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Exam 15: Accounting for Debt and Share Investments

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Question 31

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Micron purchased 40,000 Martok Corp common shares. This represents 40% of the outstanding shares. The purchase price was $232,000. The entry to record thetransaction includes a:

A) Credit to Investment in Martok Common Shares for $232,000.
B) Debit to Investment in Martok Common Shares for $232,000.
C) Credit to Investment in Martok Common Shares for $92,800.
D) Debit to Investment in Martok Common Shares for $92,800.
E) Debit to Investment in Martok Common Shares for $40,000.

F) None of the above
G) All of the above

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Question 32

Multiple Choice

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The sale of a short-term equity investment includes a debit to:

A) Long-term equity investments.
B) Cash.
C) Short-term investments.
D) Gain on sale of short-term investment.
E) All of these answers are correct.

F) C) and D)
G) A) and B)

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Question 33

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The term "equity security" refers to the guarantee your broker gives you concerning an investment that was just made for you.

An investor that significantly influences the operations of an investee should account for the investment using the equity method.

Investments non-strategic debt investments require the investor to record interest income as it accrues.

The equity method is used in accounting for significant influence investments in associates.

Music City paid $37,800 plus a broker's fee of $525 to acquire 8% Airport Corp bonds with a $40,000 maturity value. Music City intends to hold the bonds to maturity. Thejournal entry to record acquisition of the bonds includes a debit to Long-Term Investment in Airport Bonds for:

Identify the reasons) why investments are made in other corporations.

Non-strategic investments are usually:

Micron owns 30% of JVT Corp's common shares and has significant influence over JVT's operations. Micron receives $6,500 in dividends from JVT. The entry to recordreceipt of the dividends includes a debit to Cash for $6,500 and a credit to Investment in JVT Shares for $6,500.

Non-strategic investments can result in gains or losses for a company.

The main feature of a non-strategic investment is that the investor's intent is to generate profit primarily through short-term changes in fair value.

A company that owns 100% of the outstanding shares of a subsidiary is required to take over the subsidiary's assets, cancel the subsidiary's shares, and merge the subsidiary into the parent.

Receipt of dividends increases the value of a significant influence investment.

Non-strategic investments are of two types: debt and share investments.

IFRS requires the fair value through profit and loss method for:

Non-strategic debt investments are initially recorded using either the fair value through profit or loss method or amortized cost method.

Accounting for long-term investments in equity securities with controlling influence uses the:

Non-strategic investments are always classified as short-term regardless of how long the investment is planned to be held.

Tool Co. received cash dividends of $3.5 per share on 300 Sharp Systems Inc. shares. The journal entry to record the transaction is a debit to Cash of $1,050 and a credit to Dividend Income of $1,050.