Ch10 Verified Test Bank Long-Term Assets II Investments and

Chapter 10

Multiple Choice

1. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
2. Investor sells the investment
3. Investee declares a dividend
4. Investee pays a dividend
5. Earnings are reported by the investee in its financial statements
6. Lomax 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

• 1. No Effect No Effect
  2. Decrease No Effect
  3. No Effect Decrease
  4. Increase Decrease

1. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method Equity Method

• 1. Income Income
  2. A reduction of the investment A reduction of the investment
  3. Income A reduction of the investment
  4. A reduction of the investment Income

1. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
   1. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee
   2. The investor should always use the equity method to account for its investment
   3. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee
   4. The investor should always use the fair value method to account for its investment
2. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
   1. Earnings are reported by the investee in its financial statements
   2. Investee pays a dividend.
   3. Investor sells the investment
   4. Investee declares a dividend
3. Mayberrry Company owns 40% of Xnau Corporation’s outstanding common stock. During the calendar year 2018, Xnau had net earnings of $500,000 and paid dividends of $60,000. Mayberry mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on Mayberry’s investment account, net income, and retained earnings, respectively?
   1. Overstate, understate, understate
   2. Understate, understate, understate
   3. Understate, overstate, overstate
   4. Overstate, overstate, overstate
4. Pence Corporation, which accounts for its investments in the common stock of Walsh Company by the equity method, should ordinarily record a dividend received from Walsh as
   1. An addition to the carrying value of the investment
   2. Dividend revenue
   3. A reduction of the carrying value of the investment
   4. Revenue from affiliate
5. A requirement for a security to be classified as held-to-maturity is
   1. Positive intent
   2. The security must be a debt security
   3. Ability to hold the security to maturity
   4. All of these are required.
6. When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be
   1. Its original cost
   2. Its fair value at the date of the transfer
   3. The higher of its original cost or its fair value at the date of the transfer.
   4. The lower of its original cost or its fair value at the date of the transfer.
7. “Gains trading” involves
   1. Reporting investment securities at fair value but liabilities at amortized cost
   2. Selling securities whose value has increased since acquisition (winners) while

holding those whose value has decreased since acquisition (losers)

• 1. Moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses
  2. All of the above are considered methods of "gains trading"

1. Which characteristic is not possessed by intangible assets?
   1. Physical existence
   2. Long-lived
   3. Result in future benefits.
   4. Expensed over current and/or future years.
2. Under current GAAP, intangible assets are classified as
   1. Amortizable or unamortizable.
   2. Limited-life or indefinite-life
   3. Specifically, identifiable or unidentifiable
   4. Legally restricted or unrestricted
3. Which types of intangible assets are amortized?

Limited-Life Indefinite-Life

• 1. Yes Yes
  2. No No
  3. Yes No
  4. No Yes

1. The right granted to authors and other creative artists for their expressive works is termed a
   1. Copyright
   2. Trademark
   3. Patent
   4. Franchise
2. On January 15, 2018, a corporation was granted a patent on a product. On January 2, 2020, to protect its patent, the corporation purchased a patent on a competing product that originally was issued on January 10, 2016. Because of its unique plant, the corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be
3. Amortized over a maximum period of 17 years
4. Amortized over a maximum period of 13 years
5. Amortized over a maximum period of 9 years
6. Expensed in 2020
7. Pacer Company purchased 300 of the 1,000 outstanding shares of Queen Company’s common stock for $80,000 on January 2, 2019. During 2020, Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000.

If Pacer Company uses the equity method of accounting for its investment in Queen Company, its Investment in Queen Company account at December 31, 2020 should be

• • 1. $100, 000
    2. $88,000
    3. $83,600
    4. $80,000

1. Refer to the facts in the previous question. If Pacer Company uses the lower of cost or market method of accounting for its investment in Queen Company, and the value of its investment hasn’t changed, its Investment in Queen Company account on December 31, 2020, should be
2. $100, 000
3. $88,000
4. $80,000
5. $73,600
6. A large, publicly held company developed and registered a trademark during the current year. The cost of developing and registering the trademark should be accounted for by
7. Charging it to an asset account that should not be amortized
8. Expensing it as incurred
9. Amortizing it over 25 years if in accordance with management’s evaluation
10. Amortizing it over its useful life or 17 years, whichever is shorter
11. Goodwill should be written off
12. As soon as possible against retrained earnings
13. When there is evidence that its carrying value has been impaired
14. By systematic charges against retained earnings over the period benefited, but not more than 40 years
15. By systematic charges to expense over the period benefited, but not more than 40 years
16. Cash dividends declared out of current earnings are distributed to an investor. How will the investor’s investment account be affected by those dividends under each of the following accounting methods?

Fair Value Method Equity Method

1. Decrease No effect
2. Decrease Decrease
3. No effect Decrease
4. No effect No effect
5. An activity that would be expensed currently as research and development costs is the
6. Testing in search for or evaluation of product or process alternatives
7. Adaptation of an existing capability to a particular requirement or customer’s need as a part of continuing commercial activity
8. Legal work in connection with patent applications or litigation, and the sale or licensing of patents
9. Engineering follow-through in an early phase of commercial production
10. Should the following fees associated with the registration of an internally developed patent be capitalized?

Registration

Legal fees fees

1. Yes Yes
2. Yes No
3. No Yes
4. No No
5. Which of the following assets acquired in the current year are amortizable?

Goodwill Trademarks

1. No No
2. No Yes
3. Yes No
4. Yes No
5. A purchased patent has a remaining life of 15 years. It should be
6. Expensed in the year of acquisition
7. Amortized over 15 years regardless of its useful life
8. Amortized over its useful life if less than 15 years
9. Amortized over 40 years
10. Which of the following amounts incurred in connection with a trademark should be capitalized?

Cost of a Registration

Successful defense fees

1. Yes No
2. Yes Yes
3. No Yes
4. No No
5. Zink Company owns 32% of Ace Company's outstanding voting stock. Zink Company normally should account for its investment in Ace Company using the
6. Fair value method.
7. Cost method.
8. Consolidation procedure.
9. Equity method.
10. An investor purchased a bond as a long-term investment on January 1. Annual interest was received on December 31. The investor’s interest income for the year would be lowest if the bond was purchased at
11. A discount
12. A premium
13. Par
14. Face value
15. A loss on impairment of an intangible asset is the difference between the asset’s
    1. Carrying amount and the expected future net cash flows
    2. Carrying amount and its fair value
    3. Fair value and the expected future net cash flows
    4. Book value and its fair value
16. The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments?
17. R&D costs provide no future benefits, thus it does not meet the definition of an asset
18. R&D costs are incurred to generate current period revenue; thus the matching concept requires that it be expensed as incurred.
19. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.
20. Since R&D costs have been incurred during the current period, they meet the definition of an expense.
21. When a patent is successfully defended in court, the cost of the lawsuit
22. Should be expensed as incurred because it is a period cost.
23. Should be added to the cost of the patent and depreciated over the remaining useful life of the patent.
24. Should be added to the cost of the patent which is then expensed as a period cost.
25. Has already been expensed so there is no further action to take.
26. Goodwill is an intangible asset
27. That has a definite life and its cost should be amortized over its useful life.
28. That is recorded when the company has projected earnings in excess of earnings expected for an investment in a similar company in the same industry.
29. That is reviewed for impairment when circumstances indicate that impairment may have occurred.
30. That is reviewed annually to determine whether impairment has occurred.
31. The physical capital maintenance concept of income would require that an investment in the common stock of another entity be
32. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
33. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
34. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
35. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.
36. The economic concept of income would require that an investment in the common stock of another entity be
37. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
38. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
39. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
40. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.
41. Under the fair value option, an investment in the common stock of another entity will be
42. Reported as a current asset
43. Reported as a noncurrent asset
44. Reported as either a current or noncurrent asset depending on managerial intent.
45. Reported as a current asset only if it was not previously reported as an equity method investment.
46. When a company reports goodwill in its balance sheet, we know that
47. It was internally generated because the company has earnings in excess of those of other companies in the industry.
48. The company purchased it.
49. The company will be reporting amortization expense for the goodwill.
50. The company will not be reporting an impairment loss for the goodwill.

Essay

1. How are income and balance sheet values determined under the equity method?
2. Discuss accounting for equity securities under the cost method.
3. Summarize the accounting requirements for investments in equity securities. That is, what methods are available and when is each method appropriate?
4. What is the definition of fair value?
5. What is the fair value option as defined in FASB ASC 825‐10‐10?
6. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at FASB ASC 825-10.
7. ASU 2016-01 attempted to simplify the impairment model for equity securities for which an entity has elected the practicability exception by eliminating the requirement to assess whether an impairment of such an investment is other than temporary. What are the factors to be considered in making this assessment and how is an impairment recorded?
   1. A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee
   2. A significant adverse change in the regulatory, economic, or technological environment of the investee
   3. A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates
   4. A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment
   5. Factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.
8. Discuss accounting for investments in debt securities.
9. What is an intangible asset? How is the cost of an intangible asset amortized?
10. What factors should be considered in estimating the useful life of an intangible asset?
    1. Legal, regulatory, or contractual provisions may limit the maximum useful life.
    2. Provisions for renewal or extension may alter a specific limit on useful life.
    3. Effects of obsolescence, demand, competition, and other economic factors may reduce a useful life.
    4. A useful life may parallel the service life expectancies of individuals or groups of employees.
    5. Expected actions of competitors and others may restrict present competitive advantages.
    6. An apparently unlimited useful life may in fact be indefinite, and benefits cannot be reasonably projected.
    7. An intangible asset may be a composite of many individual factors with varying effective lives.
11. Discuss the accounting treatment for internally developed versus externally purchased intangible assets.
12. What is goodwill? How is the recorded value of goodwill determined? How is goodwill written off under the provisions of SFAS No. 142 now FASB ASC 350?
13. A comparison of the fair value of the reporting unit to its carrying value. In the event fair value exceeds carrying value, no further testing is required. However, if the carrying value of the reporting unit exceeds its fair value, step two is required.
14. A calculation of the implied fair value of goodwill by measuring the fair value of the net assets other than goodwill and subtracting this amount from the fair value of the reporting unit.
15. Define research and development. How are research and development costs recorded?
16. What are the general requirements for the initial and subsequent measurement of financial instruments under IFRS No. 9?

• The entity’s business model for managing the financial assets
• The contractual cash flow characteristics of the financial asset

For subsequent measurement purposes, IFRS No. 9 divides all financial assets into two measurement classifications:

1. Those measured at amortized cost

2. Those measured at fair value

Where assets are measured at fair value, gains and losses are either recognized entirely in profit or loss (fair value through profit or loss, FVTPL), or recognized in other comprehensive income (fair value through other comprehensive income, (FVTOCI). For debt instruments the FVTOCI classification is required for certain assets unless the fair value option is elected. For equity investments, the FVTOCI classification is an optional election. However, the requirements for reclassifying gains or losses recognized in other comprehensive income are different for debt instruments and equity investments.

A business model refers to how an entity manages its financial assets to generate cash flows—by collecting contractual cash flows, selling financial assets or both. Financial assets are measured at amortized cost in a business model whose objective is to hold assets to collect contractual cash flows. Financial assets are classified and measured at FVTOCI in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Any financial assets that are not held in one of these two business models are measured at FVTPL. Financial assets that are held for trading and those managed on a fair value basis are also included in this category.

Equity investments included under the scope of IFRS No. 9 are to be measured at fair value in the statement of financial position, with value changes recognized in profit or loss, except for those equity investments for which the entity has elected to present value changes in other comprehensive income. If a financial asset is a debt instrument and the objective of the entity’s business model is to collect its contractual cash flows, the financial asset is measured at amortized cost. All other debt instruments are measured at FVTPL.