Reading 22- LOS f ～ Q11－14

11.Which of the following transactions would necessitate the use of the consolidation method of accounting for an intercorporate investment?

A)   Passive investment in a company that is represents less than 20 percent of ownership.

B)   Controlling interest in a company that represents greater than 50 percent of ownership.

C)   Shared control of a company in which each party owns a 50 percent stake.

D)   Minority ownership investment that permits significant influence of the company.

The correct answer was B)

The consolidation method is utilized for investments that represent greater than 50% ownership and give the investor control over the acquired entity.

12.Which one of the following scenarios would require the application of the consolidation method of accounting for investments under U.S. GAAP standards?

A)   Company A acquires a 50 percent stake in Company B.

B)   Company A acquires a 75 percent stake in Company B.

C)   Company A acquires a 25 percent stake in Company B.

D)   Company A acquires a 10 percent stake in Company B.

The correct answer was B)

The consolidation method of accounting for intercorporate investments in used when the degree of ownership is greater than 50%, effectively giving the investor control over the acquired entity.

13.Which of the following statements comparing U.S. GAAP to IAS rules for intercorporate investments is most accurate?

A)   U.S. GAAP rules provide for a choice between the equity method and proportionate consolidation for equally-owned joint ventures.

B)   IAS rules provide for a choice between the equity method and proportionate consolidation for investments of between 20 and 50 percent with significant influence over the investee firm.

C)   U.S. GAAP rules provide for a choice between the equity method and proportionate consolidation for investments of between 20 and 50 percent with significant influence over the investee firm.

D)   IAS rules provide for a choice between the equity method and proportionate consolidation for equally-owned joint ventures.

The correct answer was D)

With regard to accounting standards for intercorporate investments, U.S. GAAP rules and IAS rules agree concerning most categories of percentage of ownership, except that IAS rules provide for a choice between the equity method and proportionate consolidation for equally-owned joint ventures.

14.You are evaluating two firms, A and B, which have passive intercorporate investments. In each case the ownership levels are less than 20 percent, and they have no significant influence over the firms in which they have invested. However, Firm A has invested via a negotiated transaction in shares that are not publicly traded, and for which no liquid secondary market exists. Firm B has purchased shares that are publicly traded, and has identified these as trading securities. Which of the following statements most accurately describes the correct method of accounting for these securities under both U.S. GAAP and IAS rules?

A)   Firm A should account for its investment using the market method, while firm B should account for its investment using the cost method.

B)   Firm A should account for its investment using the cost method, and firm B should account for its investment using the cost method.

C)   Firm A should account for its investment using the cost method, while firm B should account for its investment using the market method.

D)   Firm A should account for its investment using the market method, and firm B should account for its investment using the market method.

The correct answer was C)

Passive investments in firms whose shares are not publicly traded should be accounted for using the cost method. Passive investments in publicly traded securities that have been acquired for the purpose of trading should be accounted for using the market method.