Exam 13: Investments

A company is referred to as a parent if it owns

Match the following terms to their correct definition: a.equity security j.held-to-maturity securities b.debt security k.amortized cost method c.passive l.fair value method d.significant influence m.unrealized gains and losses e.control n.equity method f.parent o.consolidation worksheet g.subsidiary p.minority interest h.trading securities q.business combination i.available-for-sale securities r.goodwill -Device that facilitates combining the financial statements of the investor and investee companies

If the investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the operating and financial policies of the investee.

An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends.

Match the following terms to their correct definition: a.equity security j.held-to-maturity securities b.debt security k.amortized cost method c.passive l.fair value method d.significant influence m.unrealized gains and losses e.control n.equity method f.parent o.consolidation worksheet g.subsidiary p.minority interest h.trading securities q.business combination i.available-for-sale securities r.goodwill -Situation where the investor owns over 50% of the outstanding common stock and is therefore deemed to own the investee

Select the incorrect statement from the following:

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a ____________________.

A transaction that brings together two or more previously separate entities to form a single legal entity is called

The Allowance to Adjust Trading Securities to Market account is

Consolidation is required when a parent acquires between 50% and 100% of the subsidiary's stock. Any voting stock not held by the parent is called the ____________________.

Which method of accounting for investments recognizes income when income is earned by the investee?

Match the following terms to their correct definition: a.equity security j.held-to-maturity securities b.debt security k.amortized cost method c.passive l.fair value method d.significant influence m.unrealized gains and losses e.control n.equity method f.parent o.consolidation worksheet g.subsidiary p.minority interest h.trading securities q.business combination i.available-for-sale securities r.goodwill -Any voting stock not held by the parent in situations where consolidation is required because the investor acquires between 50% and 100% of the investee's stock

If the acquisition cost exceeds the current value of the net assets (assets minus liabilities)acquired, the investor must also be purchasing an intangible asset arising from attributes that are not separable from the business-such as customer satisfaction, product quality, skilled employees, and business location.

Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock, are called equity securities.

On January 1, 2012, Parent, Inc., purchases all the outstanding common stock of Sub Corporation for $750,000. Since Parent has control over Sub, a consolidated balance sheet must be prepared from the individual balance sheets of both companies. Complete the following worksheet to prepare the consolidated balance sheet on January 1, 2012.

Match the following terms to their correct definition: a.equity security j.held-to-maturity securities b.debt security k.amortized cost method c.passive l.fair value method d.significant influence m.unrealized gains and losses e.control n.equity method f.parent o.consolidation worksheet g.subsidiary p.minority interest h.trading securities q.business combination i.available-for-sale securities r.goodwill -Situation where the investor owns 20% to 50% of the outstanding common stock of the investee and is therefore assumed to possess significant influence over the operating and financial policies of the investee

What are the effects on the accounting equation from the purchase of a short-term investment?

When an investor is able to exert significant influence over another company, the ____________________ method of accounting is used for the investment.

Match the following terms to their correct definition: a.equity security j.held-to-maturity securities b.debt security k.amortized cost method c.passive l.fair value method d.significant influence m.unrealized gains and losses e.control n.equity method f.parent o.consolidation worksheet g.subsidiary p.minority interest h.trading securities q.business combination i.available-for-sale securities r.goodwill -Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity

On January 1, 2011, P Company purchased all of the outstanding common stock of S Company. The consolidation of the two balance sheets requires a