Flashcards in FAR 17 - Intro to Equity and Debt Investments Deck (12):
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; the bonds were acquired by East Company. On December 31, which, if any, of the following companies is an investee?
North = Yes, investee
South = No, neither
East = No, investor
North is the investee because it issued the bonds, but neither South nor East are investees. Since East owns the bonds on December 31, it is the investor. Since South did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.
In which one of the following cases would an investor be presumed to have significant influence over the investee?
A. Investor acquires more than 50% of the investee's non-voting preferred stock.
B. Investor acquires 10% of investee voting common stock.
C. Investor acquires 40% of investee voting common stock, which it intends to hold for 60 days.
D. Investor acquires 18% of investee voting common stock and is the primary buyer of the investee's output.
D. Although the acquisition of 18% of an entity's voting common stock is less than the 20% normally required to presume significant influence over the investee, the fact that the investor has material transactions with the investee (together with the 18% ownership) is presumed to give the investor sufficient means for exercising significant influence.
At what percentage is an investor considered to have control of an investee?
When an investor owns more than 50% of the voting common stock of an investee, in the absence of constraining conditions (e.g., investee in bankruptcy), the investor has controlling interest in the investee.
In the absence of other relevant factors, what minimum level of voting ownership is considered to give an investor significant influence over an investee?
20%. In the absence of other relevant factors, an investor is considered to have significant influence over an investee if it owns 20%-50% of the voting securities of the investee.
T/F: An investor is given ownership rights if it invests in either bonds or common stock of another entity.
An investment in the bonds of another entity does not give the investor an ownership interest, but an investment in the common stock of another entity does give the investor an ownership interest. An investment in the bonds of another entity establishes a debtor-creditor relationship, not an ownership relationship.
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?
A. The nature of the investment.
B. The method of payment used to acquire the investment.
C. The extent or proportion of the investment securities acquired.
D. The purpose for which the investment was made.
B. The method of payment used to acquire an investment does not help determine the correct accounting treatment of the investment. While the method of payment determines what will be "credited" upon acquisition of the securities, it will not enter into the subsequent accounting treatment of the investment.
T/F: An investment in equity securities gives the investor the right to receive dividends.
Equity ownership provides voting rights.
T/F: Stock options held are equity securities for investment accounting purposes.
T/F: An investment in debt securities does not give the investor any influence over the investee.
T/F: If an investor has significant representation on the Board of Directors of the investee and participates in the investee's policy making, the investor is likely to have significant influence over the investee.
T/F: For accounting purposes, convertible bonds are debt securities.