) $10,920 Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 3 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? 1) 2) 3) 4) A) B) C) D) Total Cash Spent $10,100 $ 9,600 $ 9,700 $10,000 Choice 1 Choice 2 Choice 3 Choice 4

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 3

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Debit to Investment Account $10,000 $ 9,700 $ 9,600 $10,100

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

58. The data below pertains to the values of various FVTPL investments held by a client company: Stock X Y Z Shares 500 1,000 750 Cost $30 = $15,000 20 = 20,000 24 = 18,000 Market Value (12/31/2011) $24 = $12,000 30 = 30,000 30 = 22,500

The companys entire FVTPL portfolio should be valued at which amount on December 31st, 2011? A) $50,000 B) $53,000 C) $64,500 D) $67,500 Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 5 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? 1) 2) 3) 4) A) B) C) D) Total Cash Spent $10,100 $ 9,600 $ 9,700 $10,000 Choice 1 Choice 2 Choice 3 Choice 4 Debit to Investment Account $10,000 $ 9,700 $ 9,600 $10,100

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 3

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

59. The data below pertains to the values of various FVTOCI investments held by a client company: Stock X Y Z Shares 500 1,000 750 Cost $30 = $15,000 20 = 20,000 24 = 18,000 Market Value (12/31/2011) $24 = $12,000 30 = 30,000 30 = 22,500

The companys entire FVTOCI portfolio should be valued at which amount on December 31st, 2011? A) $50,000 B) $53,000 C) $64,500 D) $67,500 Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 5 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) $560,000 B) $600,000 C) $638,000 D) $678,000 Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 4

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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

Assuming the cost method is used, WXC should record this 2001 investment at: A) $6,000 B) $6,600 C) $6,900 D) $7,300 Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 4

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 $40,000 B) Debiting the investment account for $120,000 C) Debiting the investment account for $100,000 and crediting a contra account for $60,000 D) No entry should be made until the securities are fully paid for Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 4

63. ZTC purchased shares of W common on the following dates: Purchases January 1, 500 shares at $3................ March 30, 200 shares at $2................. June 20, 100 shares at $5.................. August 30, 50 shares at $7................. Cash $1,500 400 500 350

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................................... Investment in W stock................ 1050 1000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Gain on sale of investment........... (2) Cash................................... Investment in W stock................ Gain on sale of investment........... (3) Cash................................... Investment in W stock................ (4) Cash................................... Investment in W stock.............. Gain on sale of investment........... A) B) C) D) Choice 1 Choice 2 Choice 3 Choice 4

50 1050 486 564 1050 1050 1050 400 650

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 4 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. Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 4

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: 1) 2) 3) 4) A) B) C) D) (a) Investment Revenue $14,000 $28,000 $42,000 $42,000 Choice 1 Choice 2 Choice 3 Choice 4 (b) Carrying Value $276,000 $290,000 $318,000 $332,000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 7 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) $ 570,000 B) $ 600,000 C) $ 630,000 D) $ 636,000 Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 7 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 $20,000 Buildings 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) $23,330 B) $23,120 C) $23,000 D) $33,400

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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) $540,000 B) $600,000 C) $620,000 D) $680,000 Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 7 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) $50,000 B) $77,000 C) $86,000 D) $95,000 Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7

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 Investment Account $60,000 $65,500 $65,500 $65,500 Choice 1 Choice 2 Choice 3 Choice 4 Income Statement-2001, Investment Revenue $ 6,000 $ 5,500 $11,500 $12,000

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

Ans: C
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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Difficulty: Medium Level of Learning: Application Topic: LO 7 73. When a company holds between 20% and 50% of the outstanding shares of an investee, which of the following statements applies A) The investor should always use the equity method to account for its investment B) 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 investee D) The investor should always use the cost method to account for its investment Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7 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 June 30th, 2010 3,000 shares @ $4 per share June 30th, 2011 3,000 shares @ $6 per share $12,000 $12,000 $18,000

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 December 31st, 2010 December 31st, 2011 $3.50 per share $5.00 per share $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 ABCs 2009 income as a result of owning the DEF shares would be: A) B) C) D) Nil A $2,000 unrealized holding loss. A $2,000 unrealized holding gain. A $4,000 unrealized holding gain.

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 5


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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

75. Assuming that the shares are designated an FVTOCI investment, the effect on ABCs 2009 financial statements as a result of owning the DEF shares would be: A) B) C) D) Nil A $2,000 unrealized holding loss. A $2,000 unrealized holding gain. A $2,000 credit to OCI.

Ans: D Difficulty: Medium Level of Learning: Application Topic: LO 6 76. Assuming that the shares are designated an FVTPL investment, the effect on ABCs 2010 income as a result of owning the DEF shares would be: A) B) C) D) Nil A $2,000 unrealized holding loss. A $7,000 unrealized holding gain. A $9,000 unrealized holding gain.

Ans: D Difficulty: Medium Level of Learning: Application Topic: LO 5

77. Assuming that the shares are designated an FVTOCI investment, the effect on ABCs 2009 financial statements as a result of owning the DEF shares would be: A) B) C) D) Nil A $7,000 unrealized holding loss. A $9,000 unrealized holding gain. A $9,000 credit to OCI.

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 6

78. The total gain or loss realized on the sale of the shares was: A) B) C) D) Nil A $16,000 realized gain. An $8,000 realized loss. An $8,000 realized gain.

Ans: D Difficulty: Medium Level of Learning: Application Topic: 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) B) C) D) $58,000. $29,000. $53,000. $55,000.

Ans: A Difficulty: Medium Level of Learning: Application Topic: LO 5, 6 80. The balance in the Investment in DEF account immediately following the sale of the shares was: A) B) C) D) $58,000. $29,000. $53,000. $55,000.

Ans: B Difficulty: Medium Level of Learning: Application Topic: 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:

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A) B) C) D)

$16,000 Cr. $8,000 Cr. $16,000 Dr. $8,000 Dr.

Ans: A Difficulty: Medium Level of Learning: Application Topic: 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) B) C) D) $16,000 Cr. $8,000 Cr. $16,000 Dr. $8,000 Dr.

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Ans: B
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Difficulty: Medium Level of Learning: Application Topic: LO 5, 6 83. The balance in the OCI account related to the Investment in DEF account on December 31st, 2011 was: A) B) C) D) Nil. $8,000 Cr. $5,500 Cr. $3,000 Cr.

Ans: D Difficulty: Medium Level of Learning: Application Topic: LO 6 84. The balance in Investment in DEF account on December 31st, 2011 was:

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Income

A) B) C) D)

Nil. $30,000. $27,500. $25,000.

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 6

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 ABCs managerial involvement, for $600,000. On that date, DEFs net assets had a fair value equivalent to their book values. During 2011 and 2012, DEF Inc. earned income and paid dividends as follows: Dividends $20,000 $30,000

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2011 2012

$120,000 $180,000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

85. Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABCs 2011 income as a result of this investment? A) B) C) D) E) No effect. $6,000 of dividend income. $6,000 of investment income. $20,000 of dividend income. $30,000 of investment income.

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7 86. Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABCs 2012 income as a result of this investment? A) B) C) D) E) No effect. $6,000 of dividend income. $6,000 of investment income. $9,000 of dividend income. $30,000 of investment income.

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7

87. Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABCs 2011 income as a result of this investment? A) B) C) D) E) No effect. $36,000 of dividend income. $36,000 of investment income. $20,000 of dividend income. $20,000 of investment income.

Ans: C Difficulty: Medium Level of Learning: Application Topic: LO 7

88. Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABCs 2012 income as a result of this investment? A) B) C) D) E) No effect. $45,000 of dividend income. $45,000 of investment income. $54,000 of dividend income. $54,000 of investment income.

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Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7 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) B) C) D) $600,000. $700,000. $720,000. $630,000.

Ans: D Difficulty: Medium Level of Learning: Application Topic: LO 7 90. Assuming that ABC adheres to IFRS, what would be the balance in the Investment in Associate DEF Inc. account on December 31st, 2011?

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A) B) C) D)

$600,000. $675,000. $720,000. $630,000.

Ans: B Difficulty: Medium Level of Learning: Application Topic: LO 7 91.

Match the following by entering appropriate letters to the left. Method A. Cost B. Equity C. Consolidated Statement basis D. 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. ___ 6. ___ 7.

Owns 25 percent of the outstanding bonds payable of another corporation. The bonds were purchased with the intention of being sold within 3 months. Owns 51 percent of the common shares (voting) of another corporation. 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. D Difficulty: Medium Level of Learning: Knowledge Topic: 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.............................. 20,000 Interest receivable ($20,000 x .09 x 4/12)....... 600 Cash................................... 20,600 b) Interest receivable ($20,000 x .09 x 2/12)....... Interest revenue....................... Difficulty: Medium Level of Learning: Application Topic: LO 4

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.

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300 300

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Ans:

Interest receivable ($20,000 x .072 x 3/12)............ Interest revenue............................... Difficulty: Medium Level of Learning: Application Topic: LO 4

360 360

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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)............... Interest receivable ($20,000 x .084 x 6/12)....... Cash........................................ b) Interest receivable (20,000 x .084 x 3/12)........ Interest revenue............................ Difficulty: Medium Level of Learning: Application Topic: LO 4 19,460 840 20,300 420 420

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 7,500 Loss on exchange ($50 $37.50)200. 2,500 Investment P/S Y Corp. 10,000 Difficulty: Medium Level of Learning: Application Topic: LO 5

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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/S New 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 Difficulty: Medium Level of Learning: Application Topic: LO 4

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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: 2001 2002 Income $20,000 (5,000) Dividends $12,000 -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).... Investment revenue............................ Cash (12,000 x .4)................................... Investments-DKM, Inc., C/S.......... 2002 Entries: Investment revenue (or loss) (5,000 x .4)............ Long-term investments-DKM, Inc., C/S.......... Difficulty: Medium Level of Learning: Application Topic: LO 7 8,000 8,000 4,800 4,800 2,000 2,000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

98. On January 1, 2001, IB Corporation purchased 30 percent of the outstanding common shares, nopar, of CXT at $2 per share. CXT data on this date were as follows: Assets not subject to depreciation...... Assets subject to depreciation (10 year life)........... Liabilities............................. Stockholders' equity (40,000 shares outstanding)... Book Value $20,000 30,000 14,000 36,000 Market Value $24,000 40,000 Same

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 $___________________. Difficulty: Medium Level of Learning: Application Topic: LO 7

Ans: (1) Purchase price (12,000 shares x $2)............. Market Value Purchased: ($24,000 + $40,000 - $14,000 = $50,000) x 30%. Goodwill........................................ (2) January 1, 2001: Investment in CXT.................... Cash............................ December 31, 2001: (Income) Investment in CXT ($10,000 x 30%)......... Investment revenue........................... Cash ($4,000 x 30%).......................... Investment in CXT.........................
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$24,000 $15,000 $ 9,000 ======

24,000 24,000 3,000 3,000 1,200 1,200

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

300 300

(3) (A) ($3,000 - $300)........................ (b) ($24,000 + $3,000 - $1,200 - $300)..... Difficulty: Medium Level of Learning: Application Topic: LO 7, 8

$ 2,700 $25,500

99. At December 31, 2001, end of the reporting period, AB owned the following FVTPL investments: Security Common shares Date Acquired 3/31/2001 8/31/2001 Amount Owned 600 shares $10,000

Debt security, 9%

60 Preferred shares 10/30/2001

AB should report 2001 dividend and interest revenue of: $_________ Ans: Comm. Stock 600 x $1 = $60 Debt Security 10,000 x .09 x 4/12 = 300 $900 ====

Difficulty: Medium Level of Learning: Application Topic: LO 5

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Additional Data Dividends of $1 per share declared on Dec. 31, 2001; payable 3/15/2002 purchase price

800 shares Noncumulative

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

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 Proportionate income for Dec. 2008 Dividends received 2008 (200,000 X .30cents) Balance of long-term investment account Difficulty: Medium Level of Learning: Application Topic: LO 7 $2,500,000 20,000 (60,000) $2,460,000 ========

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 = YTC allocate the balance of cost Total purchase price Difficulty: Medium Level of Learning: Application Topic: LO 5, 6 $6,000 4,000 $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 = WTC 800 shares X market value of $ 10 = Total market value Allocated to ZTC is 4,000/12,000 X 10,500 = Allocated to WTC is 8,000/12,000 x 10,500 = Difficulty: Medium Level of Learning: Application Topic: LO 5, 6 103. 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. $ 4,000 8,000 12,000 3,500 $ 7,000 ====

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Ans:

Original cost of investment in shares Average cost per share after stock dividend = Sold half of shares or 60 shares at $108 per share = Cost of shares sold (60 X $100) Gain on sale of shares Difficulty: Medium Level of Learning: Application Topic: LO 4

$120,000 $120,000/120 shares = $ 100 $6,480 6,000 $ 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 $20,000 Buildings $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) Amortization of excess on patent (10,000 X 40% /5) Proportionate income for 2007 (10,000 x 40 %) Less dividends received (20,000 x 40 %) Ending balance in investment account Difficulty: Medium Level of Learning: Application Topic: LO 7

(1,200) ( 800) 4,000 (8,000) $24,000 ======

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 = Brokerage fees Total cost Difficulty: Medium Level of Learning: Application Topic: LO 4

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$10,500(premium of $ 500) 120 $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 Share of net income (.3 x $720,000) Share of dividends (.3 x $340,000) Balance in investment account Difficulty: Medium Level of Learning: Application Topic: LO 7 107. 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? $ 900,000 216,000 (102,000) $1,014,000 ========

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Ans:

Purchase price 2001 Share of income (40,000 X 30 %) 2001 Share of dividend (25,000 x 30 %) 2002 Share of income (50,000 X 6/12 X 30 %) 2002 Share of April dividend (15,000 x 30 %) Balance of investment before sale Sale of half of shares Proceeds on sale of half of shares Gain on sale of shares Difficulty: Medium Level of Learning: Application Topic: LO 7

$ 100,000 12,000 (7,500) 7,500 (4,500) 107,500 53,750

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108. 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 carrying amount of this investment in Mater's December 31, 2001 balance sheet. Ans: Purchase price 2001 Share of income (40,000 X 30 %) 2001 Share of dividend (25,000 x 30 %) Balance in investment account Difficulty: Medium Level of Learning: Application Topic: LO 7 109. 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 carrying amount of this investment in Mater's December 31, 2002 balance sheet. Ans: Purchase price 2001 Share of income (40,000 X 30 %) 2001 Share of dividend (25,000 x 30 %) 2002 Share of income (50,000 X 30 %) 2002 Share of April dividend (15,000 x 30 %) Balance of investment before sale Sale of half of shares Balance of investment after sale $ 100,000 12,000 (7,500) 15,000 (4,500) 115,000 57,500 $57,500 ====== (No reduction for Oct. dividends as Masters does not have significant influence) $ 100,000 12,000 (7,500) $104,500 ======

Difficulty: Medium Level of Learning: Application Topic: LO 7

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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 Difficulty: Medium Level of Learning: Application Topic: LO 7

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 $ 190,000 Less income (120,000 X 25 %) (30,000) Add dividends (48,000 X 25 %) 12,000 Beginning balance in investment account $ 172,000 ======= Difficulty: Medium Level of Learning: Application Topic: LO 7

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) b) Ans: a) How much was the bond purchased for (ignore brokerage fees)? Provide all required journal entries for 2011. Present Value of Bond on January 1st, 2011: Principal=$1,000*(PV, 3%, 10 periods=0.74409) =$744.09 Interest=$40*(PVA, 3%, 10 periods=8.5302) = $341.21
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Acquisition Cost: b) Journal entries: January 1st: Investment in DEF Bonds Cash June 30th, 2011 Cash Interest Revenue Investment in DEF Bonds December 31st, 2011 Cash Interest Revenue Investment in DEF Bonds $40 $40

$1,085.30

$1,085.30 $1,085.30

$32.56 $ 7.44

$32.34 $ 7.66

Difficulty: Hard Level of Learning: Application Topic: LO 3

113. On January 1st, 2011, ABC Inc. purchased a $2,000 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) b) Ans: a)

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

Present Value of Bond on January 1st, 2011: Principal=$2,000*(PV, 3%, 10 periods=0.74409) =$1,488.18 Interest=$80*(PVA, 3%, 10 periods=8.5302) = $ 682.42 Acquisition Cost: $2,170.60

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$2,170.60

b)

Journal entries: January 1st: Investment in DEF Bonds Cash $2,170.60

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June 30th, 2011 Cash Interest Revenue Investment in DEF Bonds December 31st, 2011 Cash Interest Revenue Investment in DEF Bonds Difficulty: Hard Level of Learning: Application Topic: LO 3 114. 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 6% per annum. The market rate was 8% 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. $80 $64.68 $15.32 $80 $65.12 $14.88

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Required: a) b) Ans: a)

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

Present Value of Bond on January 1st, 2011:

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

Acquisition Cost: b) Journal entries: January 1st: Investment in DEF Bonds Cash June 30th, 2011 Cash Investment in DEF Bonds Interest Revenue December 31st, 2011

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$30 $6.75

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$918.89 $36.75

$918.89

$918.89

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Cash Investment in DEF Bonds Interest Revenue Difficulty: Hard Level of Learning: Application Topic: LO 3

$30 $7.03 $37.03

115. On January 1st, 2011, ABC Inc. purchased a $2,000 bond which pays interest semi-annually on June 30th and December 31st each year at the stated rate of 6% per annum. The market rate was 8% 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) b) Ans: a) How much was the bond purchased for (ignore brokerage fees)? Provide all required journal entries for 2011.

Present Value of Bond on January 1st, 2011: Principal=$2,000*(PV, 4%, 10 periods=0.67556) =$1,351.12 Interest=$30*(PVA, 4%, 10 periods=8.1109) = $ 486.66 Acquisition Cost:

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$60 $13.50 $60 $14.06

$1,837.78

b)

Journal entries: January 1st:

Investment in DEF Bonds Cash June 30th, 2011

$1,837.78

d
$73.50 $74.06

$1,837.78

Cash Investment in DEF Bonds Interest Revenue December 31st, 2011 Cash Investment in DEF Bonds Interest Revenue

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Difficulty: Hard Level of Learning: Application Topic: LO 3 116. ABC Inc. made the following share purchases during 2012: 123 Inc: 400 shares @ $50 per share 456 Inc: 200 shares @ $60 per share $20,000 $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 $800 Unrealized holding gain - FVTPL securities $800 Investment in FVTOCI securities $1,200 OCI FVTOCI securities $1,200 Difficulty: Medium Level of Learning: Application Topic: LO 5, 6

117. 123 Inc. made the following share purchases during 2012: GHI Inc: 300 shares @ $60 per share JKL Inc: 300 shares @ $30 per share $18,000 $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 $900 Investment in FVTOCI securities $1,200 OCI FVTOCI securities $1,200

Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Difficulty: Medium Level of Learning: Application Topic: LO 5, 6 118. 456 Inc. made the following share purchases during 2012: ABC Inc: 500 shares @ $60 per share XYZ Inc: 500 shares @ $30 per share $30,000 $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.

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Ans:

Investment in FVTPL securities $5,000 Unrealized holding gain - FVTPL securities Investment in FVTOCI securities $2,500 OCI FVTOCI securities Difficulty: Medium Level of Learning: Application Topic: LO 5, 6

$5,000 $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 ABCs management. The share price was $9 on December 31st, 2012. Required: a) b)

Prepare all required journal entries for 2012. 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.

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d
$10,000

Ans: a) July 1st: Investment in FVTPL securities Cash December 31st


Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

$10,000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Dividends Receivable Dividend Income

$1,200 $1,200 $1,000 $1,000

Unrealized Holding Loss- FVTPL securities* Investment in FVTPL securities

*Note that since a permanent impairment appears to have occurred in early 2013, ABCs 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 yearend 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.

Difficulty: Hard Level of Learning: Application Topic: LO 5

120. On January 1st, ABC purchased 80% of the voting shares of DEF Inc. for $300,000. On that date, DEFs 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 DEFs 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 $120,000 $ 40,000 $20,000 $40,000 $220,000

Cash Accounts Receivable Inventories Plant & Equipment (net) Investment in DEF Inc Patent TOTAL ASSETS

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

Required: Prepare ABCs consolidated balance sheet immediately following the acquisition.
Beechy, Conrod & Farrell Intermediate Accounting Fifth Edition - Vol. 1 Copyright 2011 McGraw-Hill Ryerson Limited.

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$300,000 $120,000 $100,000 $160,000 $300,000 $220,000 $1,200,000

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Chapter 11 Financial Instruments: Investments in Debt and Equity Securities

Ans: Consolidated Balance Sheet ASSETS Cash Accounts Receivable Inventories Plant & Equipment (net) Patent Goodwill TOTAL ASSETS LIABILITIES & EQUITY Current Liabilities Bonds Payable Common Shares Retained Earnings Non-Controlling Interest** LIABILITIES & EQUITY *Goodwill: $280,000 $870,000 $100,000 $100,000 $ 75,000 $1,425,000 $420,000 $160,000 $140,000 $200,000 $270,000 $235,000* $1,425,000

Purchase price: $300,000 for 80%

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

**Non-Controlling Interest: $375,000*20%=$75,000 Difficulty: Hard Level of Learning: Application Topic: LO 8

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