Exam 16: Intercorporate Equity Investments

When two companies form a joint venture and each company owns exactly 50% of the joint venture,both parents will account for the joint venture using the equity method.

Consolidation procedures for 100%-owned subsidiaries require simply adding together the asset,liability,and stockholders' equity accounts of the two companies.

When the ownership percentage of voting stock exceeds 20 percent,GAAP requires that the investor use the equity method to account for the investment.

Under the Exposure Draft issued by the FASB (based on joint deliberations with IASB),most changes in fair value of financial assets would be recorded in net income.

When the ownership percentage of voting stock exceeds 20 percent,GAAP presumes that the investor is able to exert significant influence over the investee company.

Which of the following is true regarding IFRS?

The disclosure rules pertaining to GAAP accounting for business combinations complicates financial analysis for which of the following reasons?

On January 1, 2015, the Regal Company purchased 30% of the outstanding voting stock of the Air Corporation for $300,000; the book value of Air's net assets at the date of purchase was $900,000. Regal was willing to pay more than the book value of the acquired shares because Air's depreciable assets with a ten-year remaining life were undervalued. Regal uses straight-line depreciation. During 2015, Air reported net income of $75,000 and paid dividends of $30,000. -Regal has elected the fair value option to account for equity method investments.The fair value of the Air investment as of December 31,2015 was $295,000.The income reported by Regal during 2015 pertaining to the Air investment was

The amount of goodwill recognized on a consolidated balance sheet will always be the same when accounting for a business combination under either the acquisition method or the purchase method.

For available-for-sale debt securities,if a firm intends to sell the security or it is more likely than not that the firm will be required to sell the security before recovery of its amortized cost basis less current-period credit loss,then the amount of impairment

Minority passive investments of less than 20% of the voting stock shares are classified as either trading securities or available-for-sale securities.

Which of the following statements does not accurately describe the current accounting standards for goodwill?

Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to avoid double counting.

GAAP requires comparative financial statements to be retroactively adjusted to include data for the acquired company for periods prior to the acquisition.

Under both IFRS and GAAP special purpose entities are consolidated when the firm is the "primary beneficiary."

The investment account is decreased by the dividends received by the investor when the investor uses the equity method to account for the stock investment.

A variable interest entity must be consolidated into the financial statements of the sponsoring entity if the sponsoring entity has either a controlling or a noncontrolling financial interest.

Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2015, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2015 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 2015. At the end of 2015, the market value of the Able stock was $18,000 and the market value of the Baker stock was $28,000. The stocks were purchased for short-term speculation. Perry owns 10% of each company. -Perry should record the receipt of the Baker dividend as

A company purchased shares of stock of another company for $75,000 during 2014;the shares were classified as available-for-sale.The shares' market value was $79,000 at the end of 2014 and $81,000 at the end of 2015.Which of the following statements correctly describes the investor's accounting for the investment?

On January 1, 2015, Como Company purchased 45% of the outstanding common shares of the Lite Company for $200,000. The net assets of Lite Company totaled $400,000. The inventory had a book value of $100,000 and a fair value of $120,000. Excess cost attributable to inventory is written off in 2015. During 2015, Lite Company earned $200,000 and declared a dividend of $40,000 for the year. -The amount of goodwill implicit in Como's transaction is