11 Investments

Question 1

List the guidelines for determining no significant influence in an investment.

Answer 1

The investment is:
In debt securities;
In nonvoting stock;
Temporary in nature;
Less than 20% ownership of voting stock.

Question 2

Equity investments can be carried at cost when ________ .

Answer 2

Fair value is not readily determinable

Question 3

Where on the financial statements are impairment losses on equity investments recorded?

Answer 3

In the income statement

Question 4

Where are unrealized holding gains and losses on investments held-for-trading reported?

Answer 4

In income (income statement) as part of income from continuing operations

Question 5

How are held-for-trading investments carried and reported?

Answer 5

At fair value, with changes in fair value reported in current income

Question 6

List the criteria for held-for-trading securities.

Answer 6

Applies to investments in debt securities.
Investor buys for the purpose of selling in the near term.

Question 7

What amounts are included in a gain or loss recognized on the sale of an available-for-sale investment?

Answer 7

The gain or loss recognized on the sale of an available-for-sale investment includes
The difference between the carrying value of the investment and its selling price; and
Any unrealized gain or loss in accumulated other comprehensive income related to the securities sold.

Question 8

How are available-for-sale investments reported in the balance sheet?

Answer 8

At fair value as either current or noncurrent assets (based on the entity’s policy).

Question 9

How are available-for-sale investments accounted for and reported in financial statements?

Answer 9

Recognize interest income.
Amortize discount or premium, if any, on debt securities.
Adjust investment to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.

Question 10

What investments are classified as available-for-sale?

Answer 10

Any debt investments not classified as either held-to-maturity or held-for-trading. The available-for-sale category is the default category if an investment in debt does not meet the requirements of either held-to-maturity or held-for-trading.

Question 11

When an investor has significant influence over the operating and financial policies of an investee, what method must be used to account for the investment in the investee?

Answer 11

The investment must be carried on the investor’s books and reported in the investor’s financial statements using the equity method of accounting.

Question 12

At the time an investor makes an investment that gives it significant influence over an investee, what information must the investor determine in order to use the equity method of accounting?

Answer 12

At the time of investment, the investor must determine:
Book value of assets and liabilities of investee.
Fair value of assets and liabilities of investee.
Allocation of any difference between cost of investment and fair value of investee’s assets and liabilities.

Question 13

Under what conditions will an investment give the investor significant influence, but not control, over the investee?

Answer 13

When an investor owns 20% to 50% of the voting equity securities of an investee and there are no impediments to the investor exercising its voting rights to influence the investee’s operating and financial policies. Investments in nonvoting equity securities (e.g., preferred stock) or in debt securities do not convey influence.

Question 14

How are dividends recorded for equity investments carried at cost?

Answer 14

As dividend income

Question 15

List the criteria for a held-to-maturity classification.

Answer 15

The investment is a debt security
Investor has intent to hold to maturity.
Investor has ability to hold to maturity.

Question 16

Identify the three possible levels of influence over an investee for accounting purposes.

Answer 16

Not significant
Significant influence but not control
Control

Question 17

What is the required accounting treatment when an investor has control of an investee?

Answer 17

Treat as a subsidiary and consolidate investee with investor (consolidated financial statements)

Question 18

At what cost are held-to-maturity securities carried and reported?

Answer 18

At amortized cost

Question 19

Identify the three major equity method items recognized each period by an investor.

Answer 19

Recognize investor’s share of investee’s net income/loss.
Recognize investor’s share of investee’s dividends declared.
Recognize adjustment to share of investee’s net income/loss for “depreciation/amortization” of amount allocated to excess of fair value over book value.

Question 20

When are equity securities carried at fair value?

Answer 20

When there is no significant influence and fair value is readily determinable

Question 21

Define “equity securities.”

Answer 21

Securities representing ownership or the right to acquire ownership interest

Question 22

What is the basis for general guidelines for determining the level of economic influence over an equity investee?

Answer 22

The nature and extent of ownership rights

Question 23

Define “debt securities.”

Answer 23

Securities representing the right of the creditor to receive from the debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds

Question 24

List the classifications of intangible assets.

Answer 24

Definite-life intangibles
Indefinite-life intangibles