Question 1

A publicly quoted share price would be an example of a Level 2 input in determining fair value.

Accepted Answer

A publicly quoted share price is considered a Level 1 input, as it is a quoted price in an active market for an identical asset or liability that the entity can access at the measurement date.

Question 2

All investments are recorded at fair value upon acquisition.

Accepted Answer

According to the IFRS (International Financial Reporting Standards), all investments are required to be initially recognized at their fair value upon acquisition. This includes investments in equity securities, debt securities, and other financial assets. However, there are some exceptions to this rule, such as investments in associates, joint ventures, and subsidiaries, which are accounted for using different methods. Nevertheless, the general principle is that investments are measured at their current fair value at the time of purchase, and any subsequent changes in value are recognized in the financial statements.

Question 3

Under ASPE, all passive investments must be accounted for using only FVTPL, Cost or Amortized Cost methods.

Accepted Answer

According to ASPE, all passive investments must be accounted for using only FVTPL, Cost or Amortized Cost methods. There is no provision for any other method. Therefore, the statement is true.

Question 4

Level 1 inputs should be used to determine fair value in the absence of level 2 inputs.

Accepted Answer

Level 1 inputs are preferred over Level 2 inputs for determining fair value because they are based on quoted prices in active markets for identical assets or liabilities.

Question 5

Under the equity method of accounting for an investment, an investor recognizes its share of earnings in the period in which the investee declares a dividend.

Accepted Answer

Under the equity method, an investor recognizes its share of the investee's earnings in the period in which they are earned, regardless of whether a dividend is declared or not. The investor's share of dividends declared by the investee is recognized as dividend income in the period in which the dividend is declared.

Question 6

Under IFRS, discounts or premiums on amortized cost investments may be amortized using either the straight line or effective interest methods.

Accepted Answer

The answer of Under IFRS, discounts or premiums on amortized...

Question 7

Once an investor has power over an investee, consolidation is automatically required.

Accepted Answer

While power is an important factor in determining whether consolidation is necessary, it is not the only factor. The investor must also have control over the investee, which is determined by examining the substance of the relationship between them. In some cases, an investor may have power but not control, and consolidation would not be required.

Question 8

The accounting approach for recording a stock dividend received on a long-term equity investment is the same whether the cost or the equity method is used by the investor.

Accepted Answer

Whether an investor uses the cost or equity method, a stock dividend received on a long-term equity investment is recorded by increasing the number of shares held at the fair value on the date of the dividend declaration. The accounting treatment for the dividend is the same in both methods.

Question 9

Under ASPE, management may choose to account for any strategic investments using either the cost or equity methods.

Accepted Answer

Under ASPE, management is allowed to use either the cost or equity method to account for strategic investments.

Question 10

Gains and losses realized from the sale of FVTOCI investments are transferred from OCI to earning when the sale occurs.

Accepted Answer

Gains and losses realized from the sale of FVTOCI (Fair Value Through Other Comprehensive Income) investments are not transferred to earnings upon sale; instead, they are reclassified from OCI (Other Comprehensive Income) to retained earnings, bypassing the income statement.

Question 11

Under IFRS, Investments in Associates may be accounted for using either the Cost or Equity Methods.

Accepted Answer

Under IFRS, investments in associates are accounted for using the equity method, not the cost method.

Question 12

During Consolidation, the net assets of the subsidiary are revalued to fair value at acquisition.

Accepted Answer

During Consolidation, the net assets of the subsidiary are revalued to fair value at acquisition. This fair value reflects the market value of the assets at the time of acquisition, and the adjustment for the revaluation appears on the balance sheet as goodwill.

Question 13

When the equity method is used by an investor to account for investments in common stock, the investment account will be increased when the investor recognizes cash dividend received from investee.

Accepted Answer

Under the equity method, the investment account is decreased for the receipt of dividends, as these are considered a return on investment, not income.

Question 14

Over time, the total gain or loss flowing through income will be the same, regardless of whether an investment is designated as FVTPL or FVTOCI.

Accepted Answer

The answer of Over time, the total gain or loss...

Question 15

The book value of a bond purchased at a premium or discount and classified, as an investment in marketable securities must be adjusted each period for amortization of the premium or discount.

Accepted Answer

The book value of a bond purchased at a premium or discount and classified as an investment in marketable securities must be adjusted each period for amortization of the premium or discount. This is required by generally accepted accounting principles (GAAP) to reflect the true cost of the bond over its life. Amortization is the process of systematically reducing the premium or discount to its original value at maturity, either by taking a portion of the premium into income each period for bonds purchased at a premium, or by adding a portion of the discount to interest expense each period for bonds purchased at a discount.

Question 16

When shares are not actively traded on open markets, it is impossible to estimate their fair value.

Accepted Answer

Shares not actively traded can still have their fair value estimated through other valuation methods such as discounted cash flows, comparisons with similar companies, or asset-based valuations.

Question 17

Unrealized holding gains flow through income or OCI for FVTOCI investments.

Accepted Answer

Unrealized holding gains for FVTOCI (Fair Value Through Other Comprehensive Income) investments are recognized in other comprehensive income (OCI), not through the income statement.

Question 18

When fair-value is not determinable, investments may be carried at cost.

Accepted Answer

This statement is true. When fair value is not determinable, investments can be carried at cost.

Question 19

There is no separate impairment test for FVTPL investments.

Accepted Answer

FVTPL (Fair Value Through Profit or Loss) investments are measured at fair value with changes in fair value recognized in profit or loss, thus eliminating the need for a separate impairment test as any decline in value is immediately recognized.

Question 20

A change from the equity method to the cost method is a prospective accounting change.

Accepted Answer

Switching from the equity method to the cost method is considered a prospective accounting change, meaning the change affects only future financial statements and not past ones. This is because the equity method records the investor's share of the investee's earnings on the investor's income statement, while the cost method records the investment as a fixed cost and the investor only records revenue when they receive dividends or earn proceeds from selling the investment. Switching methods affects how future earnings will be recognized, but not past earnings.

Quiz 11: Financial Instruments: Investments in Bonds and Equity Securities