Q: A company owns 40% of another company’s common shares and uses the equity method. The investee reports net income of $100,000 and declares dividends of $20,000. What is the increase in the investor’s 'Investment in Associates' account for the year?

$100,000 \times 0.4 = 40,000$; $20,000 \times 0.4 = 8,000$; $40,000 - 8,000 = 32,000$

Question 1

Which of the following best describes a debt investment?

Accepted Answer

A security that earns interest over time and obligates the borrower to return the original investment (principal).

Question 2

A company purchases 25% of the common shares of another company. Which accounting method should it generally use to account for this investment?

Accepted Answer

Equity method

Question 3

Which of the following is NOT a reason why companies invest in other companies?

Accepted Answer

To reduce the company’s total liabilities

Question 4

Under the fair value through profit or loss model, how is an unrealized gain or loss calculated?

Accepted Answer

$Fair\ Value - Carrying\ Amount = Unrealized\ gain\ (loss)$

Question 5

Which of the following investments would be classified as a strategic investment?

Accepted Answer

Common shares purchased to obtain significant influence over another company

Question 6

A company purchases $200,000 of 10% bonds at face value on January 1 and receives interest semi-annually. At year-end, the fair value of the bonds is $210,000. Using the fair value through profit or loss model, what is the unrealized gain to be recorded?

Accepted Answer

$210,000 - 200,000 = 10,000$

Question 7

Which statement about the cost model for equity investments is correct?

Accepted Answer

The investment is recorded at cost and not adjusted until sold.

Question 8

A company owns 40% of another company’s common shares and uses the equity method. The investee reports net income of $100,000 and declares dividends of $20,000. What is the increase in the investor’s 'Investment in Associates' account for the year?

Accepted Answer

$100,000 	imes 0.4 = 40,000$; $20,000 	imes 0.4 = 8,000$; $40,000 - 8,000 = 32,000$

Question 9

Which of the following is TRUE regarding the reporting of investments on the statement of financial position?

Accepted Answer

Short-term investments are reported as current assets; long-term investments are reported as non-current assets.

Question 10

Under the equity method, how does the receipt of dividends from an associate affect the investor’s accounts?

Accepted Answer

It decreases the Investment in Associates account.

Question 11

Which valuation model is used for debt investments that are intended to be held to maturity and not adjusted to fair value?

Accepted Answer

Amortized cost model

Question 12

A company purchases 15% of the common shares of another company with the intent to purchase more and appoint an executive to the board. How should this investment be classified?

Accepted Answer

Equity investment, strategic

Question 13

Which of the following is NOT a feature of strategic investments?

Accepted Answer

Include bonds and other debt securities

Question 14

If a company uses the fair value through other comprehensive income (OCI) model for a non-strategic investment, where are unrealized gains and losses reported?

Accepted Answer

Other comprehensive income

Question 15

A company purchases $50,000 of bonds at face value and intends to hold them to maturity. At year-end, the fair value is $52,000. Using the amortized cost model, what amount is reported on the statement of financial position?

Accepted Answer

$50,000$

Question 16

Which of the following is a correct journal entry to record the purchase of an associate under the equity method?

Accepted Answer

Debit Investment in Associates; Credit Cash

Question 17

Which of the following is TRUE about the reporting of realized gains and losses for investments measured at fair value through profit or loss?

Accepted Answer

They are reported in the statement of income.

Question 18

A company purchases 100% of the common shares of another company. Which accounting method is most appropriate?

Accepted Answer

Consolidation of financial statements

Question 19

Which of the following best describes a non-strategic investment?

Accepted Answer

An investment in debt or equity securities to earn income or capital gains

Question 20

A company holds 10% of another company’s common shares and receives dividends. Under the fair value model, how is the dividend income reported?

Accepted Answer

It is reported in the statement of income.

Chapter 12: Reporting and Analyzing Investments – Financial Accounting Study Notes

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