Chapter 1

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31, 2011: Par value $100,000 Original cost 108,000 Current premium 3,500 Fair value 105,000 Inco normally does not invest in debt but made this investment with the expectation that it could profit from short‐term decreases in the market interest rate. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31, 2011 IFRS‐based Statement of Financial Position?

$105,000

Gil Co. began operations on January 3, year 1. The following information was extracted from Gil Co.'s December 31, year 1 balance sheet: Noncurrent assets: Long‐term investments in marketable equity securities $96,450 Stockholders' equity: Accumulated other comprehensive income: Net unrealized loss on investments in marketable equity securities (less tax benefit of 4,800) (15,000) Gil Co. did not elect to use the fair value option for reporting financial assets. Historical cost of the long‐term investments in marketable equity securities was

$116,250

On January 2, 2004, Adam Co. purchased, as a long‐term investment, 10,000 shares of Mill Corp.'s common stock for $40 a share. On December 31, 2004, the market price of Mill's stock was $35 a share, reflecting a temporary decline in market price. On December 28, 2005, Adam sold 8,000 shares of Mill stock for $30 a share. For the year ended December 31, 2005, Adam should report a loss on disposal of long‐term investment of

$80,000

On January 2, 2004, Adam Co. purchased, as a long‐term investment, 10,000 shares of Mill Corp.'s common stock for $40 a share. On December 31, 2004, the market price of Mill's stock was $35 a share, reflecting a temporary decline in market price. On December 28, 2005, Adam sold 8,000 shares of Mill stock for $30 a share. For the year ended December 31, 2005, Adam should report a loss on disposal of long‐term investment of:

$80,000

Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc's held‐to‐maturity portfolio of marketable debt securities should be reflected in the current financial statements as

A footnote or parenthetical disclosure only.

For accounting purposes, how many levels of influence, that an investor may have over an investee, are identified?

Accounting identifies three levels of influence that an investor may have over an investee. Those levels are: (1) no significant influence, (2) significant influence, but not control, and (3) control.

In which one of the following cases would an investor be presumed to have significant influence over the investee?

Although the acquisition of 40% of an entity's voting common stock normally would be considered sufficient ownership to enable significant influence over the investee, if the investor intends to own the stock only temporarily, the length of ownership is not considered sufficient to enable significant influence over the investee.

Frank Corporation has investment property that is held to earn rental income. Frank prepares its financial statements in accordance with IFRS. Frank uses the fair value model for reporting the investment property. Which of the following is true?

Changes in fair value are reported as profit or loss in the current period.

Jae Corporation purchased land for $100,000. Jae is holding the land for future use and appropriately classifies the land as investment property. Jae prepares its financial statements in accordance with IFRS. What valuation model(s) may Jae use to report the land?

Cost model or fair value model.

On April 1, North Company issued bonds in the market. Upon issue, South Company acquired 10% of North Company's issue. On November 30, South sold the North Company bonds in the market, and the bonds were acquired by East Company. On December 31, which one of the companies, if any, is an investor?

East Company.

The method of accounting for investments that does not give the investor significant influence over the investee is based on the investor's intent in making the investment. When investor intent changes, the classification of and accounting for the investment changes. When investments are transferred between classifications, which one of the following valuation basis is most likely to be used when recording the investment in the new classification?

Fair market value.

Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct? I. Only investments in debt securities may be transferred between categories. II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.

I only.

Clara Corp. does not elect to use the fair value option to report financial assets. For marketable debt securities included in Clara's held‐to‐maturity portfolio, which of the following amounts should be included in the period's net income?

II and III.

In 2003, Lee Co. acquired, at a premium, Enfield, Inc. 10‐year bonds as a held‐to‐maturity investment. At December 31, 2004, Enfield's bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds' market value?

Interest rates have increased since Lee purchased the bonds.

Which of the following is considered investment property for entities preparing financial statements using IFRS?

Land held for future use.

A marketable equity security is transferred from the available‐for‐sale portfolio to the trading securities portfolio. At the transfer date, the security's cost exceeds its market value. What amount is used at the transfer date to record the security in the trading portfolio?

Market value, regardless of whether the decline in market value below cost is considered permanent or temporary.

A marketable equity security is transferred from the held for trading portfolio to the available‐for‐sale portfolio. At the transfer date, the security's cost exceeds its market value. What amount is used at the transfer date to record the security in the available‐for‐sale portfolio?

Market value, regardless of whether the decline in market value below cost is considered permanent or temporary.

Milgram Corporation prepares its financial statements in accordance with IFRS. Milgram has investment property that it leases to Jenson Corporation. Milgram uses the fair value model to report its investment property. Which of the following statements is true?

Milgram does not record depreciation on the investment property.

An investor purchased a bond as a long‐term investment between interest dates at a premium. At the purchase date, the cash paid to the seller is:

More than the face amount of the bond

On both December 31, 2003 and December 31, 2004, Kopp Co.'s only marketable equity security had the same market value, which was below cost. Kopp considered the decline in value to be temporary in 2003 but other than temporary in 2004. At the end of both years, the security was classified as a noncurrent available‐for‐sale investment. What should be the effects of the determination that the decline was other than temporary on Kopp's 2004 net noncurrent assets and net income?

No effect on net noncurrent assets and decrease in net income.

Which one of the following is not considered an equity investment for investment accounting purposes?

Redeemable preferred stock.

Which, if any, of the following characteristics concerning the categories of investments under IFRS No. 9 is/are correct? I. There is a single category for debt investments and a single category for equity investments. II. The business model test used in evaluating debt instruments for classification purposes is concerned with the investor's intent.

Statement I is not correct; Statement II is correct. While there is a single category for equity investments (at fair value), there are two categories for debt investments (at amortized cost and at fair value) (Statement I). The business model test used in evaluating debt instruments for classification purposes is concerned with the investor's intent. Specifically, did the investor make the investment to collect cash flows from interest and return of principal, rather than to make a profit on sale of the investment (Statement II)?

In which one of the following circumstances would an investor most likely have control of an investee?

The investor owns more than 50% of the voting common stock of an investee

A security in an available‐for‐sale securities portfolio is transferred to a held‐to‐maturity securities portfolio. The security should be transferred between the corresponding portfolios at

The market value at date of transfer, regardless of its cost.

Which one of the following is least likely to be a factor in determining how an investment in debt or equity securities is accounted for and reported in financial statements?

The method of payment used to acquire the investment

Which one of the following is least likely to be a factor in determining how an investment in debt or equity securities is accounted for and reported in financial statements?

The method of payment used to acquire the investment.

On April 1, Year 2, Calico Corp. purchases 10,000 shares of stock in Linwood Corporation for $60 per share, representing 5% of the outstanding shares of Linwood. Calico classifies the investment as an available‐for‐sale security. During Year 2, Linwood pays a dividend of $.30 per share. On December 31, Year 2, the Linwood shares are valued at $62 per share. Calico elects to use the fair value option for reporting its investment in Linwood. What is the amount that Calico will record as unrealized gain on the securities in its Year 2 income statement?

This answer is incorrect because dividend income is realized income and is reported on the income statement.

During year 1, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 and properly classified the investment as available‐for‐sale. The market value of this investment was $29,500 at December 31, year 1. Wall did not elect to use the fair value option for reporting financial assets. Wall sold all of the Hemp common stock for $14 per share on December 15, year 2, incurring $1,400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss of

This answer is incorrect. A realized loss on the disposal of available‐for‐sale securities is the excess of the carrying value (before recognition of any unrealized gain or loss) of the investment ($31,500) over the net proceeds from the sale [(2,000 × $14) − $1,400 = $26,600]. Therefore, the loss is $4,900 ($31,500 − $26,600). Changes in the market value of the MES before sale do not affect the computation of the realized loss. For example, at 12/31/Y1, the market value of the MES was below its cost, which required the security to be written down to $29,500 and a $2,000 unrealized loss to be recognized as other comprehensive income and included in accumulated other comprehensive income in the balance sheet. However, the netting of these figures yields the equivalent of the investment's original cost ($29,500 + $2,000 = $31,500). Upon sale of the investment in year 2, the $2,000 loss would be reversed out of "Accumulated other comprehensive income" by reporting the $2,000 as a reclassification adjustment that would increase "Other comprehensive income."

Beach Co. determined that the decline in the fair value (FV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available‐for‐sale on Beach's books. Beach Co. does not elect the fair value option to account for these securities. The controller would properly record the decrease in FV by including it in which of the following?

This answer is incorrect. An available‐for‐sale security is valued at fair value at the balance sheet date, and any temporary decline in value is recorded in other comprehensive income for the period. However, because the decline was permanent (not temporary in nature), the available‐for‐sale security should be written down to fair value, and the amount of the write‐down should be recorded in the income statement as a loss. Therefore, this answer is incorrect. The new cost basis would not be changed for subsequent recoveries in fair value; however, subsequent increases in the fair value of the available‐for‐sale security would be included in other comprehensive income in the year of the increase.

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31, 2011: Par value $100,000 Original cost 108,000 Current premium 3,500 Fair value 105,000 Inco's business model is to regularly invest in debt to receive the cash flow provided by interest and the repayment of principal on maturity. The bonds are not associated with any other asset or liability. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31, 2011 IFRS‐based Statement of Financial Position?

This incorrect answer ($105,000) results from reporting the investment in bonds at fair value. Under IFRS No. 9, investments in debt securities made under an entity's business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment, and when there is no accounting mismatch, should be reported at amortized cost, not at fair value.

Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, 20x2, Sun decided to hold the investments indefinitely and, accordingly, reclassified them from held‐for‐trading to available‐for‐sale on that date. The investments' market value was $575,000 at December 31, 20x1, $530,000 at June 30, 20x2, and $490,000 at December 31, 20x2. What amount should Sun report as net unrealized loss on noncurrent marketable equity securities in its 20x2 statement of stockholders' equity?

This is the decline in market value from December 31, 20x2 to June 30, 20x2. The securities were not classified as available‐for‐sale during this period, but as trading securities. The holding loss during this period is recognized in income.

Assume a company does not elect the fair value option for reporting financial assets. Realized gains from the sale of marketable debt securities should be included in net income of the period of sale when the marketable debt securities portfolio of which they are a part is classified as Available‐for‐sale Held‐to‐maturity

Yes Yes

Which of the following are possible ways that gains or losses on changes in the fair value of investments in equity securities may be reported under IFRS requirements? In profit/loss (Income Statement) In other comprehensive income

Yes Yes

Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities? Amortized cost to fair value Fair value to amortized cost

Yes Yes

Which, if any, of the following transfers between classifications of investments (which do not give the investor significant influence) are possible? Held‐to‐maturity to held‐for‐trading Held‐for‐trading to held‐to‐maturity

Yes Yes