Topic 4 (Ch. 15-21)

Question 1

The IASB requires that investments meeting the business model (held-for-collection) and contractual cash flow tests be valued at fair value.

Answer 1

F

Question 2

2. The IASB requires that companies classify financial assets into two measurement categories – amortized cost and fair value.

Answer 2

T

Question 3

3. Amortized cost is the initial recognition amount of the investment minus cumulative amortization.

Answer 3

F

Question 4

4. Companies measure debt investments at fair value if the objective of the company’s business model is to hold the financial asset to collect the contractual cash flows.

Answer 4

F

Question 5

5. The gain on sale of debt investments is the excess of the selling price over the fair value of the bonds.

Answer 5

F

Question 6

6. The Unrealized Holding Gain or Loss–Income account is reported in the other income and expense section of the income statement.

Answer 6

T

Question 7

7. At each reporting date, companies adjust debt investments’ amortized cost to fair value, with any unrealized holding gain or loss reported as part of their comprehensive income.

Answer 7

F

Question 8

8. Over the life of a debt investment, interest revenue and the gain on sale are the same using either amortized cost or fair value measurement.

Answer 8

T

Question 9

9. The fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability.

Answer 9

T

Question 10

10. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.

Answer 10

F

Question 11

11. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other compre-hensive income.

Answer 11

T

Question 12

12. Non-trading equity investments are recorded at fair value, with unrealized gains and losses reported in other comprehensive income.

Answer 12

T

Question 13

13. An investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee.

Answer 13

F

Question 14

14. All dividends received by an investor from the investee decrease the investment’s carrying value under the equity method.

Answer 14

T

Question 15

15. Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.

Answer 15

F

Question 16

16. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.

Answer 16

T

Question 17

17. An impairment loss is the difference between an investment’s cost and the expected future cash flows.

Answer 17

F

Question 18

18. If a company determines that an investment is impaired, it writes down the amortized cost basis of the individual security to reflect this loss in value.

Answer 18

T

Question 19

19. Companies account for transfers between investment classifications retroactively, at the end of the accounting period after the change in the business model.

Answer 19

F

Question 20

20. Transferring an investment from one classification to another should occur only when the business model for managing the investment changes.

Answer 20

T

Question 21

21. Which of the following is not a financial asset?

a. Cash
b. Equity investment
c. Inventory
d. Receivables

Answer 21

C.

Question 22

22. Debt investments not held for collection are reported at

a. amortized cost.
b. fair value.
c. the lower of amortized cost or fair value.
d. net realizable value.

Answer 22

B

Question 23

23. Debt investments that meet the business model and contractual cash flow tests are reported at

a. net realizable value.
b. fair value.
c. amortized cost.
d. the lower of amortized cost or fair value.

Answer 23

B

Question 24

24. Which of the following are reported at fair value?

a. Debt investments.
b. Equity investments.
c. Both debt and equity investments.
d. None of these answers choices are correct.

Answer 24

C

Question 25

The IASB permits which of the following measurement categories for financial assets? Fair value Amortized cost

a.No No
b. Yes No
c. Yes Yes
d. No Yes

Answer 25

C

Question 26

26. IFRS requires companies to measure their financial assets based on all of the following
    except

a. The company’s business model for managing its financial assets.
b. Whether the financial asset is a debt or equity investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of these answer choices are IFRS requirements.

Answer 26

B

Question 27

27. Match the investment accounting approach with the correct valuation approach:

Question 28

28. Debt investments that are accounted for and reported at amortized cost, are
    a. debt investments which are managed and evaluated based on a documented
    risk-management strategy.
    b. trading debt investments.
    c. held-for-collection debt investments.
    d. All of these answer choices are correct.

Answer 28

C

Question 29

29. Amortized cost is the initial recognition amount of the investment minus

a. repayments and net of any reduction for uncollectibility.
b. cumulative amortization and net of any reduction for uncollectibility.
c. repayments plus or minus cumulative amortization and net of any reduction for
uncollectibility.
d. repayments plus or minus cumulative amortization.

Answer 29

C

Question 30

30. A gain on sale of a debt investment is the excess of the selling price over the bonds
    a. market price.
    b. fair value.
    c. face value.
    d. book value.

Answer 30

B

Question 31

31. Held-for-collection investments are reported at
    a. acquisition cost.
    b. amortized cost.
    c. maturity value.
    d. fair value.

Answer 31

B

Question 32

32. A held-for-collection debt investment is purchased at a premium. The entry to record the amortization of the premium includes a
    a. Credit to Debt Investments.
    b. Credit to Interest Receivable.
    c. Credit to Interest Revenue.
    d. None of these answers are correct.

Answer 32

A.

Question 33

33. Which of the following is correct about the effective-interest method of amortization?
    a. The effective-interest method applied to debt investments is different from that applied
    to bonds payable.
    b. Amortization of a discount decreases from period to period.
    c. Amortization of a premium decreases from period to period.
    d. The effective-interest method applies the effective-interest rate to the beginning
    carrying amount for each interest period.

Answer 33

D

Question 34

34. Which of the following is not generally correct about recording a sale of a debt investment before maturity date?
    a. Accrued interest will be received by the seller even though it is not an interest payment
    date.
    b. An entry must be made to amortize a discount to the date of sale.
    c. The entry to amortize a premium to the date of sale includes a debit to Debt
    investments.
    d. A gain on the sale is the excess of the selling price over the book value of the bonds.

Answer 34

C

Question 35

35. An unrealized holding gain or loss on a trading debt investment is the difference between the investment’s
    a. fair value and original cost.
    b. face value and amortized cost.
    c. fair value and amortized cost.
    d. face value and original cost.

Answer 35

C

Question 36

36. Which of the following is not correct in regard to trading investments?
    a. They are held with the intention of selling them in a short period of time.
    b. Unrealized holding gains and losses are reported as part of net income.
    c. Any discount or premium is not amortized.
    d. All of these answer choices are correct.

Answer 36

C

Question 37

37. In accounting for debt investments that are classified as trading investments,
    a. any unrealized gain (loss) is reported as part of equity.
    b. a premium is reported separately.
    c. the fair value is compared to amortized cost to compute any unrealized gain (loss).
    d. no discount or premium amortization is required.

Answer 37

C

Question 38

38. Investments in trading debt investments are generally reported at
    a. amortized cost.
    b. face value.
    c. fair value.
    d. maturity value.

Answer 38

C

Question 39

39. Investments in trading debt investments should be recorded on the date of acquisition at
    a. face value.
    b. fair value.
    c. amortized cost.
    d. the lower of face value or amortized cost.

Answer 39

C.

Question 40

40. Which of the following statements is true regarding the differences between amortized cost and fair value for debt investments?

a. When bonds sold at a discount and are accounted for using amortized cost, interest
revenue will be greater than the interest revenue recorded under fair value.
b. When bonds sold at a premium and are accounted for using amortized cost, interest
revenue will be less than the interest revenue recorded under fair value.
c. Under the fair value approach, an unrealized gain or loss is recorded in each year whereas no unrealized gains or losses are recorded under the amortized cost method.
d. All of these answer choices are correct.

Answer 40

C

Question 41

41. Under IFRS, the fair value option

a. must be applied to all instruments the company holds.
b. may be selected as a valuation method by the company at any time during the first
2 years of ownership.
c. reports all gains and losses in income.
d. All of these answer choices are correct.

Answer 41

C

Question 42

42. Under the fair value option, companies report all gains and losses related to changes in fair value in

a. comprehensive income.
b. income.
c. equity.
d. other comprehensive income.

Answer 42

D

Question 43

43. The fair value option allows a company to

a. record income when the fair value of its investment increases.
b. value its debt investments at fair value in some years but not other years.
c. report most financial instruments at fair value by recording gains and losses as a
separate component of stockholders’ equity.
d. All of these answer choices are true of the fair value option.

Answer 43

A.

Question 44

44. Equity investments acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of equity are

a. non-trading where a company has holdings of less than 20%.
b. trading investments where a company has holdings of less than 20%.
c investments where a company has holdings of between 20% and 50%. d. investments where a company has holdings of more than 50%.

Answer 44

A

Question 45

45. When a company has acquired a “passive interest” in another corporation, the acquiring company should account for the investment

a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.

Answer 45

B

Question 46

46. Unrealized holding gains or losses on trading investments are reported in

a. equity.
b. net income.
c. other comprehensive income.
d. accumulated other comprehensive income.

Answer 46

B

Question 47

47. When a company holds between 20% and 50% of the outstanding ordinary 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
circum-stances indicate that it is unable to exercise “significant influence” over the
investee.
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise “significant influence” over the investee.
d. The investor should always use the fair value method to account for its investment.

Answer 47

B

Question 48

48. If the investor owns 60% of the investee’s outstanding ordinary shares, the investor should generally account for this investment under the

a. cost method.
b. fair value method.
c. consolidation equity method.
d. consolidation method.

Answer 48

D

Question 49

49. Under IFRS, the presumption is that equity investments are

Question 50

50. Under IFRS,

a. The accounting for non-trading equity investments deviates from the general
provisions for equity investments.
b. Realized gains and losses related to changes in the fair value of non-trading equity
investments are reported as a part of other comprehensive income and as a
component of other accumulated comprehensive income.
c. Dividends received in cash are always reported as income on the income statement.
d. All of hese answer choices are correct.

Answer 50

A.

Question 51

51. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method Equity Method
A. No Effect Decrease
B. Increase Decrease
C. No Effect No Effect
D. Decrease No Effect

Answer 51

A.

Question 52

52. An investor has a long-term investment in ordinary shares. Regular cash dividends received by the investor are recorded as

Fair Value Method; Equity Method
A. Income; Income
B. A reduction of the investment; A reduction of the investment
C. Income; A reduction of the investment
D. A reduction of the investment; Income

Answer 52

C

Question 53

53.Koehn Corporation accounts for its investment in the ordinary shares of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a. a reduction of the carrying value of the investment.
b. share premium.
c. an addition to the carrying value of the investment.
d. dividend income.

Answer 53

A.

Question 54

54. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.

Answer 54

D.

Question 55

55. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2015, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate

Answer 55

D

Question 56

56. Impairments of debt investments are
    a. based on discounted contractual cash flows.
    b. recognized as a realized loss if the impairment is judged to be temporary.
    c. based on fair value for non-trading investments and on negotiated values for
    held-for-collection investments.
    d. evaluated at each reporting date for every held-for-collection investment.

Answer 56

D

Question 57

57. An impairment loss is the difference between the recorded investment and the

a. expected cash flows .
b. present value of the expected cash flows.
c. contractual cash flows.
d. present value of the contractual cash flows.

Answer 57

B.

Question 58

58. Under IFRS, a company

a. Should evaluate every investment for impairment.
b. Accounts for an impairment as an unrealized loss, and includes it as a part of other
comprehensive income and as a component of other accumulated comprehensive
income until realized.
c. Calculates the impairment loss on debt investments as the difference between the
carrying amount plus accrued interest and the expected future cash flows discounted
at the investment’s historical effective-interest rate.
d. All of these answer choices are correct.

Answer 58

C.

Question 59

59. Royce Company holds a portfolio of debt investments. The debt investments are not held-for-collection but managed to profit from interest rate changes. As a result, it accounts for these investments at fair value. As part of its strategic planning process, completed in the fourth quarter of 2015, Royce management decides to move from its prior strategy—which requires active management—to a held-for-collection strategy for these debt investments. The company will account for this change

Method Implementation
a. Retrospectively 2015
b. Prospectively 2016
c. Retrospectively 2016
d. Prospectively 2015

Answer 59

B.

Question 60

60. Companies account for transfers of investments between categories
    a. prospectively, at the end of the period after the change in the business model.
    b. prospectively, at the beginning of the period after the change in the business model.
    c. retroactively, at the end of the period after the change in the business model.
    d. retroactively, at the beginning of the period after the change in the business model.

Answer 60

B.

Question 61

61. “Gains trading” or “cherry picking” involves

a. moving investments whose value has decreased since acquisition from non-trading to
held-for-collection in order to avoid reporting losses.
b. reporting investments at fair value but liabilities at amortized cost.
c. selling investments whose value has increased since acquisition while holding those
whose value has decreased since acquisition.
d. All of these answer choices are considered methods of “gains trading” or “cherry picking.”

Answer 61

D.

Question 62

62. Transfers between categories

a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into
trading.
d. will always result in an impact on net income.

Answer 62

B.

Question 63

63. Transfers of investments between classifications are done

a. at the end of the accounting period.
b. retroactively.
c. prospectively.
d. None of these answer choices are correct.

Answer 63

C.

Question 64

64. Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

a. arbitrageurs.
b. gamblers. c. hedgers.
d. speculators.

Answer 64

A.

Question 65

65. All of the following statements regarding accounting for derivatives are correct except that

a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.

Answer 65

C.

Question 66

66. All of the following are characteristics of a derivative financial instrument except the instrument

a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these answer choices are characteristics.

Answer 66

B.

Question 67

67. The accounting for fair value hedges records the derivative at its

a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.

Answer 67

B.

Question 68

68. Gains or losses on cash flow hedges are

a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.

Answer 68

B.

Question 69

69. An option to convert a convertible bond into ordinay shares is a(n)

a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.

Answer 69

A.