Flashcards in FAR 20 - Joint Ventures, Investor Stock and IFRS Investment Property Deck (31):
Which one of the following is least likely to be used to report an investment in a corporate joint venture?
A. Equity method.
B. Fair Value method.
C. Consolidation basis.
D. Partnership basis.
B. Even though an investment in a joint venture is a financial asset, and financial assets generally are eligible to be reported at fair value at the election of the holder (investor), such an option is not likely to be available for joint ventures because (1) if the joint venture is to be consolidated, it is not eligible for fair value measurement and (2) even if it is not to be consolidated, the nature of joint ventures (e.g., not traded in a public market) makes it unlikely that a readily determinable fair value will be available.
Which one of the following is the most likely characteristic of a business joint venture?
A. Profits and losses are shared equally.
B. Control is shared jointly by parties to the venture.
C. Must be established for a limited time.
D. Must be formed as a corporation.
B. Shared control is a central characteristic of a joint venture. None of the participating parties is likely to have unilateral control of the joint venture.
Jacko, Co., a 50% owner of Venture Co., a jointly controlled entity, contributed to Venture a nonmonetary asset with an original cost of $200,000, accumulated depreciation of $50,000, and a fair value of $180,000. Under IFRS, which one of the following is the amount of gain, if any, Jacko should recognize on its contribution to Venture Co.?
A. $ 0 (no gain)
B. A gain should be recognized by Jacko for the share of ownership held by others (50%) attributable to the excess of the fair value of the asset over its carrying value. The excess of fair value ($180,000) over carrying value ($200,000-$50,000 = $150,000) is $30,000 ($180,000- $150,000). Therefore, Jacko should recognize .50 x $30,000 = $15,000 as a gain.
T/F: Under IFRS, an entity must carry and report its investment in a jointly controlled entity using the equity method of accounting.
IFRS accounting for joint arrangements allows either the equity method or the Proportionate consolidation method.
T/F: A corporate joint venture could be a variable interest entity.
T/F: The only way to form a joint venture is through the participation of two entities.
Joint control by two or more investors is central to a joint venture association. Investors can be individuals or entities.
T/F: In a joint venture, usually none of the participating parties has unilateral legal control.
T/F: Under IFRS, when a nonmonetary asset is contributed in the formation of a jointly controlled entity, only a portion of the difference between the carrying value of the asset and its fair value is recognize as a gain or loss.
T/F: If a corporation participates as an owner of a corporate joint venture, it will consolidate the joint venture in its consolidated financial statements.
Generally, the investor accounts for and reports its investment in the corporate joint venture using the equity method of accounting.
Only when a VIE is determined, or the investor is able to unilaterally control a corporate joint venture, would the FS be consolidated.
T/F: A joint venture can be established only as a separate corporation.
A joint venture can be established as either a joint venture corporation or a joint venture partnership.
Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the following methods?
Neither. Stock dividends are not recognized in the accounts at receipt, at fair value or any other value. Rather, they reduce the cost per share under both methods. The original cost is spread over more shares.
The investor's percentage of the firm has not changed as a result of the stock dividend, but the investor has more shares (as do all investors). When the shares received as a dividend are sold, the reduction in cost basis increases the gain or reduces the loss.
Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?
A. As dividend revenue at Guard's carrying value of the stock.
B. As dividend revenue at the market value of the stock.
C. As a reduction in the total cost of Guard stock owned.
D. As a memorandum entry, reducing the unit cost of all Guard stock owned.
D. Under any method used to account for an investment in common stock, the investor records a stock dividend received by a memorandum entry to increase the number of shares owned. Since the cost of the investment does not change, the per share cost of the stock decreases.
On March 4, 2004, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share.
On September 26, 2004, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, 2005. On September 30, 2004, LVC's common stock had a market value, exrights, of $95 per share and the stock rights had a market value of $5 each.
What amount should Evan report on its September 30, 2004, Balance Sheet for investment in stock rights?
The original stock investment cost is allocated to the stock and the rights based on their relative market values. Total market value of the stock is $95,000, and of the rights is $5,000. The original cost of the stock is $80,000. Thus the investment in stock rights is reported at [$5,000/($5,000 + $95,000)]$80,000 = $4,000.
Simpson Co. received dividends from its common stock investments during the year ended December 31, 2005 as follows:
A cash dividend of $8,000 from Wren Corp., in which Simpson owns a 2% interest.
A cash dividend of $45,000 from Brill Corp., in which Simpson owns a 30% interest. This investment is appropriately accounted for using the equity method.
A stock dividend of 500 shares from Paul Corp. was received on December 15, 2005, when the quoted market value of Paul's shares was $10 per share. Simpson owns less than 1% of Paul's common stock.
In Simpson's 2005 Income Statement, dividend revenue should be:
Only the $8,000 dividend is included in dividend revenue. The dividend on the Brill stock is accounted for under the equity method, which treats all dividends as a reduction in the investment account. The stock dividend is not revenue. Rather it reduces the per share cost of the investment in Paul stock. No entry is recorded on receipt of a stock dividend.
T/F: Stock rights can be classified as held-to-maturity investments.
Stock rights are equity securities and therefore are classified as trading- or AFS and accounted for/reported as such.
T/F: The allocation of a portion of the cost of an investment between the original investment (shares) and the related stock rights should be based on relative market value of the shares and the stock rights.
T/F: A stock option (warrant) always has value.
T/F: If stock rights which are assigned value are permitted to expire without being exercised, a loss will result.
Which, if either, of the following statements concerning investment property is/are correct?
I. A part of a building may be investment property, while the other part is not investment property.
II. Property leased between affiliated entities cannot be reported as investment property in consolidated statements.
Both. It is correct that a part of a building may be investment property, while the other part is not investment property, if the two parts of property can be separately sold or rented and if the other requirements of investment property are met. It also is correct that property leased between affiliated entities cannot be reported as investment property in consolidated statements because, at the consolidated level, the leased property would be owner-occupied.
If property is transferred from another category to investment property because of a change in use of the property, which of the following cases can result in the recognition of a gain or loss on the transfer?
I. Investment property is measured and reported at cost.
II. Investment property is measured and reported at fair value.
II only. When property is transferred from another category into investment property measured at fair value, the old category will be based on cost and the new category (investment property) will be based on fair value. Any difference between the old cost-based carrying value and the new fair value will result in a gain or loss (statement II). When property is transferred from another category into investment property measured at cost, the cost-base carrying amount from the old category is the amount at which the asset is recorded in the new category and no gain or loss is recognized on the transfer (Statement I).
Which of the following methods used to measure and report investment property will require disclosure of a reconciliation showing the causes of changes in the carrying amounts of investment property, between the beginning and end of a period?
Use of cost method
Use of fair value method
Both. When either the cost method or the fair value method is used to measure investment property; the entity must provide a reconciliation showing the causes of changes in the carrying amounts of investment property between the beginning and end of a period.
Which of the following is least likely to be investment property under IFRS?
A. A vacant building listed with a broker as available for lease under an operating lease.
B. A plot of vacant land held for long-term capital appreciation.
C. A building under construction that is to be leased upon completion to another entity under an operating lease.
D. A plot of vacant land that is for sale by a land developer.
D. A plot of vacant land that is for sale by a land developer would not qualify as investment property. The vacant land would constitute inventory to a land developer and, since it is not being held for capital appreciation, would not qualify as investment property.
Which, if any, of the following statements concerning disclosures related to investment property is/are correct?
I. When the fair value method is used, the entity must disclose whether or not a qualified independent party provided valuations.
II. When the cost method is used, the entity must still disclose fair value of investment property.
Both. When the fair value method is used to measure investment property, the entity must disclosed whether or not a qualified independent party provided valuations, (Statement I) and when the cost method is used to measure investment property, the entity must disclose fair value of investment property (Statement II).
T/F: When the cost method is used to measure and report investment property, the fair value of the investment property must be disclosed.
T/F: To be investment property, the property must be held to earn rent, for capital appreciation, or both.
T/F: Property used by its owner while awaiting appreciation in property value can be classified as investment property.
Property that is being used by the owner, is not used for the purpose of earning rent, or capital appreciation, and therefore can not be classified as Investment property.
T/F: Investment property can include land, buildings, and equipment.
Not equipment. Only land and/or buildings.
T/F: An entity may use the cost method to measure and report some investment property and the fair value method to measure and report other investment property.
Only one method must be used for all of an entity's investment property. Either cost or FV.
T/F: Investment property is initially recorded at cost.
T/F: Both U.S. GAAP and IFRS designate an investment property category.
US GAAP does not have a separate investment property category designated.