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Question 1

WHAT are indicators of an investor’s ability to exercise significant influence over the operating and financial policies of an investee?

Answer 1

• Representation on the Board of Directors
• Participation in policy-making processes
• Material Inter-Entity transactions
• Interchange of managerial personnel
• Technological Dependency

Question 2

WHAT must an entity disclose when it accounts for investments in common stock under the equity method?

Answer 2

• The name of each investee (not investor) and percentage of the entity’s ownership of each investee’s common stock
• The entity’s accounting policies for investments in common stock
• The difference, if any, between the carrying amount of the investment and the amount of the entity’s underlying equity in the investee’s net assets

Question 3

Under IFRS, WHAT do Joint ventures involve?

Answer 3

BOTH shared control and rights to the arrangement’s net assets

Question 4

Under IFRS, WHAT do Joint Operations involve?

Answer 4

(1) Shared control but no rights to the arrangement’s net assets; and
(2) THEY are accounted for using the equity method approach – i.e. “Proportionate Consolidation”

Question 5

WHAT are your Current Assets?

Answer 5

ASSETS that will be settled within one-year or the operating cycle which ever is LONGER

Question 6

WHAT are your Current Liabilities?

Answer 6

LIABILITIES that will be settled within one-year or the operating cycle which ever is LONGER

Question 7

WHAT are Cash Equivalents?

Answer 7

Securities easily convertible into cash with an original maturity of 90 days or less

NOTE: A Cash Equivalent is “highly liquid” and has an “Original Maturity” of 3 months from the date of purchase

Question 8

WHAT does “D-E-N-T” stand for?

Answer 8

• Derivative Cash Flow Hedges
• Excess Adjustment of Pension PBO and FV of Plan Assets
• Net unrealized gains or losses on Available-For-Sale Securities
• Translation adjustments for Foreign Currency

Question 9

WHAT method of Accounting for an Investment would you use when the Ownership Percentage is 0 - 20%?

Answer 9

THE Cost Method

WHY? - Because there is no influence over the investee company

NOTE - If the security is NOT marketable, use the Cost Method

Caveat - An ownership percentage of 20% or less can have major influence IF the other owners’ have a less ownership amount

Question 10

WHAT method of Accounting for an Investment would you use when the Ownership Percentage is 20 - 50%?

Answer 10

THE Equity Method of Accounting (i.e. “One-Line Consolidation”)

WHY? - Because the implication is that the investor has significant voting influence over the investee entity

Question 11

WHAT method of Accounting for an Investment would you use when the Ownership Percentage is 50% or more?

Answer 11

YOU would use the Consolidation Approach

WHY? - Because the implication is that the investor has significant influence over the investee entity

e.g. Members of the investor entity constitute a majority of Board of Director’s of investee

Question 12

WHAT are your Equity in Earnings?

Answer 12

THE earned money an investor records in their books based on the percentage of ownership in the investee

The Account is “Equity in Earnings” and is a component of the Income Statement

Question 13

WHAT would be considered the method of accounting most consistent with accrual accounting for investments?

Answer 13

THE Equity Method

Question 14

HOW is an investment recorded initially under the Equity Method?

Answer 14

AT Purchase Price

(Debit) Investment
(Credit) Cash

NOTE: Subsequent income changes the account balance on a continuous basis

Question 15

WHAT is the initial Journal entry by the investor to record their investment in the investee? (Equity Method)

Answer 15

Dr. Investment

Cr. Cash

Question 16

WHAT is the Journal entry at year end by the investor to report their share of investee income? (Equity Method)

Answer 16

Dr. Investment

Cr. Equity in Investee Income

Question 17

WHAT is the Journal entry by the investor to record their share of investee dividends? (Equity Method)

Answer 17

Dr. Dividends Receivable

Cr. Investment

Question 18

HOW would an investor record dividends received under the Cost method?

Answer 18

As Dividend Income on the Income Statement

NOTE: IT is NOT recorded as a reduction of the investment

Question 19

HOW would an investor account for an investment if Market Value did exist under the cost method?

Answer 19

BY using the appropriate Marketable Securities Rule:

e.g. Trading, Available-for-Sale, Held-to-Maturity

Question 20

WHAT happens when a security is reclassified from a “Trading” to “Available-for-Sale” security?

Answer 20

THEY are initially recorded at the market value on the date of transfer