CHAPTER 16

INVESTMENTS

CHAPTER STUDY OBJECTIVES

1. Identify reasons to invest, and classify investments. Companies purchase debt and equity securities of other companies for two main reasons: (1) for non-strategic reasons as a source of investment income, and (2) for strategic reasons, such as gaining control of a competitor, influencing strategic alliances, or moving into a new line of business. Non-strategic investments are debt and equity securities that are purchased for purposes of earning interest or dividend revenue or of selling them in the short term at a gain. Investments purchased for selling in the short term are called trading investments and are reported at fair value. Debt investments reported at amortized cost may be short-term or long-term. Strategic investments are always investments in equity securities and are classified as long-term investments.

2. Demonstrate the accounting for debt investments that are reported at amortized cost. Companies reporting under IFRS report debt investments purchased for the purposes of earning interest income at amortized cost. Companies reporting under ASPE may report all investments in debt instruments at amortized cost or at fair value if a fair value can be reliably determined. Debt investments include money-market instruments, bonds, and similar items. Entries are required to record the (1) acquisition, (2) interest revenue, and (3) maturity or sale. Interest revenue is recognized as it accrues and any discount or premium is amortized using the effective interest method under IFRS. Companies reporting under ASPE will use the effective-interest method but are permitted to use other methods.

3. Demonstrate the accounting for fair value investments. Under IFRS, debt and equity investments held for trading purposes and investments that do not meet the criteria for amortized cost or fair value through other comprehensive income are reported at fair value through profit or loss. Fair value through profit or loss is a “catch-all” category for investments. When using this measurement method, adjustments to the fair value of assets are included in the calculation of profit or loss on the income statement or statement of comprehensive income. Certain investments in equity may be categorized as fair value through other comprehensive income and are reported at fair value each reporting period. However, holding gains or losses from fair value adjustments are included in other comprehensive income on the statement of comprehensive income. Under ASPE, any investment that has a quoted market price may be accounted for using fair value through profit or loss; otherwise, cost or amortized cost is used. An equity investment may be in either preferred or common shares of another corporation. Entries are required to record the (1) acquisition, (2) investment revenue, (3) fair value adjustments, and (4) sale.

4. Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence. Strategic investments are long-term investments in common shares of another company. The accounting for strategic investments is based on how much influence the investor has over the operating and financial affairs of the issuing corporation (the investee). The investor company is usually considered not to have significant influence over the investee company when it owns less than 20% of the investee. In this case, the investor company reports the investment in the investee company at either fair value through profit or loss or, under IFRS, fair value through other comprehensive income. When there is significant influence (ownership is usually 20% or more), the investee is called an associate. The equity method is used to account for investments with significant influence. The equity method records investment revenue when profit is reported by the associate and increases the investor’s investment account accordingly. Dividends that are received reduce the value of the investment account. Under ASPE, companies can elect to report investments with significant influence at fair value if there is a quoted market price. In the absence of a quoted market price, significant influence investments may be reported using the equity method or cost. When a company controls the common shares of another company (that is, its ownership is usually greater than 50%), consolidation is required and consolidated financial statements are prepared.

5. Explain how investments are reported in the financial statements. Investments held for trading purposes and categorized as fair value through profit or loss are presented in the current assets section of the balance sheet. This includes equity investments and short- and long-term debt investments as long as they have been purchased with the intent to resell. Debt investments reported at amortized cost, maturing within 12 months of the balance sheet date, are also reported in current assets. Debt instruments reported at amortized cost with maturity dates of longer than 12 months from the balance sheet date and equity investments that are purchased for strategic purposes are reported in non-current assets. Gains and losses resulting from investments categorized as fair value through profit or loss are reported in the income statement and are presented in other revenues or other expenses. Gains and losses resulting from equity investments categorized as fair value through other comprehensive income are reported in other comprehensive income, then closed to accumulated other comprehensive income in the shareholders’ equity section of the balance sheet.

TRUE-FALSE STATEMENTS

1. Companies purchase investments as a strategic investment with the intention of establishing and maintaining a long-term operating relationship with another company.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

2. The purpose of a strategic investment is to generate investment income.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

3. When investing excess cash for short periods of time, corporations usually invest in shares of other companies.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

4. A short-term debt instrument that is held to earn interest will be valued at fair value on the balance sheet.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

5. For companies reporting under IFRS, a short-term debt instrument that is held for trading will be valued at fair value on the balance sheet.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

6. An equity investment that is held for trading will be valued at cost on the balance sheet.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

7. If an investment is valued at an amount that is most relevant to the type of investment, it will allow investors to better predict future cash flows of the company.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

8. The degree of influence determines how a strategic investment is classified.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

9. Investments in equity securities bought for the purposes of trading are reported at amortized cost.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

10. Investments that are purchased principally for selling in the near future are called trading investments.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

11. The purpose of the investment is the most important factor in determining the balance sheet classification and measurement method.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

12. At acquisition, a debt instrument is recorded at its fair value on the date of purchase.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

13. If a debt instrument is sold before maturity, then a gain is recorded if the cash received is less than the carrying amount of the instrument.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

14. A treasury bill is normally recorded at the face value of the instrument.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

15. A treasury bill will be shown at its amortized cost on the balance sheet.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

16. If a bond investment that is held to earn interest is sold before maturity, an entry must be made to update any unrecorded interest and amortization of the discount or premium.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

17. When a bond investment that is held to earn interest is sold, a gain will be recorded when the amortized cost of the bond is less than the cash received.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

18. When a debt instrument is reported at amortized cost, the interest expense is calculated by multiplying the market rate of interest by the carrying value of the investment.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

19. Interest revenue is reported under other revenues on the income statement.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

20. The purchaser of the bonds, or the bondholder, is known as the investor.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

21. If there is a bond premium, interest revenue is increased by the amortization amount.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

22. Under IFRS, companies have the choice to use the effective-interest method or straight-line method to amortize any discounts or premiums and record interest expense.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

23. Under IFRS, all investments held for trading are valued at amortized cost on the balance sheet.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

24. A fair value adjustment at the balance sheet date is required only on investments that will be sold within 30 days of the balance sheet date.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

25. Under IFRS, investments reported at fair value may include investments in common shares, preferred shares, and debt investments.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

26. Under ASPE, only debt instruments will be reported at fair value.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

27. The advantage of using fair value for investments held for trading is that it allows users to better predict future cash flows.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

28. Dividend revenue is reported under revenues from operations on the income statement.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

29. Companies reporting under IFRS will report all investments in debt instruments at amortized cost.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

30. If the market rate changes after a public company purchases bonds to trade, the bonds carrying amount will NOT change.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

31. Fair value through profit and loss means that fair value adjustments are recorded as holding gains and losses on the income statement, and: therefore, are included in the determination of either a profit or loss for a company.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Fair Value Investments

CPA: Financial Reporting

AACSB: Analytic

32. For a company reporting under IFRS, if it holds less than 20% of a strategic investment and does NOT exercise significant influence on the investment, then the investment will be accounted for using the equity method.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

33. Generally, if an investor holds more than 50% of a strategic investment, then the investor will prepare consolidated financial statements.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

34. Under IFRS, if an investor holds less than 20% of a strategic investment but holds a majority of seats on the board of directors of the investment, then the investment should be valued at fair value.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

35. If an investor owns more than 20% of an investee's common shares, it is presumed that the investor has significant influence over the investee’s decisions.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

36. Under IFRS, a strategic investment, in which the company does NOT exercise significant influence, may report any holding gains or losses from changes in the fair value, as other comprehensive income.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

37. When a dividend is received from a strategic investment over which the company exercises significant influence, the dividend will reduce the amount of the strategic investment asset account.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

38. The profit earned by an investee over which the company exercises significant influence, will NOT affect the value of the strategic investment asset account.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

39. Under ASPE, if there is NOT an active market for an equity instrument that has no significant influence, the investment will be reported at fair value.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

40. When an investment is accounted for under the equity method, the payment of a dividend by the associate will reduce the amount shown on the balance sheet of the investor.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

41. Investments held for trading may be classified as either long-term or current based solely on the maturity date of the underlying investment.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

42. Treasury bills will be shown at amortized cost on the balance sheet.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

43. A strategic investment by a public company over which the company does NOT exercise significant influence, will be reported at cost on the balance sheet.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

44. For a company reporting under IFRS, a strategic investment over which the company exercises significant influence will be reported at fair value on the balance sheet.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

45. One of the differences between IFRS and ASPE is that under ASPE there is no other comprehensive income.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

46. All equity securities that are purchased for strategic purposes are classified as non-current assets.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

47. Which of the following would NOT normally be considered a motive for making an equity investment in another corporation?

a) to invest surplus cash

b) use of the investment for expanding its own operations

c) use of the investment to diversify its own operations

d) an increase in the amount of interest revenue from the equity investment

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

48. All of the following are examples of money-market investments EXCEPT

a) money-market funds.

b) term deposits.

c) treasury bills.

d) shares of a privately held corporation.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

49. Which of the following is the most accurate?

a) Non-strategic investments maintain a long-term operating relationship with another company.

b) Non-strategic investments are purchased to generate investment income.

c) Preferred shares and common shares are debt instruments.

d) Strategic investments are always short-term instruments.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

50. Which of the following is a true statement regarding an investment in short-term debt instruments?

a) The instruments usually do not pay interest.

b) They are often made when the company has surplus cash on hand.

c) This type of investment is never traded in the securities market.

d) A chequing account is a type of short-term debt investment.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

51. Short-term and long-term debt instruments purchased to earn interest are reported at

a) cost.

b) unamortized cost.

c) fair value.

d) amortized cost.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

52. For companies reporting under IFRS, debt instruments purchased to trade are reported on the balance sheet at

a) amortized cost.

b) cost.

c) fair value.

d) lower of cost and market.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

53. All of the following are considered debt instruments EXCEPT

a) term deposits.

b) treasury bills.

c) bonds.

d) preferred shares.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

54. Which of the following statements is INCORRECT with regards to non-strategic instruments?

a) They can be debt instruments.

b) They maintain an operating relationship with another company.

c) They can be equity instruments.

d) They generate investment income.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

55. Excess cash may be invested for the long term to

a) generate dividend income on bonds.

b) generate interest income on bonds.

c) generate interest income on shares.

d) generate additional operating income.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

56. Debt & equity securities that are purchased for the purpose of selling in the short term at a gain are referred to as

a) debt instruments.

b) equity instruments.

c) long-term instruments.

d) trading investments.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

57. Short-term debt instruments that are held to earn interest income are recorded as

a) current assets at amortized cost.

b) non-current assets at amortized cost.

c) current asset at fair value.

d) non-current assets at fair value.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

58. Long-term debt instruments held to earn interest income are recorded as

a) current assets at amortized cost.

b) non-current assets at amortized cost.

c) current asset at fair value.

d) non-current assets at fair value.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

59. Short- or long-term debt instruments held for trading are recorded as

a) current assets at amortized cost.

b) non-current assets at amortized cost.

c) current asset at fair value.

d) non-current assets at fair value.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

60. Equity instruments held for trading are recorded as

a) current assets at amortized cost.

b) non-current assets at amortized cost.

c) current asset at fair value.

d) non-current assets at fair value.

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

61. Companies make strategic investments for several reasons. Which of the following reasons is INCORRECT?

a) to speculate that their investment will increase in value and result in a gain when it is sold

b) to become a part of a different industry

c) to expand operations

d) to eliminate competition

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

62. The valuation method for investments under ASPE is

a) amortized cost.

b) unamortized cost.

c) fair value.

d) both a) and c)

Difficulty: Easy

Learning Objective: Identify reasons to invest, and classify investments.

Section Reference: Classifying Investments

CPA: Financial Reporting

AACSB: Analytic

63. On January 1, 2021, Windows and Doors Ltd. purchased at face value, a $ 1,000, 5%, bond that pays interest on January 1 and July 1. Windows and Doors has a calendar year end. The entry for the receipt of interest on July 1, 2021, is

a) Cash 25
Interest Revenue 25

b) Cash 50
Interest Revenue 50

c) Interest Receivable 25
Interest Revenue 25

d) Interest Receivable 50
Interest Revenue 50

Difficulty: Medium

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

64. On January 1, 2021, Manny Manufacturing Ltd. purchased at face value, a $ 1,000, 5%, bond that pays interest on January 1 and July 1. Manny Manufacturing has a calendar year end. The adjusting entry on December 31, 2021, is

a) none required.

b) Cash 25
Interest Revenue 25

c) Interest Receivable 25
Interest Revenue 25

d) Interest Receivable 25
Long-term investment–Bonds 25

Difficulty: Medium

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

65. On January 1, 2021, Peter Plumbing Ltd. purchased at face value, a $ 1,000, 5%, bond that pays interest on January 1 and July 1. Peter Plumbing has a calendar year end. The entry for the receipt of interest on January 1, 2022, is

a) Cash 50
Interest Revenue 50

b) Cash 50
Interest Receivable 50

c) Cash 25
Interest Revenue 25

d) Cash 25
Interest Receivable 25

Difficulty: Medium

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

66. On January 1, Wendy Welding Ltd. purchases a $ 100,000 150 day treasury bill for $ 97,560. The treasury bills are trading at a market rate of interest of 6% annually. The entry to record the investment is

a) Cash 97,560
Investment at Amortized Cost—treasury bill 97,560

b) Investment at Amortized Cost—treasury bill 100,000
Discount 2,440
Cash....................................... 97,560

c) Investment at Amortized Cost—treasury bill 97,560
Cash 97,560

d) Cash 97,560
Discount............................................................ 2,440
Investment at Amortized Cost—treasury bill 100,000

Difficulty: Medium

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

67. Any premium or discount on an investment in bonds to earn interest is amortized

a) to interest expense over the remaining term of the bonds.

b) only if the effective-interest method is used.

c) to interest revenue over the remaining term of the bonds.

d) only if the investor owns 20% or more of the bonds.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

68. Instruments that mature within 12 months of the balance sheet date are

a) long-term debt instruments.

b) fair value instruments.

c) short-term debt instruments.

d) unamortized instruments.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

69. Which of the following statements is INCORRECT with regard to treasury bills?

a) They are issued by the federal government.

b) They are unsafe investments with maturity dates of up to 5 years.

c) They are purchased at a discount.

d) They generate interest income.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

70. Interest income is calculated by multiplying

a) market rate of interest by the face value of the investment.

b) contract rate of interest by the face value of the investment.

c) market rate of interest by the carrying value of the investment.

d) stated interest rate by the carrying value of the investment.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

71. Regardless of the bonds purchase price, their amortized cost at maturity will equal

a) face value.

b) face value less premium amounts.

c) purchase price.

d) face value plus discount amounts.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

72. Losses and gains on the sale of FVTPL instruments are reported on

a) the income statement under current operations.

b) the balance sheet with long-term investments.

c) the income statement under other revenue and expenses.

d) the balance sheet with short-term investments.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

73. On October 1, Sally Sailing Ltd. purchased a $ 10,000, 150-day treasury bill for $ 9,756. Similar treasury bills are trading on the market at a rate of 6% annually. Assuming Sally Sailing has a December 31 year end, the amount accrued as interest revenue on the treasury bill at December 31 is

a) $ 146.

b) $ 160.

c) $ 195.

d) $ 200.

Difficulty: Medium

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Section Reference: Accounting for Debt Investments Reported at Amortized Cost

CPA: Financial Reporting

AACSB: Analytic

74. Which of the following is a true statement about the accounting for investments held for trading under IFRS?

a) The investment is initially recorded at fair value.

b) Gains and losses are recorded in OCI when the market value is different from the purchase price.

c) The accounting for trading investments is the same as the accounting for short-term investments in debt instruments purchased to earn interest.

d) The investment is initially recorded at face value.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

75. Vlad Corporation sells 100 common shares being held as a trading investment. The shares were acquired six months ago at a cost of $ 50 a share Vlad sold the shares for $ 40 a share. The entry to record the sale is

a) Cash 4,000
Investment Income or Loss 1,000
Investments at FVTPL 5,000

b) Cash 5,000
Investment Income or Loss 1,000
Investments at FVTPL 4,000

c) Cash 4,000
Investments at FVTPL 4,000

d) Investments at FVTPL 4,000
Investment Income or Loss 800
Cash 4,800

Difficulty: Medium

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

76. Investments held for trading in equity instruments are reported on the balance sheet at

a) amortized cost.

b) cost.

c) fair value.

d) lower of cost and fair value.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

77. Investments held for trading are adjusted to fair value when

a) there is a change in fair value.

b) the decline is thought to be permanent.

c) both a) and b)

d) Trading investments should never be recorded at fair value.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

78. If a bond investment is sold at a price that is greater than the amortized cost of the bond

a) a loss is reported in balance sheet.

b) a gain is reported in balance sheet.

c) a gain is reported on the income statement.

d) a loss is reported on the income statement.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

79. In recognizing a decline in the market value of a FVTPL investment, Investment Income or Loss account is debited

a) because management intends to realize this loss in the near future.

b) to reflect the fair value of the investment on the balance sheet.

c) because the company is no longer a going concern.

d) because there is a permanent decline in the fair value.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

80. At the end of Players Corporation's fiscal year, its portfolio of FVTPL investments purchased during the year is as follows:
Security Cost Market Value
A Common shares $ 10,000 $ 12,000
B Common shares 8,000 5,000
$ 18,000 $ 17,000
At the end of the year, Players Corporation normally would

a) make no entry.

b) increase the investment accounts to market value.

c) report an loss on the income statement for $ 3,000 under "Other Expenses".

d) report an loss on the income statement for $ 1,000 under "Other Expenses".

Difficulty: Medium

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

81. At the end of McDougal Corporation's fiscal year, its portfolio of FVTPL investments is as follows:
Security Cost Market Value
A Common shares $ 10,000 $ 12,000
B Common shares 8,000 5,000
$ 18,000 $ 17,000
McDougal subsequently sells B common shares for $ 10,000. What entry is made to record the sale?

a) Cash 10,000
Investments at FVTPL 10,000

b) Cash 8,000
Investments at FVTPL 8,000

c) Cash 10,000
Investments at FVTPL 8,000
Investment Income/Loss 2,000

d) Cash 10,000
Investments at FVTPL 5,000
Investment Income or Loss 5,000

Difficulty: Medium

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

82. If the cost of an investment held for trading exceeds its fair value by $ 40,000, the entry to recognize the loss

a) is not required since the share prices will likely rebound in the long run.

b) will show a debit to an expense account in the operating section of the income statement.

c) will show a credit to a contra asset account that appears in the shareholders' equity section of the balance sheet.

d) will show a debit to a holding gain or loss account that appears in the other expenses section of the income statement.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

83. Which of the following statements is correct?

a) A debt instrument purchased to earn interest will be valued at fair value.

b) A debt instrument which is purchased to earn interest will be valued at amortized cost.

c) Gains or losses on FVTPL investments are not recorded until the trading investments are sold and the gains or losses are realized.

d) All gains and losses on fair value adjustments arising from FVTPL investments are reported in profit or loss.

Difficulty: Easy

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

84. Lopez Company purchased 1,000 common shares of George Company on August 1 for $ 16 per share. At December 31, Lopez’s year end, George’s shares are selling for $ 20.50 and George reported net income of $ 160,000. Assuming Lopez accounts for the investment using FVTPL, the adjustment to the investment account at year end would be

a) credit to Investment at FVTPL - ABC Company for $ 20,500.

b) debit to Investment at FVTPL - ABC Company for $ 16,000.

c) credit to Investment at FVTPL - ABC Company for $ 4,000.

d) debit to Investment at FVTPL - ABC Company for $ 4,500.

Difficulty: Medium

Learning Objective: Demonstrate the accounting for fair value investments.

Section Reference: Accounting for Trading Investments

CPA: Financial Reporting

AACSB: Analytic

85. Pine Inc. owns 25% of Tantramar Sand and Gravel and has significant influence over the company’s operations. During the year, Tantramar had a net income of $ 240,000 and paid a dividend of $ 45,000. The balance on Pine’s Balance Sheet for this investment would

a) increase by $ 240,000.

b) increase by $ 195,000.

c) decrease by $ 48,750.

d) increase by $ 48,750.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

86. Which of the following investments would most likely NOT be valued at fair value on a company’s books?

a) investments held for trading

b) debt investment purchased to trade by companies reporting under IFRS in the short-term at gain

c) strategic investments held by companies reporting under IFRS with less than 20% ownership

d) strategic investments held by companies reporting under IFRS with more than 20% ownership

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

87. For accounting purposes, the method used to account for long-term equity investments in common shares is determined by

a) the amount paid for the shares by the investor.

b) the extent of an investor's influence on the operating and financial affairs of the investee.

c) whether the shares have paid dividends in past years.

d) whether the acquisition of the shares by the investor was "friendly" or "hostile".

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

88. If an investor owns less than 20% of the common shares of another corporation as a long-term investment,

a) the equity method of accounting for the investment should be employed.

b) no dividends can be expected.

c) it is presumed that the investor has relatively little influence on the investee.

d) it is presumed that the investor has significant influence on the investee.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

89. If the fair value method is used to account for a long-term investment in common shares and fair value changes are reported through other comprehensive income, dividends received should be

a) credited to the Long-term Equity investment account.

b) credited to the Dividend Revenue account.

c) debited to the Long-Term Equity Investment account.

d) recorded only when 20% or more of the shares are owned.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

90. For companies reporting under IFRS, if 10% of the common shares of an investee company are purchased as a long-term investment, the investment is reported

a) at fair value.

b) using the equity method.

c) using consolidated financial statements.

d) determined by agreement with whomever owns the remaining 90% of the shares.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

91. For companies reporting under ASPE, a long-term investment in shares will most likely be reported at fair value when the

a) investor owns more than 50% of the investee's shares.

b) investor has significant influence on the investee and the shares held by the investor are marketable equity securities.

c) company elects to report the investment at fair value.

d) investor's influence on the investee is insignificant and there is a quoted market price.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

92. When an investor reporting under IFRS owns more than 20% of the common shares of a corporation, it is generally presumed that the investor

a) has insignificant influence on the investee and that the fair value method should be used to account for the investment.

b) should apply the cost method in accounting for the investment.

c) will prepare consolidated financial statements.

d) has significant influence on the investee and that the equity method should be used to account for the investment.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

93. Under the equity method of accounting for long-term investments in common shares, when a dividend is received from the investee company,

a) the Dividend Revenue account is credited.

b) the Investment in Associate account is increased.

c) the Investment in Associate account is decreased.

d) no entry is necessary.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

94. On January 1, 2021, Bull Corporation purchased 25% of the common shares of Dozer Corporation for $ 200,000. During 2021, Dozer Corporation reported profit of $ 80,000 and paid cash dividends of $ 40,000. The balance of the Investment in Associate—Dozer Corp. account on the books of Bull Corporation at December 31, 2021 is

a) $ 200,000.

b) $ 210,000.

c) $ 220,000.

d) $ 190,000.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

95. Under the equity method, the Investment in Associate account is increased when the

a) investee company reports a profit.

b) investee company pays a dividend.

c) investee company reports a loss.

d) equity investment is sold at a gain.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

96. On January 1, 2021, Freeman Corporation purchased 40% of the common shares of Freightways International Ltd. During 2021, Freeman paid dividends of $ 80,000 and Freightway paid dividends of $ 50,000. Assuming Freeman has no other equity investments, the year-end balance in Freeman’s Dividend Income account would be

a) $ 0.

b) $ 80,000.

c) $ 50,000.

d) $ 20,000.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

97. Which of the following is the correct match concerning an investor's influence on the operations and financial affairs of an investee?
% of Investor Ownership Presumed Influence

a) less than 20% significant

b) more than 20% significant

c) more than 50% insignificant

d) more than 20% controlling

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

98. Which of the following is the correct match concerning the appropriate guideline under IFRS for accounting for long-term equity investments in common shares?
% of Investor Ownership Accounting Guidelines

a) less than 20% fair value

b) more than 20% fair value

c) more than 50% fair or equity method

d) more than 20% consolidated financial statements

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

99. If fair value is used to account for an equity investment in common shares under IFRS,

a) it is presumed that the investor has insignificant influence on the investee.

b) the earning of a profit by the investee is considered a proper basis for recognition of income by the investor.

c) profit of the investee is not considered earned by the investor until dividends are declared by the investee.

d) the investment account will remain at cost.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

100. If a company acquires a 40% common share interest in another company,

a) the equity method is usually applicable.

b) all influence is classified as controlling.

c) the cost method is always applicable.

d) the ability to exert significant influence over the activities of the investee does not exist.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

101. On January 1, 2021, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $ 400,000. During 2021, Grafenburg Limited paid cash dividends of $ 60,000 and had profit of $ 300,000. During the same period, Goyeche earned $ 500,000 and paid dividends of $ 125,000. Both corporations have a December 31 year end. Immediately following the acquisition, the balance in Goyeche’s Investment in Associate—Grafenburg account is

a) $ 472,000.

b) $ 400,000.

c) $ 460,000.

d) $ 340,000.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

102. On January 1, 2021, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $ 400,000. During 2021, Grafenburg Limited paid cash dividends of $ 60,000 and had profit of $ 300,000. During the same period, Goyeche earned $ 500,000 and paid dividends of $ 125,000. Both corporations have a December 31 year end. On December 31, 2021, the balance in Goyeche’s Investment in Associate—Grafenburg Common Shares account is

a) $ 472,000.

b) $ 640,000.

c) $ 400,000.

d) $ 192,000.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

103. On January 1, 2021, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $ 400,000. During 2021, Grafenburg Limited paid cash dividends of $ 60,000 and had profit of $ 300,000. During the same period, Goyeche earned $ 500,000 and paid dividends of $ 125,000. Both corporations have a December 31 year end. Assuming Grafenburg is Goyeche’s only equity investment, on its December 31, 2021 income statement, Goyeche would report which of the following?

a) dividend revenue, $ 18,000

b) dividend revenue, $ 60,000

c) income from investment in Grafenburg, $ 300,000

d) income from investment in Grafenburg, $ 90,000

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

104. Under the equity method, the Investment in Associate account is credited when the

a) associate reports a profit.

b) associate reports a net loss.

c) investment is originally acquired.

d) associate reports profit and when the investment is originally acquired.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

105. Company B has strategic investment in Company A. Company B owns 5% of the common shares of A and it does NOT have influence over A. How should an increase in the fair value of common shares of A company be reported in B’s books?

a) The Investment in A should be shown at unamortized cost on B’s Balance Sheet.

b) The Investment in A should be shown at cost on B’s Balance Sheet.

c) The investment in A should be shown at fair value on the Balance Sheet of B.

d) The Investment in A should be shown at the net realizable value on B’s Balance Sheet.

Difficulty: Easy

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments

CPA: Financial Reporting

AACSB: Analytic

106. Darby Inc. purchased 30% of the outstanding common shares of LME Company for $ 840,000. On March 31, LME’s year end, the company reported net income of $ 540,000. The appropriate adjustment to the investment account would be

a) debit to Investment in Associate – ABC Company for $ 162,000.

b) debit to Investment in Associate – ABC Company for $ 252,000.

c) debit to Investment in Associate – ABC Company for $ 540,000.

d) no adjustment necessary.

Difficulty: Medium

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

Section Reference: Accounting for Strategic Investments – Equity Method

CPA: Financial Reporting

AACSB: Analytic

107. Short-term debt investments are most likely listed on the balance sheet immediately below

a) cash.

b) inventory.

c) accounts receivable.

d) prepaid expenses.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

108. Grindstone Island Millstones purchased a strategic investment in Dorchester Drilled Wells. Grindstone holds 15% of Dorchester; it has no significant influence on Dorchester. Dividends that are paid from Dorchester to Grindstone should be reported as

a) an increase in the investment on the balance sheet.

b) a decrease in the investment on the balance sheet.

c) other expenses on the income statement.

d) other revenues on the income statement.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

109. Which of the following would NOT be reported under "Other Revenues" on the income statement?

a) loss on the sale of strategic investment

b) dividend revenue

c) interest revenue

d) investment income or loss

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

110. The balance in the Investment Income or Loss account will

a) appear on the balance sheet as a contra asset.

b) appear on the income statement in the non-operating section.

c) appear as a deduction in the shareholders' equity section.

d) not be shown on the financial statements until the securities are sold.

Difficulty: Easy

Learning Objective: Explain how investments are reported in the financial statements.

Section Reference: Reporting of Investments

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONS

111. Match the items below by entering the appropriate code letter in the space provided.

A. Investments at FVTPL G. Parent company

B. Subsidiary company H. Strategic Investment

C. Equity method I. Significant Influence

D. Investee J. Long-term investment

E. Fair value K. Investment Income or Loss

F. Consolidated financial statements

____ 1. The issuer of a bond

____ 2. Securities that are held for resale in the near future, hopefully at a gain

____ 3. Debt instrument held to earn interest income that does not mature within the next year

____ 4. An investment in equity securities that is purchased to influence or control another

____ 5. Amount for which an investment could be sold for in the market

____ 6. The investor has control over an investee.

____ 7. The Equity Investment in Common Shares account is adjusted for profit and dividends received

____ 8. Normally exists when the investor owns 20% or more of the investee’s voting shares

____ 9. Financial statements that present the assets and liabilities of the parent and the subsidiary company

____ 10. Entity whose shares are owned by the parent company

_____11. An investment in which there is intention of establishing and maintaining a long-term operating relationship

_____12. Accounting entries are required to adjust the investment’s carrying value for any increase and decrease in its fair value