Professional Documents
Culture Documents
15 - Investments - Theory
15 - Investments - Theory
5. Equity security
a. Encompasses any instrument representing ownership shares and the right to
acquire ownership shares.
b. Is a security that represents a creditor relationship with the enterprise.
c. Is the residual interest in the enterprise.
d. Includes redeemable preferred stock, treasury stock and convertible bonds.
7. The following statements relate to investments in trading and available for sale
securities. Which is the incorrect statement?
I. Realized and unrealized gains and losses on trading securities are recognized in
income.
II. Realized and unrealized gains and losses on available for sale securities shall
be excluded from earnings and reported as a separate component of
stockholders’ equity
a. I only b. II only c. Both I and II d. Neither I nor II
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8. Kyla Company purchased bonds at a discount on the open market and intends to hold
these bonds to maturity. Kyla should account for those bonds at
a. Cost c.
Fair value
b. Amortized cost d. Lower at
cost or market
9. For a marketable debt securities portfolio classified as held to maturity, which of the
following amounts should be included in the net income?
I. Unrealized temporary losses during the period.
II. Realized gains during the period
III. Changes in the valuation allowance during the period.
a. III only b. II only c. I and II d. I, II and III
10. Moira has a portfolio of marketable equity securities which it does not intend to sell in
the near term. How should Moira classify these and how should it report unrealized
gains and losses from these securities?
a. Trading securities and any unrealized gains and losses are reported as component
of income.
b. Available for sale securities and any unrealized gains and losses are reported as
component of equity.
c. Trading securities and any unrealized gains and losses are reported as component
of equity.
d. Available for sale securities and any unrealized gains and losses are reported as
component of income.
11. On both December 31, 2004 and 2005, Kate Company’s only marketable equity
security had the same market value, which was below cost. Kate considered the
decline in value to be temporary in 2004 but “other than temporary” in 2005. At the end
of both years, the security was classified as a noncurrent asset. Kate considers the
investment as “available for sale”. What should be the effects of the determination that
the decline was other than temporary on Kate’s 2005 noncurrent assets and net
income?
a. No effect
b. No effect on noncurrent assets and decrease in net income
c. Decrease in noncurrent assets and no effect on net income
d. Decrease in both noncurrent assets and net income
12. The transfer of a security between categories of investments shall be accounted for at
fair value. Which is incorrect concerning the treatment of the security’s unrealized gain
or loss at the date of transfer?
a. For a security transferred from trading securities, the unrealized gain or loss at the
date of transfer shall be recognized in earnings.
b. For a security transferred into trading securities, the unrealized gain or loss at the
date of transfer shall be recognized in earnings.
c. For a debt security transferred into available for sale securities from “held to
maturity”, the unrealized gain or loss at the date of transfer shall be reported as a
separate component of stockholders equity.
d. For a security transferred into “held to maturity” from available for sale securities,
the unrealized gain or loss at the date of transfer shall be included in earnings.
16. An investor uses the equity method to account for an investment in common stock.
After the date of acquisition, the investment account of the investor would
a. Not be affected by its share of the earnings or losses of the investee
b. Not be affected by its share of the earnings of the investee but be decreased by its
share of the losses of the investee
c. Be increased by its share of the earnings of the investee but not be affected by its
share of the losses of the investee
d. Be increased by its share of the earnings of the investee and decreased by its share
of the losses of the investee
17. When an investor uses the equity method to account for investment in common stock,
cash dividends received by the investor from the investee should be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s earnings
c. A deduction from investment account
d. A deduction from goodwill
18. An investor uses the equity method to account for investment in common stock. The
purchase price implies a fair value of the investee’s depreciable assets in excess of the
investee’s net asset carrying values. The investor’s amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
20. An investment in associate should not be accounted for under the equity method
I. When the investor ceases to have significant influence.
II. When the investment is acquired and held exclusively with a view to its
subsequent disposal within twelve months from acquisition.
III. When the associate operates under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor but the investor
continues to have significant influence.
a. I, II and III c. I and III only
b. I and II only d. II and III only
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21. If under the equity method, an investor’s share of losses of an associate equals or
exceeds the carrying amount of an investment, which of the following is an incorrect
accounting treatment?
a. The investment is reported at NIL value.
b. Additional losses are provided to the extent the investor has incurred obligations or
made payments on behalf of the associate to satisfy obligations of the associate
that the investor has guaranteed or otherwise committed.
c. If the associate subsequently reports profits, the investor resumes its share of those
profits without regard to the share of net losses not previously recognized.
d. The investor ordinarily discontinues its share of further losses.
22. If an associate has outstanding cumulative preferred stock, the investor computes its
share profits or losses
a. After adjusting for preferred dividends which were actually paid during the year.
b. After adjusting for preferred dividends only when declared.
c. Without regard for preferred dividends
d. After adjusting for preferred dividends whether or not the dividends have been
declared.
24. An increase in the cash surrender value of a life insurance policy owned by an
enterprise would be recorded by
a. Decreasing annual insurance expense
b. Increasing investment income
c. Recording a memorandum entry only
d. Decreasing deferred charge
31. Embedded derivative should be separated from its host contract and accounted for as
a derivative when:
a. The economic risks and characteristics of the embedded derivative are not closely
related to those of the host contract.
b. A separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative.
c. The entire instrument is not measured at fair value with changes in fair value
recognized in the income statement.
d. All of the above.
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33. Which of the following should be valued at fair value subsequent to initial recognition?
a. Held-to-maturity investments.
b. Financial assets and liabilities that are designated as a hedged item or hedging
instrument.
c. Investments in equity instruments with no reliable fair value measurement.
d. Financial assets acquired or held for the purpose of selling in the short term.
37. A party to a joint venture and has joint control over that joint venture
a. Venturer b. Investor c. Operator d. Manager
38. A method of accounting whereby a venturer’s share of each of the assets, liabilities,
income and expenses of a jointly controlled entity is combined line by line with similar
items in the venturer’s financial statements or reported as separate line items in the
venturer’s financial statements
a. Equity method c. Proportionate consolidation method
b. Cost method d. Combination method
39. This form of joint venture maintains own records and prepares and presents financial
statements in accordance with GAAP.
a. Jointly controlled operations c. Jointly controlled entities
b. Jointly controlled assets d. All of the above
40. This form of joint venture involves the use of assets and other resources of the
venturers rather than the establishment of a separate entity
a. Jointly controlled operations c. Jointly controlled entities
b. Jointly controlled assets d. All of the above
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42. Allowed accounting treatment for interests in jointly controlled entity include
a. Proportionate consolidation c. Either a or b
b. Equity method of accounting d. None of the above
45. A property interest that is held by a lessee under an operating lease may be classified
and accounted for as investment property provided that:
I. The rest of the definition of investment property is met.
II. The operating lease is accounted for as if it were a finance lease.
III. The lessee uses the cost model.
a. I only b. I and II only c. I and III only d. I, II and III
46. Which of the following is incorrect if the owner uses part of the property for its own use,
and part to earn rentals or for capital appreciation?
a. If the portions can be sold or leased out separately, they are accounted for
separately.
b. If the portions can be sold or leased out separately, the part that is rented out is
investment property.
c. If the portions cannot be sold or leased out separately, the property is investment
property only if the owner-occupied portion is insignificant.
d. None of the above.
47. Which of the following is incorrect if the enterprise provides ancillary services to the
occupants of a property held by the enterprise?
a. The appropriateness of classification as investment property is determined by the
significance of the services provided.
b. If the services provided are relatively insignificant component of the arrangement
as a whole (for instance, the building owner supplies security and maintenance
services to the lessees), then the enterprise may treat the property as investment
property.
c. Where the services provided are more significant (such as in the case of an owner-
managed hotel), the property should be classified as owner-occupied.
d. None of the above.
II. From the perspective of the affiliates as a group and for purposes of
consolidated financial statements, the property is treated as owner-occupied
property.
a. Both I and II b. Neither I nor II c. I only d. II only
50. Investment property is initially measured at cost, including transaction costs. Such cost
includes
a. Start-up costs c. Property transfer taxes
b. Abnormal waste d. Initial operating losses
52. Which of the following rules is incorrect regarding accounting for transfers (to or from
investment property) between categories?
a. For a transfer from investment property carried at fair value to owner-occupied
property or inventories, the fair value at the change of use is the 'cost' of the
property under its new classification.
b. For a transfer from owner-occupied property to investment property carried at fair
value, PAS 16 should be applied up to the date of reclassification. Any difference
arising between the carrying amount under PAS 16 at that date and the fair value
should be recognized in net profit or loss for the period.
c. For a transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount
should be recognized in net profit or loss for the period.
d. When an entity completes construction/development of an investment property
that will be carried at fair value, any difference between the fair value at the date of
transfer and the previous carrying amount should be recognized in net profit or
loss for the period.
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