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Exam 12: Investments

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Question 21

Multiple Choice

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Which of the following is not true about accounting for investments using the equity method under IFRS?

A) IFRS requires the equity method when the investor exercises significant influence over the investee.
B) IFRS is more restrictive than U.S.GAAP concerning when an investor can elect the fair value option.
C) IFRS requires that the accounting policies of an investee be adjusted to correspond to those of the investor when applying the equity method.
D) IFRS does not allow use of the equity method where two or more investors have joint control.

E) A) and B)
F) A) and C)

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Question 22

Multiple Choice

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Holding gains and losses on trading securities are included in earnings because:

A) They measure the success or failure of taking advantage of short-term price changes.
B) The IRS mandates the inclusion.
C) The SEC mandates the inclusion.
D) They measure the book value of the securities in the balance sheet date.

E) B) and C)
F) A) and B)

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Question 23

Multiple Choice

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When the equity method of accounting for investments is used by the investor,the investment account is increased when:

Stanhope Associates accounts for the following investments under IFRS No.9: 1.10 shares of Blackstone equity,held for long-term investment,no election of FVOCI. 2.10 shares of Erickson equity,held for risk management,election to classify as FVOCI. 3.10 shares of AT&E equity,held for immediate resale. 4.10 bonds (consisting of only interest and principal)issued by Filo Inc. ,held for long-term collection of cash flows. 5.10 bonds (consisting of only interest and principal)of SimSung,held for risk management but also might be sold 6.10 bonds (consisting of only interest and principal)issued by Attachi,held for immediate resale. Required: For each investment,indicate: (a)the accounting approach that will be used to account for the investment,and briefly explain why that approach is appropriate,and (b)the effect on earnings of an increase in the fair value of the investment in the period following acquisition of the investment,assuming that Stanhope does not sell the investment.You may group the specific investments if they have the same answers.Identify the investments you are including in the group.

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because it is viewed as "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year:

What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/2016 balance sheet (ignore taxes) ?

From time to time,debt and equity securities must be reclassified when conditions and circumstances surrounding the investment change. Required: Describe the general accounting procedures for reclassifying securities from one category to another-held to maturity,available for sale,or trading.

Trading securities are most commonly found on the books of:

Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet,depending upon their maturity dates.

Under the equity method of accounting for a stock investment,cash dividends received are considered a reduction of the investee's net assets.

On July 1,2016,Silverwood Company purchased for cash 35% of the voting common stock of Yellowstone Corporation.Both companies have a December 31 fiscal year-end.Yellowstone Corporation,which is publicly traded on an organized stock exchange,reported its net income for the year to Silverwood and paid a dividend to Silverwood during the year. Required: How should Silverwood report the above information in its year-end income statement and balance sheet? Discuss the rationale for your answer.

If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity,Dinsburry would:

Indicate (by number)the level of stock ownership that most frequently relates to each concept listed below.

On January 1,2016,American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash.On that date,Short's book value and fair value were both $840,000.The equity method is deemed appropriate for this investment.Short's net income reported on December 31,2016,was $80,000.During 2016,Short also paid cash dividends in the amount of $24,000. Required: Prepare the journal entries necessary to record the above information on American Corporation's books during 2016.

All investment securities are initially recorded at:

Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1,2016.On November 1,2016,Hack declared and paid $1 million in dividends.On December 31,Hack reported a net loss of $6 million for the year.What amount of loss should Sox report on its income statement for 2016 relative to its investment in Hack?

The Guitar World (TGW) holds an investment that increased in fair value over 2016,and accounts for that investment as available for sale.When considering taxes,TGW would:

When an impairment of an equity investment that is classified as available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair value and the amount of the write-down is:

Wang Corporation purchased $100,000 of Hales Inc.6% bonds at par with the intent and ability to hold the bonds until they matured in 2020,so Wang classifies its investment as held to maturity.Unfortunately,a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $70,000 during 2016.Wang views this decline as an other-than-temporary (OTT) impairment.Wang calculates that,of the $30,000 drop in fair value,$10,000 of it relates to credit losses and $20,000 relates to non-credit losses.If Wang accounts for the Hales bonds under IAS No.39,before-tax net income for 2016 will be reduced by:

Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2013 for $800 per share and classified the investment as securities available for sale.Witt's market value was $400 per share on December 31,2014,and $300 on December 31,2015.During 2016,Dim sold all of its Witt stock at $350 per share.In its 2016 income statement,Dim would report: