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Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition
Chapter 2 Intercorporate Equity Investments: An Introduction
Copyright © 2014 Pearson Canada Inc.2-1
1) Passive investments can be classified as fair value through profit or loss (FVTPL) or as fair value through other comprehensive income (FVTOCI). Which of the following statements is true?
- Under both FVTPL and FVTOCI, changes in the fair value of the investment are reported as other
- Under both FVTPL and FVTOCI, changes in the fair value of the investment are reported under the net
- Under both FVTPL and FVTOCI, dividends received from the investee are reported under the net
- Under both FVTPL and FVTOCI, dividends received from the investee are reported as other
comprehensive income on the statement of comprehensive income.
income section on the statement of comprehensive income.
income section on the statement of comprehensive income.
comprehensive income on the statement of comprehensive income.
Answer: C
Page Ref: 28
Learning Obj.: 2.2
Difficulty: Moderate
2) Rudd Ltd. has a passive investment in Burke Ltd. Rudd has elected to treat Burke as a fair value through other comprehensive income (FVTOCI) investment under IFRS 9 Financial Instruments. Which of the following statements is true?
- Dividends from Burke are reported as other comprehensive income in Rudd's statement of
- Dividends from Burke are reported as a line item on Rudd's statement of financial position.
- Year-to-year changes in the fair value of the investment in Burke are reported as net income in Rudd's
- Accumulated gains and losses in the fair value of investment in Burke should be reported as a
comprehensive income (SCI).
SCI.
separate component in Rudd's shareholders' equity on the statement of financial position.
Answer: D
Page Ref: 28
Learning Obj.: 2.2
Difficulty: Moderate
3) Townsend Ltd. has the following shareholders:
Palermo Co.—60% Nix Ltd.—30% Riley Ltd.—10%
Nix does not conduct any business with Townsend; nor has it been able to secure a seat on the board of directors. Which of the following statements is true?
- Nix has significant influence over Townsend.
- Nix should consider Townsend to be a special purpose entity.
- Nix should consider Townsend to be an associated company.
- Nix should treat Townsend as a non-strategic investment.
Answer: D
Page Ref: 30-32, 35
Learning Obj.: 2.1
Difficulty: Moderate
4) O'Reilly Ltd. incorporated O'Reilly R&D Co. to conduct research and development activities. O'Reilly Advanced Financial Accounting Canadian Canadian 7th Edition Beechy Test Bank Visit TestBankDeal.com to get complete for all chapters
Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition
Chapter 2 Intercorporate Equity Investments: An Introduction
Copyright © 2014 Pearson Canada Inc.2-2
R&D is a(n) ________.
- associated company
- joint venture
- structured entity
- passive investment
Answer: C
Page Ref: 32-33
Learning Obj.: 2.1
Difficulty: Easy
5) What is securitization?
- It is the process of issuing long-term debt for financing.
- It is the process of issuing preferred and common shares for financing.
- It is the process of transferring long-term liabilities to a structured entity.
- It is the process of transferring receivables to a structured entity and issuing securities to finance those
receivables.
Answer: D
Page Ref: 33
Learning Obj.: 2.2
Difficulty: Easy
6) In Canada, what entities must be included in consolidated financial statements?
- Subsidiaries only
- All subsidiaries, except for ones in unrelated industries
- All domestic subsidiaries
- All subsidiaries and structured entities
Answer: D
Page Ref: 33-34
Learning Obj.: 2.2
Difficulty: Moderate
7) Bela Ltd. has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?
- A holding of 15,000 of the 50,000 outstanding common shares of Earthwise Co.
- A holding of 3,000 of the 10,000 outstanding preferred shares of Earthbent Co.
- A holding of 5,000 of the 60,000 outstanding common shares of Earth-Kind Co.
- A holding of 20,000 of the 25,000 outstanding common shares of Earth-Clean Co.
Answer: A
Page Ref: 35-36
Learning Obj.: 2.1
Difficulty: Easy
Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition
Chapter 2 Intercorporate Equity Investments: An Introduction
Copyright © 2014 Pearson Canada Inc.2-3
8) On January 1, 20X1, Best Décor Ltd. started Chic Styles Ltd. by contributing $500,000 and received 100% of the common shares of Chic Styles. Chic Styles reported net income of $50,000 in 20X1 and $75,000 in 20X2 and paid out 40% of its net income as dividends in each year. Under the equity method, what amount should be reported as Investment in Chic Styles and Investment Income on Best Décor's separate- entity 20X2 financial statements?A) Investment in Chic Styles Investment Income
$500,000 $30,000
B) Investment in Chic Styles Investment Income
$575,000 $75,000
C) Investment in Chic Styles Investment Income
$625,000 $30,000
D) Investment in Chic Styles Investment Income
$625,000 $75,000
Answer: B
Page Ref: 36
Learning Obj.: 2.2
Difficulty: Moderate
9) Townsend Ltd. has the following shareholders:
Palermo Co.—60% Nix Ltd.—30% Riley Ltd.—10%
Nix has two seats on Townsend's five-person board of directors. Which of the following statements is true?
- Nix has significant influence over Townsend.
- Nix has control over Townsend.
- Townsend is a special purpose entity to Nix.
- Nix should treat Townsend as a passive investment.
Answer: A
Page Ref: 35
Learning Obj.: 2.1
Difficulty: Moderate
Beechy, Trivedi, MacAulay Advanced Financial Accounting, Seventh Edition
Chapter 2 Intercorporate Equity Investments: An Introduction
Copyright © 2014 Pearson Canada Inc.2-4
10) Which of the following is not an indicator of significant influence?
- The investor has representation on the investee's board of directors.
- There are material transactions between the investor and the investee.
- The investor and the investee share office space and use the same accounting firm.
- The investor provides computing services to the investee.
Answer: C
Page Ref: 35
Learning Obj.: 2.1
Difficulty: Easy
11) How do joint ventures differ from private corporations?
- The joint venturers must share the risks and profits of the joint venture equally.
- There can only be two parties in a joint venture.
- A joint venture does not have a board of directors.
- Venturers cannot make unilateral decisions.
Answer: D
Page Ref: 37
Learning Obj.: 2.1
Difficulty: Moderate
12) On whose books are the consolidating adjusting entries recorded?
- In the general journal of both the parent and subsidiary companies
- In the general journal of the parent company and on the consolidated worksheet
- In the general journal of both the parent and subsidiary companies and on the consolidated worksheet
- Only on the consolidated worksheet
Answer: D
Page Ref: 38
Learning Obj.: 2.3
Difficulty: Easy
13) How are most significant influence investments in equity securities actually recorded on the investors' books?
- Using the cost method
- Using the equity method
- Using proportionate consolidation
- On a fully consolidated basis
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