土豆妮

Mustang Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46(R) and is consolidation required by Mustang, respectively?

A) Yes; Yes.

B) No; No.

C) Yes; No.

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Since the shareholders do not absorb the expected losses, the SPE is considered a VIE. The unrelated firm (not Mustang) that absorbs the losses is the primary beneficiary and must consolidate the VIE.

土豆妮

Carter Schmitz purchased 200 shares of Intelismart at $21 a share in June 2006 and intends to actively trade 80 shares in the near future and hold the remaining 120 shares as available for sale securities. Intelismart's closing price was $26 on December 31, 2006, and Schmitz did not sell any of its shares.

What amount should Schmitz report on this investment under the income statement?

A) $400.

B) $1,000.

C) $600.

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The unrealized gain on the 120 shares available for sale is $600 (26 - 21 = 5 × 120 shares). There is also an unrealized gain of $400 (5 × 80) related to the 80 shares that are trading securities which would be reported on the income statement. For trading securities, realized and unrealized gains and losses are reported on the income statement. For available for sale securities, only realized gains and losses are reported on the income statement.

土豆妮

Two equity securities were purchased by Company XYZ in 1999 for $1,000. The market value of these securities rose to $1,350 by the end of 2000. If these securities were accounted for under SFAS 115 as Trading Securities, which of the following correctly describes their treatment on the balance sheet prior to posting the results of the income statement to the balance sheet?

A) The valuation of the "Marketable Securities" account on the assets side of the balance sheet will remain unchanged.

B) The valuation of the "Marketable Securities" account on the assets side of the balance sheet will rise by $350.

C) The equity of the firm will rise by $350.

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If a portfolio of securities is classified as "Trading Securities" under SFAS 115, then the portfolio's value is marked to market on each balance sheet date. Since the question specifically states that the change in retained earnings has not been posted to the balance sheet, equity will be unaffected by the increase in the valuation of the portfolio.

土豆妮

Birtch Corporation acquires 25% of the common stock of TRQ Inc. on January 1, 2002. TRQ subsequently reports net income for the full year of $700,000, and pays a cash dividend equal to 30 percent of the reported income.

Assuming the equity method of accounting is used, what will be the reported investment income for Birtch?

A) $60,000.

B) $175,000.

C) $115,000.

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Click for Answer and Explanation

Under the equity method, dividends are not included as income to the acquirer. ($700,000 × 0.25) = $175,000 will be the reported investment income for Birtch.

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Assuming the equity method of accounting is used, What will be the cash flow received by Birtch, due to their investment in TRQ during 2002?

A) $52,500.

B) $227,500.

C) $65,400.

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The cash flow to Birtch will be ($700,000)(0.30)(0.25) = $52,500.

土豆妮

Mashburn Company acquired 25% of the 100,000 outstanding shares of Humm Co. on January 1 for $250,000 in cash. Humm Co. earned $1 per share and had a dividend payout ratio of 40%. As of December 31, Humm Co. shares were trading in the open market at $12 per share. Calculate the income statement treatment of the Humm Co. investment as of December 31.

A) $75,000.

B) $25,000.

C) $10,000.

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Under the equity method, the investor recognizes its pro-rata share of the affiliate's income on the income statement. Since Mashburn owns 25,000 shares of Humm and Humm earned $1, the income statement impact of the investment is $25,000.

土豆妮

The Anderson Company acquired 100,000 shares of the Birschbach Company on January 1, 2000, at $25 per share. The market price of a share of Birschbach stock on December 31, 2000, was $35 per share. During 2000, Birschbach paid dividends of $1.50 per share and had earnings of $2.50 per share.

If the Anderson Company accounts for the Birschbach shares as trading securities, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $2.6 million.

B) $3.5 million.

C) $2.5 million.

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Trading securities are measured at fair market value.

(100,000)($35) = $3,500,000

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If Anderson Company accounts for the Birschbach Company shares as securities available-for-sale, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $2.6 million.

B) $2.5 million.

C) $3.5 million.

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Available-for-sale securities are measured at fair market value.

(100,000)($35) = $3,500,000

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