Question 1

The ability of an investor to affect the operating and financial activities of another company, even though the investor does not control the company, is known as
A)significant influence.
B)control.
C)a combination.
D)influence and control.

Accepted Answer

The term "significant influence" is used in accounting to describe an investor's ability to affect the operating and financial decisions of a company in which they have invested, but do not have control over. This is based on the investor having a significant portion of ownership, usually between 20 and 50 percent, and being able to exert influence through board representation or other means. Control (B) would require the investor to have more than 50 percent ownership and be able to direct the company's activities.

Question 2

Behnke Corp.owns a 10% interest in the common shares of DeLonghi Ltd.During this year, DeLonghi pays a total of $15,000 in dividends and reports $130,000 profit.Behnke's investment in DeLonghi will increase Behnke's profit by
A)$15,000.
B)$13,000.
C)$12,500.
D)$ 1,500.

Accepted Answer

Behnke Corp. owns a 10% interest in DeLonghi Ltd., so it will receive 10% of the dividends paid, which is $1,500 (10% of $15,000). The profit reported by DeLonghi does not directly increase Behnke's profit unless Behnke uses the equity method, which is not applicable here due to the 10% ownership.

Question 3

The equity method should generally be used to account for an investment in shares when the level of ownership is
A)less than 10%.
B)between 10% and 20%.
C)20% or more.
D)10% or more.

Accepted Answer

The equity method should generally be used to account for an investment in shares when the level of ownership is 20% or more. This is because the investor has significant influence over the investee's decisions and operations, which warrants accounting for the investment using the equity method rather than the cost method.

Question 4

An advantage of using the fair value through other comprehensive income is that
A)the effect on other comprehensive income is reported in the income statement.
B)unrealized gains and losses are not used to evaluate management.
C)unrealized losses must be reported on the income statement, but unrealized gains are reported in other comprehensive income.
D)unrealized gains must be reported on the income statement, but unrealized losses are reported in other comprehensive income.

Accepted Answer

Unrealized gains and losses are reported in other comprehensive income, not affecting the income statement, thus not used to evaluate management's performance directly.

Question 5

On September 15, 2015, Spirit Ltd.sells 100 common shares of Ghoul Corp., which were being held as a trading investment.The shares were acquired six months ago at $100 a share.Spirit sells the shares for $80 a share.The entry to record the sale is

Accepted Answer

The answer of On September 15, 2015, Spirit Ltd.sells 100...

Question 6

Use the following information to answer questions 
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
 
-The entry to record the sale of the shares on Oct 1 would include a
A)credit to Trading Investments for $3,800.
B)credit to Realized Gain for $800.
C)credit to Unrealized Gain for $800.
D)debit to Unrealized Gain for $3,800.

Accepted Answer

The sale of the shares would result in a realized gain, which would be credited to the Realized Gain account. The cost of the investment ($3,000) plus the realized gain ($800) would be debited to Cash, and the original cost of the investment would be credited to Trading Investments. Therefore, the entry would include a credit to Realized Gain for $800.

Question 7

Use the following information to answer questions 
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
 
-The entry to record the receipt of the dividends on Jun 1 would include a
A)debit to Trading Investments for $1,500.
B)debit to Dividend Revenue for $1,500.
C)credit to Dividend Revenue for $1,500.
D)credit to Strategic Investments for $1,500.

Accepted Answer

Since the investments are marketable trading investments intended to generate profits and to be sold in the near term, the receipt of dividends would be recorded as revenue and not as an increase in the value of the investment. Therefore, the entry would include a credit to Dividend Revenue for the amount received, which is $1,500 in this case.

Question 8

Use the following information to answer questions 
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
 
-The entry to record the purchase of the Taylor shares on Feb 1 would include a
A)debit to Long- Term Trading Investments.
B)debit to Trading Investments.
C)debit to Strategic Investments.
D)debit to Investment in Associates.

Accepted Answer

The company reported transactions relating to marketable trading investments intended to generate profits and to be sold in the near term, which indicates that the investments are designated as trading investments. Therefore, the entry to record the purchase of the Taylor shares on Feb 1 should include a debit to Trading Investments.

Question 9

Use the following information to answer questions 
Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term:
 
-The entry, if any is required, to record the value of the investment on December 31 would include a debit to
A)Realized Loss for $450.
B)Unrealized Loss for $750.
C)No entry is required.
D)Unrealized Loss of $450.

Accepted Answer

The prompt states that the investments are intended to be sold in the near term, which means they are classified as trading securities. These investments are reported at fair value on the balance sheet, with changes in fair value recognized in net income as unrealized gains or losses. On December 31, if the fair value of the investment has declined, an unrealized loss would be recognized. Therefore, the entry required would include a debit to Unrealized Loss (for the amount of the decline in fair value). The options (A) and (B) both reference Realized Loss, which would only be recognized if the investment had actually been sold. Option (C) is incorrect because an entry is required to recognize the change in fair value.

Question 10

Jet Inc.owns a 25% interest in the shares of Winnipeg Corp.During the year, Winnipeg pays $5,000 in dividends to Jet and reports a net loss of $50,000.Jet's investment in Winnipeg will affect Jet's profit by
A)$5,000 increase.
B)$1,000 increase.
C)$12,500 decrease.
D)$11,250 decrease.

Accepted Answer

Jet Inc. owns a 25% interest in Winnipeg Corp., which means it uses the equity method to account for its investment. Under the equity method, Jet's share of Winnipeg's net loss is 25% of $50,000, which is $12,500. Dividends received do not affect profit under the equity method; they reduce the carrying amount of the investment. Therefore, Jet's profit is decreased by $12,500.

Question 11

Under the equity method of accounting for an investment
A)Dividend Revenue is credited when dividends are received.
B)an Unrealized Gain account is credited when the investee reports a profit.
C)the Investment account is credited when the investee reports a profit.
D)the Investment account is credited when dividends are received.

Accepted Answer

Under the equity method, dividends received are considered a return of investment, thus reducing the Investment account.

Question 12

Edmonton Ltd.owns 10% interest in the shares of Jasper Corporation.During the year, Jasper pays $5,000 in dividends to Edmonton and reports a net loss of $50,000.Edmonton's investment in Jasper will affect Edmonton's profit by
A)$500 increase.
B)$5,000 increase.
C)$5,000 decrease.
D)$4,500 decrease.

Accepted Answer

Since Edmonton Ltd. owns less than 20% of Jasper Corporation, it is likely using the cost method for accounting. Under this method, dividends received are recognized as income. Therefore, the $5,000 in dividends received will increase Edmonton's profit by $5,000. The net loss of Jasper does not affect Edmonton's profit under the cost method.

Question 13

The receipt of dividends from an investment affects the investment account when which of the following methods is used?
A)cost method
B)equity method
C)fair value through profit or loss model
D)fair value through other comprehensive income model

Accepted Answer

The equity method is used when an investor has significant influence over an investee (20-50% ownership) and requires the investor to recognize dividends received as a reduction in the investment account, rather than as income. Therefore, the receipt of dividends would affect the investment account when the equity method is used. The cost method (A) only recognizes dividends as income, while the fair value through profit or loss model (C) and fair value through other comprehensive income model (D) does not apply to dividend accounting as they focus on changes in the fair value of an investment.

Question 14

When an investee can be significantly influenced, it is known as a(n)
A)subsidiary.
B)associate.
C)trading investment.
D)parent.

Accepted Answer

When an investee can be significantly influenced, it is known as an associate. A subsidiary is a company that is wholly owned by another company, a trading investment refers to a company that is bought and sold for short-term gains or liquidity, and a parent is the company that owns and controls its subsidiaries.

Question 15

Under the equity method of accounting for investments in common shares, when a dividend is received from the investee,
A)the Dividend Revenue account is credited.
B)the Investment account is increased.
C)the Investment account is decreased.
D)no entry is necessary.

Accepted Answer

Under the equity method, dividends received from the investee are considered a return of investment, thus decreasing the Investment account.

Question 16

On October 1 of last year, Canadian Trader Corp.(CTC) purchased 1,000 shares of the Regal Bank for $50,000 as a trading investment.At year end, December 31, the fair value of these shares was $52,000.On February 1 of this year, CTC sold all these shares for $51,000.The realized gain (loss) that CTC will report this year is
A)a gain of $1,000.
B)a gain of $2,000.
C)a loss of $2,000.
D)a loss of $1,000.

Accepted Answer

The answer of On October 1 of last year, Canadian...

Question 17

Greene Limited owns a 30% interest in the shares of Fields Corporation.During the year, Fields pays $20,000 in dividends to Greene and reports $120,000 profit.Greene's investment in Fields will increase Greene's profit by
A)$36,000.
B)$30,000.
C)$20,000.
D)$ 6,000.

Accepted Answer

Greene Limited owns a 30% interest in Fields Corporation, so it recognizes 30% of Fields' profit. 30% of $120,000 profit is $36,000, which increases Greene's profit. The dividends received do not affect the profit recognized under the equity method.

Question 18

On June 1, 2015, Rock Corp.purchased Chan Corp.common shares for $9,300 as a trading investment.Three months later, Rock sold these shares for $10,000.The entry to record the sale would include a
A)debit to Cash of $9,300.
B)credit to Interest Revenue of $700.
C)credit to Trading Investments of $10,000.
D)credit to Realized Gain on Trading Investments of $700.

Accepted Answer

Since the shares were purchased as a trading investment, any gain or loss resulting from the sale is recognized in the income statement as a realized gain or loss on trading investments. Therefore, the entry to record the sale would include a credit to Realized Gain on Trading Investments of $700 ($10,000 selling price - $9,300 purchase price).

Question 19

If 30% of the common shares of an investee are purchased as a long-term investment, the appropriate classification for this investment is most likely
A)trading investments.
B)equity investments.
C)non-strategic investments.
D)investment in associates.

Accepted Answer

The answer of If 30% of the common shares of...

Question 20

When the cost method is used to account for an equity investment, the carrying amount of the investment is affected by
A)the profit of the investee.
B)dividend distributions of the investee.
C)both the profit and the dividend distributions of the investee.
D)neither the profit nor the dividend distributions of the investee.

Accepted Answer

The answer of When the cost method is used to...

Quiz 12: Statement of Cash Flows

The ability of an investor to affect the operating and financial activities of another company, even though the investor does not control the company, is known as

Behnke Corp.owns a 10% interest in the common shares of DeLonghi Ltd.During this year, DeLonghi pays a total of $15,000 in dividends and reports $130,000 profit.Behnke's investment in DeLonghi will increase Behnke's profit by

The equity method should generally be used to account for an investment in shares when the level of ownership is

An advantage of using the fair value through other comprehensive income is that

On September 15, 2015, Spirit Ltd.sells 100 common shares of Ghoul Corp., which were being held as a trading investment.The shares were acquired six months ago at $100 a share.Spirit sells the shares for $80 a share.The entry to record the sale is

Use the following information to answer questions Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term: -The entry to record the sale of the shares on Oct 1 would include a

Use the following information to answer questions Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term: -The entry to record the receipt of the dividends on Jun 1 would include a

Use the following information to answer questions Wells Inc.reported these transactions relating to marketable trading investments intended to generate profits and to be sold in the near term: -The entry to record the purchase of the Taylor shares on Feb 1 would include a

Jet Inc.owns a 25% interest in the shares of Winnipeg Corp.During the year, Winnipeg pays $5,000 in dividends to Jet and reports a net loss of $50,000.Jet's investment in Winnipeg will affect Jet's profit by

Under the equity method of accounting for an investment

Edmonton Ltd.owns 10% interest in the shares of Jasper Corporation.During the year, Jasper pays $5,000 in dividends to Edmonton and reports a net loss of $50,000.Edmonton's investment in Jasper will affect Edmonton's profit by

The receipt of dividends from an investment affects the investment account when which of the following methods is used?

When an investee can be significantly influenced, it is known as a(n)

Under the equity method of accounting for investments in common shares, when a dividend is received from the investee,

Greene Limited owns a 30% interest in the shares of Fields Corporation.During the year, Fields pays $20,000 in dividends to Greene and reports $120,000 profit.Greene's investment in Fields will increase Greene's profit by

On June 1, 2015, Rock Corp.purchased Chan Corp.common shares for $9,300 as a trading investment.Three months later, Rock sold these shares for $10,000.The entry to record the sale would include a

If 30% of the common shares of an investee are purchased as a long-term investment, the appropriate classification for this investment is most likely

When the cost method is used to account for an equity investment, the carrying amount of the investment is affected by