Investments

Question 1

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

Answer 1

Investment is:

(1) in Debt securities
(2) in Non-voting stock
(3) temporary in nature
(4) less than 20% ownership of voting stock

Question 2

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

Answer 2

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

Question 3

Define “debt securities.”

Answer 3

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 4

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

Answer 4

The nature and extent of ownership.

Question 5

Define “equity securities.”

Answer 5

Securities representing ownership or right to acquire ownership interest.

Question 6

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

Answer 6

(1) Not significant;
(2) Significant influence, but not control; and
(3) Control.

Question 7

List the investor’s considerations in selecting the correct accounting for an investment.

Answer 7

(1) The nature of the investment;
(2) The extent of the investment;
(3) Management’s intent.

Question 8

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

Answer 8

(1) Recognize interest income (on debt securities) or dividends (on equity securities);
(2) Amortize discount or premium, if any, on debt securities;
(3) Adjust investments to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.

Question 9

What amounts should be included in the initial recording of an held-for-trading investment?

Answer 9

Purchase price of security;

Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.

Question 10

What method is used to amortize a premium or discount on a security?

Answer 10

Effective interest method or straight-line method, if not materially different.

Question 11

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

Answer 11

At amortized cost.

Question 12

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

Answer 12

At fair value (i.e., original cost +/- allowance to adjust to fair value) as either current of non-current asset (based on entity’s policy).

Question 13

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

Answer 13

(1) Debt security;
(2) Investor has intent to hold to maturity;
(3) Investor has ability to hold to maturity.

Question 14

What investments are classified as available-for-sale?

Answer 14

Any debt or equity 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 or equity does not meet the requirements for either Held-to-Maturity or Held-for-Trading.

Question 15

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

Answer 15

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

Question 16

How is interest on held-to-maturity investments reported in the income statement?

Answer 16

As an Other Income item in the income statement.

Question 17

List the criteria for held-for-trading securities.

Answer 17

(1) Applies to investments in Debt and Equity;

(2) Investor buys for the purpose of selling in the near term.

Question 18

What amounts should be included in the initial recording of a held-to-maturity investment?

Answer 18

(1) Purchase price of security;
(2) Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.;
(3) Accrued interest, if any, is not included in the cost of the investment.

Question 19

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

Answer 19

The gain or loss recognized on the sale of an available-for-sale investment includes:

(1) The difference between the carrying value of the investment and its selling price; and
(2) Any unrealized gain or loss in Accumulated Other Comprehensive Income related to the securities sold.

Question 20

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

Answer 20

In income (Income Statement) as part of Income from Continuing Operations.

Question 21

Where are held-to-maturity investments reported on the statement of cash flows?

Answer 21

Investing Activity.

Question 22

Under what conditions can a debt security sold before maturity be considered held to maturity?

Answer 22

(1) Sale is near enough to the maturity date so that interest rate risk is substantially eliminated;
(2) Sale occurs after investor has collected a substantial portion (at least 85%) of the principal outstanding at the acquisition date.

Question 23

What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?

Answer 23

The carrying amount of the investment would change when:

(1) The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made);
(2) The investor buys additional shares of the subsidiary or sells some of the share it already owns.

Question 24

What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?

Answer 24

Under normal circumstances, the carrying amount of the investment does not change under the cost method.

Question 25

What causes transfers between classifications for investments which do not give the investor significant influence?

Answer 25

Changes in investor intent or changes in investor ability to hold-to-maturity.

Question 26

How do we account for the transfer of an investment from held-to-maturity to available-for-sale?

Answer 26

(1) Credit held-to-maturity at unamortized cost;
(2) Debit available-for-sale at fair value;
(3) Unrealized (holding) gain or loss to Other Comprehensive Income

Question 27

How do we account for the transfer of an investment from held-to-maturity to held-for-trading?

Answer 27

(1) Credit held-to-maturity at unamortized cost;
(2) Debit trading at fair value;
(3) Recognize unrealized holding gain/loss in net income.

Question 28

How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?

Answer 28

(1) Credit Trading at recorded fair value;
(2) Debit held-to-maturity or available-for-sale at current fair value;
(3) Recognize unrealized holding gain/loss in net income.

Question 29

How do we account for the transfer of an investment from available-for-sale to held-to-maturity?

Answer 29

(1) Credit available-for-sale at recorded fair value;
(2) Debit held-to-maturity at current fair value;
(3) Unrealized holding gain/loss stays in Accumulated Other Comprehensive Income in Shareholders’ Equity;
(4) Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.

Question 30

Under what conditions foes IFRS No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?

Answer 30

If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.

Question 31

What conditions must be met under IFRS No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?

Answer 31

Two conditions must be met:

(1) Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value;
(2) Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest

Question 32

Under what conditions does IFRS No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?

Answer 32

An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition consistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.

Question 33

What are the categories of investments under IFRS No. 9?

Answer 33

Under IFRS No. 9 two categories of investments (and other financial assets) include:

(1) Debt investments measured at amortized cost;
(2) All other investments, including debt instruments not at amortized cost and all equity investments.

Question 34

At the time an investment gives the investor significant influence, but not control, over an investee, how will any difference between the cost of the investments and the book value of the investee’s assets and liabilities be allocated?

Answer 34

To adjust an investee’s assets and liabilities to fair value, then

(1) If cost of investment > fair value of investee’s net assets, to Goodwill; OR
(2) If cost of investment

Question 35

What is the required accounting if a change in an investor’s level of ownership results in a loss of significant influence, but the entire investment is not disposed of?

Answer 35

The investor must cease using the equity method of accounting and begin accounting for the investment at fair value (either as available-for-sale or held-for-trading). The investment will be adjusted to fair value at the date significant influence is lost and any difference between fair value and the prior equity based carrying amount will be recognized as a gain or loss in current income.

Question 36

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 36

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

Question 37

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

Answer 37

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 non-voting equity securities (e.g., preferred stock) or in debt securities does not convey influence.

Question 38

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

Answer 38

At the time of investment, the investor must determine:

(1) Book value of assets and liabilities of investee;
(2) Fair value of assets and liabilities of investee;
(3) Allocation of any difference between cost of investment and fair value of investee’s assets and liabilities.

Question 39

What are the elements that enter into the determination of revenue recognized from an equity method investment?

Answer 39

Investor’s share of investee’s reported net income/loss - “depreciation/amortization” of excess of cost of investment over book value (OR + “depreciation/amortization” on excess of book value over cost of investment) = net revenue recognized for equity method investment. Dividends received do not enter into the determination of the investor’s revenue recognized; they reduce the investment account.

Question 40

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

Answer 40

(1) Recognize investor’s share of investee’s net income/loss
(2) Recognize investor’s share of investee’s dividends declared
(3) Recognize adjustments to share of investee’s net income/loss for “depreciation/amortization” of amounts allocated to excess of fair value over book value.

Question 41

List the journal entry for an investor to recognize proportionate share of investee dividends using equity method.

Answer 41

DR: Dividends Receivable/Cash
CR: Investment in X

Question 42

List the journal entry for an investor to recognize proportionate share of investee income using the equity method.

Answer 42

DR: Investment in X
CR: Investment (equity) revenue

Question 43

Under U.S. GAAP, what are the methods of accounting that may be used to report an investment in a joint venture?

Answer 43

Equity method or consolidation basis for a corporate joint venture. Partnership basis, with certain equity method-like adjustments, for a partnership.

Question 44

In what forms may a joint venture be established?

Answer 44

(1) By agreement or contract alone;
(2) As a corporation;
(3) As a partnership;
(4) As an undivided interest entity.

Question 45

What are the major differences between U.S. GAAP and IFRS in accounting for joint ventures?

Answer 45

(1) Contributions of non-monetary assets:
- U.S. GAAP at carrying value
- IFRS at FV for share not owned by contributing entity, with gain/loss recognized.
(2) Methods of reporting:
- U.S. GAAP - primarily using equity method; partnership or full consolidation basis when appropriate;
- IFRS - equity method or proportionate consolidation.

Question 46

How is the value of a stock right determined when the per share market value of rights is given?

Answer 46

The carrying value of the investment at the time the rights are received is allocated between the shares of stick and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right.

Question 47

If stock rights are not exercised and lapse, what entry should he investor make?

Answer 47

The investor writes-off the stock rights and recognizes a loss. The entry is:

DR: Loss on Expiration of Stock Rights
CR: Security Stock Rights

Question 48

What is the accounting treatment by an investor when a stock split occurs?

Answer 48

Investor adjusts per share cost; not total cost. Original cost is divided by new total number of shares (after split) to get new per share cost.

Question 49

What is the accounting treatment by an investor when a stock dividend is received?

Answer 49

Investor adjusts per share cost; not total cost. Original cost is divided by new total number of shares (after split) to get new per share cost.

Question 50

What entry is made by an investor who received stock rights?

Answer 50

An entry is made to transfer some of the cost of the investment in the stock that “earned” the rights to an account for the rights. The entry is:

DR: Security Stock Rights
CR: Investment

Question 51

What are the characteristics of investment property under IFRS?

Answer 51

(1) Investment property consists of building and/or land;
(2) Held by the owner or lessee under a capital lease;
(3) For the purpose of earning rental income, recognizing capital appreciation, or both.

Question 52

Under what conditions can property already held be transferred into or out of the investment property category?

Answer 52

Transfers of property into or out of the investment property category can be made only when it is clearly evident that there has been a change in the use of the property.

Question 53

What are the acceptable methods (models) for measuring and reporting investment property?

Answer 53

The cost method (model) and the fair value method (model). An entity may use only one of these methods to measure and report all of its investment property.

Question 54

If an owner uses part of property, under what conditions may the other part be accounted for as investment property?

Answer 54

If the part of the property is used by the owner and the part not used by the owner can be sold or leased separately and if the part not used otherwise meets the definition of investment property, it can be treated as investment property.