Modern Advanced Accounting in Canada 9Th Edition By Darrel -Test Bank

Conceptual and Case Analysis Frameworks for Financial Reporting Multiple Choice Questions 1. Which of the following would NOT be a reason to obtain a greater understanding of accounting practices in other nations? A. Financial results are disclosed in different currencies. B. One needs to be aware of differing disclosure requirements from nation to nation, as this impacts the preparation of financial statements. C. Income-smoothing may have affected a foreign subsidiary's results; such smoothing practices are not permitted in North America. D. Departures from the historical cost principle may be possible in other nations. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-01 Describe and apply the conceptual framework for financial reporting. Topic: 01-01 The Conceptual Framework for Financial Reporting 2. Which of the following would be most affected by financial statements being prepared under different accounting principles? A. Reduced comparability. B. Reduced reliability. C. Increased complexity. D. Inaccurate asset valuations. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-01 Describe and apply the conceptual framework for financial reporting. Topic: 01-01 The Conceptual Framework for Financial Reporting 1-1 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 3. The CPA Canada Handbook - Accounting is the handbook of Canadian accounting standards. Why do companies in Canada ensure that their financial reporting is consistent with Canadian GAAP? A. Their bank requires them to do so. B. Their auditors require them to do so. C. Reporting under the CPA Canada Handbook - Accounting is required by public companies' boards of directors. D. Compliance with the CPA Canada Handbook - Accounting pronouncements is usually required by many legal statutes. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-01 Describe and apply the conceptual framework for financial reporting. Topic: 01-01 The Conceptual Framework for Financial Reporting 4. Which decision has Canada made with respect to financial reporting for private enterprises? A. To adopt the IFRS standards for small and medium-sized enterprises. B. To retain the current standards. C. To look to US GAAP for standards. D. To develop and maintain its own standards for private enterprises. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-05 GAAP for Private Enterprises 1-2 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 5. Starting in 2011, what is the definition of a private enterprise (PE) under Canadian GAAP? A. A corporation that has no public shareholders. B. A corporation that has less than 500 shareholders and is not listed on a stock exchange. C. A corporation which is not profit oriented. D. A profit oriented enterprise that has none of its issued and outstanding financial instruments traded in a public market and does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-05 GAAP for Private Enterprises 6. Which enterprises must report under IFRS in Canada? A. All corporations, government agencies and private companies. B. Public companies and private companies whose shareholders' equity is in excess of $500,000,000 at any particular year end. C. Public companies, private companies and not-for-profit organizations. D. Publicly accountable enterprises. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-04 GAAP for Publicly Accountable Enterprises 7. What approach did Canada first decide to take with respect to convergence with IFRS? A. Harmonization of CPA Canada Handbook with IFRS. B. Substituting IFRS for Canadian GAAP when approved by the IASB. C. Adopting some but not necessarily all IFRSs by reviewing them on a case by case basis. D. Reviewing them with all publically accountable entities to see which ones would be acceptable. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-04 GAAP for Publicly Accountable Enterprises 1-3 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 8. What choice(s) do private enterprises have in their financial reporting in Canada? A. They have no choice at all; they will need to report under IFRS. B. They may elect to continue with differential reporting. C. They may adopt accounting principles that are appropriate to the circumstances. D. They may elect to report under either IFRS or ASPE but once adopted, must use all the standards. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-05 GAAP for Private Enterprises 9. For which of the following types of organizations does the CPA Canada Handbook not provide specific accounting standards? A. Publicly accountable enterprises. B. Private enterprises. C. Not-for-profit organizations. D. Proprietorships. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Learning Objective: 01-03 Identify some of the differences between IFRS and ASPE. Topic: 01-04 GAAP for Publicly Accountable Enterprises Topic: 01-05 GAAP for Private Enterprises Topic: 01-06 GAAP for Not-for-Profit Organizations Topic: 01-07 GAPP for Government and Other Government Organizations 10. Which of the following is NOT a reason why a Canadian private company would elect to report under IFRS? A. The company is planning to go public in the near future. B. The company seeks comparability with public companies of a similar size. C. It is likely to be less expensive than reporting under ASPE. D. The company is a subsidiary of a Canadian public company. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-05 GAAP for Private Enterprises 1-4 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 11. The current ratio measures: A. liquidity. B. solvency. C. profitability of assets. D. profitability of owners' investment. Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: Easy Learning Objective: 01-04 Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statements ratios. Topic: 01-08 Analysis and Interpretation of Financial Statements 12. The formula for the current ratio is: A. current assets - current liabilities B. current assets/current liabilities C. total debt/shareholders' equity D. net income/shareholders' equity Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-04 Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statements ratios. Topic: 01-08 Analysis and Interpretation of Financial Statements 13. The debt-to-equity ratio measures: A. liquidity. B. solvency. C. profitability of assets. D. profitability of owners' investment. Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: Easy Learning Objective: 01-04 Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statements ratios. Topic: 01-08 Analysis and Interpretation of Financial Statements 1-5 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting Short Answer Questions 14. One of the underlying assumptions of the Historical Cost Principle is that a stable unit of measure (currency) should be used for Financial Reporting. Is this always the case? The Historical Cost Principle is not very useful when inflation rates are high. As a result of the eroding purchase power associated with periods of high inflation, many countries have had to experiment with price-level adjustments. These adjustments often include asset revaluations to reflect their current values. Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: Easy Learning Objective: 01-01 Describe and apply the conceptual framework for financial reporting. Topic: 01-01 The Conceptual Framework for Financial Reporting Topic: 01-02 Professional Judgment 15. X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. is a public company based in Canada and follows IFRS while Y Inc. is a private enterprise based in Canada and follows ASPE. The following were the condensed income statements for both companies for the last year before both adopted IFRS. Sales: Less: Cost of Goods Sold Gross Margin Administrative Expenses Net Income: X Inc. $1,000,000 $500,000 $500,000 $200,000 $300,000 Y Inc. $2,000,000 $1,600,000 $400,000 $300,000 $100,000 1-6 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting Required: Given the information provided, what are some possible causes for the differing results of these companies? There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000, compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the accelerated depreciation on Y Inc.'s property, plant and equipment or provisions made for future maintenance costs. Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y Inc.'s income may have been further reduced by higher estimates (for example: bad debt expense, warranty costs and so forth) which are not necessarily be indicative of economic conditions. Note: Once again, the above analysis is not necessarily exhaustive. Students may be able to identify other valid differences. Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: Medium Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Learning Objective: 01-03 Identify some of the differences between IFRS and ASPE. Topic: 01-03 Accounting Standards in Canada Topic: 01-04 GAAP for Publicly Accountable Enterprises Topic: 01-05 GAAP for Private Enterprises 1-7 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 16. Briefly discuss the external users need for high quality financial information. External users require high quality financial information to enable them to assess the likelihood of making a reasonable return with an acceptable level of risk. It is important that the quality of the financial statements provide useful and reliable information to assess the prospects of future cash flows or future earnings. The users want the information to faithfully represent what has happened during the past period. Distorting the real situation by using accounting methods that do not match the actual situation or managing earnings to recognize revenue earlier or delay reporting expenses to a later period are not a faithful representation of the actual situation. The result is the external users are not able to make appropriate decisions as to whether to increase, decrease, or maintain their level of participation with the reporting entity in their capacity as investor, creditor, supplier, and/or customer. Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: Easy Learning Objective: 01-04 Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statements ratios. Topic: 01-08 Analysis and Interpretation of Financial Statements 17. What disclosure requirements must be met when a Canadian company adopts IFRS for the first time? 1. The company must reconcile its equity reported under the previous GAAP to its equity in accordance with IFRS for both the date of transition to IFRS and the end of the latest period reported under the previous GAAP. 2. The company must reconcile its total comprehensive income in accordance with IFRS to that reported in the latest statements prepared under the previous GAAP. 3. The company must provide sufficient detail to enable users to understand the material adjustments to the statement of financial position, the statement of comprehensive income and the statement of cash flows. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-02 Describe how accounting standards in Canada are tailored to different types of organizations. Topic: 01-03 Accounting Standards in Canada Topic: 01-04 GAAP for Publicly Accountable Enterprises 1-8 Chapter 01 - Conceptual and Case Analysis Frameworks for Financial Reporting 18. Provide the procedures used to analyze a company's financial statements to determine its future prospects. Procedures to analyze a company's financial statements: Perform common-size analysis and interpret the results. Review the accounting policies and estimates used by the company to ensure that they are appropriate. Adjust the financial statements, as necessary, to use appropriate accounting policies and estimates. Calculate the ratios for one or more periods. Compare the ratios to relevant benchmarks. Interpret the results of the analysis to determine whether they are better, worse, or the same as the benchmark. Decide whether to increase, decrease, or maintain the level of participation with the reporting entity. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-04 Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statements ratios. Topic: 01-08 Analysis and Interpretation of Financial Statements 1-9 Chapter 02 - Investments in Equity Securities Multiple Choice Questions 1. Which of the following types of share investment does NOT qualify as a strategic investment? A. Significant influence investments. B. Joint Control investments. C. Investments without significant influence. D. Controlled investments. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-01 Describe the main changes in the reporting of equity investments over the past 15 years. Topic: 02-01 Equity Investments-The Big Picture 2. A significant influence investment is one that: A. allows the investor to exercise significant influence over the strategic operating and financing policies of the Associate. B. allows the investor to exercise significant influence over only the financing policies of the Associate. C. allows the investor to exercise significant influence over only the operating policies of the Associate. D. allows the investor to exercise significant influence over the strategic and operating policies of the Associate. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 2-1 Chapter 02 Investments in Equity Securities Chapter 02 - Investments in Equity Securities 3. What is the dominant factor used to distinguish non-strategic investments from significant influence investments? A. Use of the cost method to account for and report the investment. B. Use of the equity method to account for and report the investment. C. The investor's intention to establish or maintain a long-term operating relationship with the investee. D. The percentage of equity held by the investor. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-01 Describe the main changes in the reporting of equity investments over the past 15 years. Topic: 02-01 Equity Investments-The Big Picture 4. Which of the following statements is TRUE under IFRS 9? A. All unrealized gains and losses on equity investments flow through other comprehensive income (OCI). B. Unrealized gains and losses on fair value through profit and loss (FVTPL) securities are included in Other Comprehensive Income. C. Unrealized gains and losses on equity investments may be included in other comprehensive income (OCI) only if a decision to do so is made when the investment is acquired. D. Other comprehensive income (OCI) is included in net income. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 2-2 Chapter 02 - Investments in Equity Securities 5. Gains and losses on fair value through profit or loss (FVTPL) securities: A. are included in net income, regardless of whether they are realized or not. B. are included in net income only when the investment has become permanently impaired. C. are included in net income only when realized. D. are never recorded until the securities are sold. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 6. How are realized gains from the sale of fair value through other comprehensive income (FVTOCI) investments accounted for under IFRS 9? A. They are transferred to net income in the period of the sale. B. They remain in accumulated other comprehensive income. C. They are transferred from accumulated other comprehensive income to retained earnings without going through net income. D. They are transferred to contributed surplus. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 7. Which of the following statements is TRUE regarding the equity method? A. The equity method is used for reporting gains or losses for non-strategic investments. B. The investor's share of the associate's dividends declared is reported as revenue. C. The investor's investment in the associate changes in direct relation to the changes taking place in the associate's equity accounts. D. The equity method reports unrealized gains and losses on revaluations to fair value in net income. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-07 Illustration of Equity Method Basics Topic: 02-08 Complexities Associated with the Equity Method 2-3 Chapter 02 - Investments in Equity Securities 8. What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures? A. 20% or more. B. Less than 20%. C. Between 20% and 50%. D. 25% or more. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 9. Which of the following methods uses procedures closest to those used in preparing consolidated financial statements? A. The fair value through profit or loss (FVTPL) approach B. The cost method C. The fair value through other comprehensive income (FVTOCI) approach D. The equity method Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-10 Example 10. Which of the following is NOT a possible indicator of significant influence? A. The investor has the ability to elect members to the Board of Directors. B. The investor has the right to participate in the policy-making process. C. The investor has engaged in numerous intercompany transactions with the Associate. D. The Associate's new CEO was previously CEO of the investor company. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 2-4 Chapter 02 - Investments in Equity Securities 11. Which of the following statements is CORRECT? A. Significant influence is only possible if the investor owns more than 50% of the voting shares of the associate. B. An ownership interest between 20% and 50% always implies significant influence. C. An ownership interest between 0 and 10% can never imply significant influence. D. Significant influence is possible even if the investor owns less than 20% of the voting shares of the associate. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-06 Equity Method of Reporting and Investment in Associate 12. The difference between the investor's cost and the investor's percentage of the carrying value of the net identifiable assets of the associate is known as: A. Goodwill. B. the Acquisition Differential. C. the Fair Value Increment. D. the Excess Book Value. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-11 Acquisition Costs Greater than Carrying Costs 13. Any unallocated positive acquisition differential is normally: A. pro-rated across the Associate's identifiable net assets. B. charged to Retained Earnings. C. recorded as Goodwill. D. expensed during the year following the acquisition. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-04 Evaluate relevant factors to determine whether an investor has significant influence over an investee. Topic: 02-11 Acquisition Costs Greater than Carrying Costs 2-5 Chapter 02 - Investments in Equity Securities 14. When are gains on intercompany transfers of assets between an investor an associate recognized as part of the investment income accounted for by the investor under the equity method? A. In the period when the intercompany transfer takes place. B. In the period(s) when the assets are sold to third parties or consumed. C. They are never recognized. D. They are recognized only when the investment is sold. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-12 Unrealized Profits 15. The ________ investment must be shown as a current asset, whereas the other investments could be current or non-current, depending on management's intention. A. fair value through profit or loss (FVTPL) B. cost method C. equity method D. fair value through other comprehensive income (FVTOCI) The FVTPL investment must be shown as a current asset, whereas the other investments could be current or non-current, depending on management's intention. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-05 Analyze and interpret financial statements involving investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 2-6 Chapter 02 - Investments in Equity Securities 16. When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency, and profitability, the real economic situation is ________ for the four different methods. A. completely different B. identical C. almost similar except for the equity method D. almost similar except for the fair value methods When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency, and profitability, the real economic situation is identical for the four different methods. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-05 Analyze and interpret financial statements involving investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 17. Reporting in accordance with the Accounting Standards for Private Enterprises (ASPE) is permitted in certain instances for: A. privately held companies. B. publicly held companies. C. all Canadian companies. D. Canadian companies consolidating their foreign subsidiaries. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-06 Identify some of the differences between IFRS and ASPE for investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 2-7 Chapter 02 - Investments in Equity Securities 18. When reporting under the Accounting Standards for Private Enterprises (ASPE) which method must be used to report investments where the investor has significant influence over the investee? A. It must use the cost method to report all such investments. B. It must use the equity method to report all such investments. C. It may use the cost method, equity method, or at fair value but must account for all such investments by the same method. D. It may use the cost method for some such investments and the equity method for other such investments. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-06 Identify some of the differences between IFRS and ASPE for investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 19. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income Dividends 2019 $50,000 $20,000 2020 $70,000 $80,000 2021 $30,000 $60,000 Which of the following journal entries would have to be made to record X's acquisition of Y's shares on January 1, 2019? 2-8 Chapter 02 - Investments in Equity Securities A. Investment in Y Cash B. Investment in Y Cash C. Investment in Y Cash D. No entry required. Debit Credit $100,000 $100,000 Debit Credit $12,000 $12,000 Debit $112,000 Credit $112,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 20. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2-9 Chapter 02 - Investments in Equity Securities 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's net income for 2019? A. Investment in Y Investment income B. Investment in Y Investment income C. Investment in Y Investment income D. No entry required. Debit $6,000 Debit $50,000 Debit $12,000 Credit $6,000 Credit $50,000 Credit $12,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 2-10 Chapter 02 - Investments in Equity Securities 21. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be dividends paid for 2019? A. made to record X's share of Y's Credit $2,400 Credit $2,400 Credit $2,400 Cash Dividend income B. Cash Investment in Y C. Investment in Y Dividend income Debit $2,400 Debit $2,400 Debit $2,400 2-11 Chapter 02 - Investments in Equity Securities D. No entry required. Share of dividends = $20,000  12% = $2,400. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 22. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2020? A. Cash Dividend income B. Cash Investment in Y Debit $9,600 Debit $9,600 Credit $9,600 Credit $9,600 2-12 Chapter 02 - Investments in Equity Securities C. Cash Dividend income Investment in Y Debit $9,600 Credit $8,400 $1,200 D. No entry required. Share of dividends = $80,000  12% = $9,600. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 23. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2021? A. Investment in Y Dividend income Debit $7,200 Credit $7,200 2-13 Chapter 02 - Investments in Equity Securities B. Cash Investment in Y C. Cash Dividend income Debit $7,200 Debit $7,200 Credit $7,200 Credit $7,200 D. No entry required. Share of dividends = $60,000  12% = $7,200. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 24. On January 1, 2019, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income 2019 $50,000 2020 $70,000 2021 $30,000 Dividends $20,000 $80,000 $60,000 2-14 Chapter 02 - Investments in Equity Securities What would be the carrying value of X's Investment in Y at the end of 2021? A. $100,000 B. $98,800 C. $90,000 D. $91,200 Under the cost method, the carrying value of the Investment in Y will remain at $100,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 25. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's acquisition of Y's shares? A. Debit Credit Investment in Y Cash $100,000 $100,000 2-15 Chapter 02 - Investments in Equity Securities B. Investment in Y Cash C. Investment in Y Goodwill Debit $12,000 Debit $112,000 Credit $12,000 Credit $112,000 D. No entry required. On acquisition date, the only journal entry that is necessary is to record the share purchase. Subsequent to this date, changes to the Investment in Y will be recorded. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 26. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income 2019 $50,000 2020 $70,000 2021 $30,000 Dividends $20,000 $80,000 $60,000 2-16 Chapter 02 - Investments in Equity Securities Which of the following journal entries would have to be made to record X's share of Y's net income for 2019? A. Investment in Y Equity method income B. Investment in Y Equity method income C. Investment in Y Equity method income Debit $12,500 Debit $7,500 Debit $12,000 Credit $12,500 Credit $7,500 Credit $12,000 D. No entry required. Share of net income = $50,000  25% = $12,500. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 2-17 Chapter 02 - Investments in Equity Securities 27. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income 2019 $50,000 2020 $70,000 2021 $30,000 Which of the following journal entries dividends paid for 2019? A. Cash Dividend income B. Cash Investment in Y C. Investment in Y Dividend income Dividends $20,000 $80,000 $60,000 would have to be made to record X's share of Y's Debit $5,000 Debit $5,000 Debit $5,000 Credit $5,000 Credit $5,000 Credit $5,000 2-18 Chapter 02 - Investments in Equity Securities D. No entry required. Share of dividends = $20,000  25% = $5,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 28. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2020? A. Cash Dividend income B. Cash Investment in Y Debit $20,000 Debit $20,000 Credit $20,000 Credit $20,000 2-19 Chapter 02 - Investments in Equity Securities C. Cash Dividend Income Investment in Y Debit $20,000 Credit $17,500 $2,500 D. No entry required. Share of dividends = $80,000  25% = $20,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 29. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: 2019 2020 2021 Net Income $50,000 $70,000 $30,000 Dividends $20,000 $80,000 $60,000 Which of the following journal entries would have to be made to record X's share of Y's dividends paid for 2021? A. Cash Dividend income Debit $15,000 Credit $15,000 2-20 Chapter 02 - Investments in Equity Securities B. Cash Investment in Y C. Cash Dividend Income Investment in Y Debit $15,000 Debit $15,000 Credit $15,000 Credit $12,500 $2,500 D. No entry required. Share of dividends = $60,000  25% = $15,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 30. On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income 2019 $50,000 2020 $70,000 2021 $30,000 Dividends $20,000 $80,000 $60,000 2-21 Chapter 02 - Investments in Equity Securities What would be the carrying value of X's Investment in Y at the end of 2021? A. $100,000 B. $97,500 C. $98,800 D. $91,200 Under the equity method, the carrying value of the Investment in Y at December 31, 2021 is calculated as follows: Acquisition Share of net income 2019 Share of dividends paid 2019 Balance, Dec.31, 2019 Share of net income 2020 Share of dividends paid 2020 Balance, Dec.31, 2020 Share of net income 2021 Share of dividends paid 2021 Balance, Dec.31, 2021 $100,000 $12,500 ($5,000) $107,500 $17,500 ($20,000) $105,000 $7,500 ($15,000) $97,500 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 2-22 Chapter 02 - Investments in Equity Securities 31. If an investor's ownership interest in a significant influence investment increases or decreases, how are changes from accounting at fair value to the use of the Equity Method (or vice-versa) to be handled? A. Changes from the Equity Method are to be handled prospectively, while changes to the Equity Method are to be handled retroactively. B. Changes from the Equity Method are to be handled retroactively, while changes to the Equity Method are to be handled prospectively. C. Any change is to be handled retroactively. D. Any change is to be handled prospectively. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-13 Changes To and From the Equity Method 32. When an investment is accounted for using the Equity Method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor? A. Any such gains or losses are to be charged directly to Retained Earnings net of tax. B. Any such gains or losses are included with the revenue and expenses from operations. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account. C. Any such gains or losses are shown separately, net of tax, below income from operations on the investor's Income Statement. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account. D. No specific accounting treatment is required. These items simply have to be disclosed in notes to the financial statements. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-09 Other Changes in Associate's Equity Topic: 02-10 Example 2-23 Chapter 02 - Investments in Equity Securities 33. If the investor sells part of its stake in an associate, accounted for using the equity method, which of the following is used to calculate the gain or loss on the sale of these shares? A. The average carrying amount of the investment B. The FIFO method C. The LIFO method D. The specific identification method Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-16 Gains and Losses on Sale of Investments 34. If an investment accounted for using the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, what accounting entry should be made? A. It may be revalued to fair value with the revaluation gain going to other comprehensive income, even if the recorded gain will exceed the original impairment loss. B. It may be written up in value but not more than the amount of the impairment loss that was recorded at the time of impairment. C. It may be revalued to fair value with the revaluation gain going to net income, even if the recorded gain will exceed the original impairment loss. D. None; once an investment has been written down, it cannot subsequently be written up. Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-15 Impairment Losses 2-24 Chapter 02 - Investments in Equity Securities 35. If an investor is reporting in compliance with the International Financial Reporting Standards (IFRS) and has an investment with significant influence over the investee, what are the reporting requirements for the investor if the investment is in shares which are actively traded on an exchange? A. The investment must be reported at fair value through profit and loss (FVTPL). B. The investment must be reported at fair value through other comprehensive income (FVTOCI). C. The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements. D. The investment must be reported using the equity method; disclosure of the fair value of the investment is at the discretion of the investor. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-18 Presentation and Disclosure Requirements 36. How does the accounting for Other Comprehensive Income differ between the International Financial Reporting Standards (IFRS) and the Accounting Standards for Private Enterprises (ASPE)? A. Under IFRS, realized gains are transferred from Other Comprehensive Income to net income when realized; under ASPE realized gains are transferred from Other Comprehensive Income directly to Retained Earnings. B. Under ASPE, realized gains are transferred from Other Comprehensive Income to net income when realized; under IFRS realized gains are transferred from Other Comprehensive Income directly to Retained Earnings. C. There is no difference between accounting for Other Comprehensive Income under IFRS and under ASPE. D. The Accounting Standards for Private Enterprises do not recognize Other Comprehensive Income. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-06 Identify some of the differences between IFRS and ASPE for investments in equity securities. Topic: 02-19 Analysis and Interpretation of Financial Statements 2-25 Chapter 02 - Investments in Equity Securities 37. Which of the following statements is true regarding an investment in associate that meets the criteria to be classified as held for sale? A. The investment in associate is to be reported as a non-current asset. B. The intention of management is to recover the carrying value of the investment through continued operations. C. The sale of the investment in associate must be highly probable. D. The investment in associate is to be measured at fair value. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-17 Held for Sale 38. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit or loss (FVTPL), what entry will the company make to record the dividends received from Stamp Company for 2019? A. Cash Dividend income B. Cash Investment in Stamp Company Debit $16,000 Credit $16,000 Debit $16,000 Credit $16,000 2-26 Chapter 02 - Investments in Equity Securities C. Cash OCI-unrealized gain D. No entry required. $80,000  20% = $16,000. Debit $16,000 Credit $16,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 39. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit or loss (FVTPL), what entry will the company make to record the revaluation of the investment at December 31, 2019? A. Investment in Stamp Company Unrealized gain (net income) B. Investment in Stamp Company Unrealized gain (OCI) Debit $20,000 Debit $20,000 Credit $20,000 Credit $20,000 2-27 Chapter 02 - Investments in Equity Securities C. Unrealized loss (net income) Investment in Stamp Company D. No entry required. Acquisition Fair value adjustment [(20,000 × $11) – $200,000] Balance, Dec.31, 2019. Debit $20,000 Credit $20,000 $200,000 $20,000 $220,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 40. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit or loss (FVTPL), what will the balance in the Investment in Stamp Company be at December 31, 2019? A. $200,000 B. $208,000 C. $220,000 D. $240,000 Acquisition Fair value adjustment [(20,000 × $11) – $200,000] Balance, Dec.31, 2019. $200,000 $20,000 $220,000 2-28 Chapter 02 - Investments in Equity Securities Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 41. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income (FVTOCI), what entry will the company make to record the dividends received from Stamp Company for 2019? A. Cash Dividend income B. Cash Investment in Stamp Company C. Cash OCI-Unrealized Gain Debit $16,000 Credit $16,000 Debit Credit $16,000 Credit $16,000 $16,000 Debit $16,000 2-29 Chapter 02 - Investments in Equity Securities D. No entry required. $80,000  20% = $16,000. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration 42. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income (FVTOCI), what entry will the company make to record the revaluation of the investment at December 31, 2019? A. Investment in Stamp Company Unrealized gain (net income) B. Investment in Stamp Company OCI-Unrealized gain C. Unrealized loss (net income) Investment in Stamp Company Debit $20,000 Debit $20,000 Debit $20,000 Credit $20,000 Credit $20,000 Credit $20,000 2-30 Chapter 02 - Investments in Equity Securities D. No entry required. Acquisition Fair value adjustment [(20,000 × $11) – $200,000] Balance, Dec.31,2019 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration $200,000 $20,000 $220,000 43. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income (FVTOCI), what will the balance in the Investment in Stamp Company be at December 31, 2019? A. $200,000 B. $208,000 C. $220,000 D. $240,000 Acquisition Fair value adjustment [(20,000 × $11) – $200,000] Balance, Dec.31,2019 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: 02-02 Investments Measured at Fair Value Topic: 02-03 Illustration $200,000 $20,000 $220,000 2-31 Chapter 02 - Investments in Equity Securities 44. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what entry will the company make to record the dividends received from Stamp Company for 2019? A. Cash Dividend income B. Cash Investment in Stamp Company C. Cash OCI-Unrealized gain D. No entry required. $80,000  20% = $16,000. Debit $16,000 Credit $16,000 Debit Credit $16,000 Credit $16,000 $16,000 Debit $16,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 2-32 Chapter 02 - Investments in Equity Securities 45. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the equity method, what entry will the company make to record the revaluation of the investment at December 31, 2019? A. Investment in Stamp Company Unrealized gain (net income) B. Investment in Stamp Company OCI-Unrealized gain C. Unrealized loss (net income) Investment in Stamp Company D. No entry required. Debit $20,000 Debit $20,000 Debit $20,000 Credit $20,000 Credit $20,000 Credit $20,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 2-33 Chapter 02 - Investments in Equity Securities 46. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the cost method, what will the balance in the Investment in Stamp Company be at December 31, 2019? A. $200,000 B. $208,000 C. $220,000 D. $240,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 47. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the cost method, what entry will the company make to record the dividends received from Stamp Company for 2019? A. Cash Dividend Income B. Cash OCI-unrealized gain Debit $16,000 Debit $16,000 Credit $16,000 Credit $16,000 2-34 Chapter 02 - Investments in Equity Securities C. Cash Investment in Stamp Company D. No entry required. Debit $16,000 Credit $16,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 48. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the cost method, what entry will the company make to record the revaluation of the investment at December 31, 2019? A. Investment in Stamp Company Unrealized gain (net income) B. Investment in Stamp Company OCI-Unrealized gain Debit $20,000 Debit $20,000 Credit $20,000 Credit $20,000 2-35 Chapter 02 - Investments in Equity Securities C. Unrealized loss (net income) Investment in Stamp Company D. No entry required. Debit $20,000 Credit $20,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-05 Cost Method of Reporting an Equity Investment 49. Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2019? A. $200,000 B. $208,000 C. $220,000 D. $240,000 Acquisition Share of net income 2019 $120,000 × 20% Share of dividends paid 2019 $80,000 × 20% Balance, Dec.31,2019 $200,000 $24,000 ($16,000) $208,000 2-36 Chapter 02 - Investments in Equity Securities Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate Topic: 02-07 Illustration of Equity Method Basics 50. In the situation where an investor's share of an associate's losses exceeds the carrying amount of the investment, which of the following is a true statement? A. After the investor's interest is reduced to zero, any additional losses will, on a pro-rata basis, reduce the value of other investments the investor may have in the associate. B. After the investor's interest is reduced to zero, any additional losses will be recognized as a gain. C. After the investor's interest is reduced to zero, any additional losses will reduce any existing trade receivables, trade payables or any long-term receivables for which adequate collateral exists. D. After the investor's interest is reduced to zero, any additional losses will be recognized as a liability to the extent the investor has legal obligations on behalf of the associate. Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-14 Losses Exceeding the Balance in the Investment Account 2-37 Chapter 02 - Investments in Equity Securities Short Answer Questions 51. On January 1, 2019, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc's outstanding voting shares. Joyce has significant influence over Mark. Mark's earnings for 2019 and 2020 were $100,000 and $200,000 respectively. Mark declared and paid dividends in the amount of $20,000 and $10,000 during 2019 and 2020, respectively. Required: Calculate the balance in the Investment in Mark Inc. account as at December 31, 2020. Joyce Inc. Investment in Mark Account As at December 31, 2020 Acquisition cost: Pro-rata share of Mark’s 2019 Net Income Pro-rata share of Mark’s 2019 Dividends Pro-rata share of Mark’s 2020 Net Income Pro-rata share of Mark’s 2020 Dividends Investment in Mark Inc. as at December 31, 2020 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-03 Prepare journal entries to account for investments under the cost and equity methods. Topic: 02-06 Equity Method of Reporting and Investment in Associate $600,000 $25,000 ($5,000) $50,000 ($2,500) $667,500 52. X purchased 40% of Y on January 1, 2019 for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2019 and 2020 showed the following. 2-38 Chapter 02 - Investments in Equity Securities Income (loss) before income taxes Income tax expense (recovery) Net income (loss) Other comprehensive income (net of tax) Comprehensive income (loss) 2019 $100,000 40,000 $60,000 20,000 $80,000 2020 ($60,000) (15,000) ($45,000) 25,000 ($20,000) At December 31, 2019, the fair value of the investment was $440,000 and at December 31, 2020 the fair value of the investment was $420,000. Required: Prepare X's journal entries for 2019 and 2020, assuming that this is a non-strategic investment and is accounted for at fair value through profit and loss (FVTPL). 2019: Debit Credit $400,000 $20,000 $40,000 Credit $20,000 $20,000 Investment in Y Cash To record X’s purchase of Y Cash Dividend Revenue To record receipt of Dividends from Y-2019 Investment in Y $400,000 $20,000 $40,000 Investment revaluation gain (net income) To record revaluation at December 31, 2019 2020: Debit Cash Dividend Revenue To record receipt of Dividends from Y-2020 Investment revaluation loss (net income) Investment in Y To record revaluation at December 31, 2020 $20,000 $20,000 2-39 Chapter 02 - Investments in Equity Securities Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-02 Distinguish between the various types of equity investments measured at fair value. Topic: