Chapter 1: Investments in Equity Securities

Question 1

Equity Investments

Answer 1

Investments in shares of another company.

Question 2

What are the two methods for reporting investments in equity securities?

Answer 2

1) Non-Strategic: investment made to earn dividends or profits by actively trading.

2) Strategic: investment made to control to or significantly influence the operations of the investee.

Question 3

What are the two ways to record non-strategic equity investments?

Answer 3

1) Fair Value Through Profit or Loss (FVTPL): classified as correct assets since they are actively trade and are intended to be sold within one year.

2) Fair Value Through Other Comprehensive Income (FVTOCI): equity investments that are not normally held for short-term trading.

Question 4

When do you use the equity method of accounting?

Answer 4

Generally when they own directly or indirectly 20% or more of voting shares. There are qualitative factors that may allow the equity method when it is lower than 20% of voting shares.

Question 5

Qualitative factors that allow significant influence when they hold less than 20% of voting shares:

Answer 5

• Representation on board (or governing body)
• Participation in policy-making process
• Material transactions between investor and investee
• Interchange of management
• Provision of essential technical information