6.Company X owns 40 percent of company S and currently accounts for the investment using the equity method. Below are the 2002 balance sheets and income statements for companies X and S, in thousands of dollars. Company | S | X | | | | Sales | 200 | 1,000 | Cost of goods sold | 140 | 700 | Operating expenses | 20 | 100 | Income from investment in S | 0 | 12 | Earnings before taxes | 40 | 188 | Taxes | 10 | 47 | Net income | 30 | 141 | | | | Cash | 10 | 50 | Accounts receivable | 20 | 100 | Inventories | 20 | 100 | Other current assets | 20 | 100 | Property, plant, and equip. | 130 | 610 | Investment in S | 0 | 40 | Total assets | 200 | 1,000 | | | | Liabilities | 100 | 500 | Stockholders’ equity | 100 | 500 |
Company X purchases 25 percent of the output of company S, and $4,000 of the receivables of company S are from company X. If the investment is treated using the proportionate consolidation method, the accounts receivable for company X will be: A) $108,000. B) $120,000. C) $116,000. D) $106,400.
7.Company X owns 40 percent of company S and currently accounts for the investment using the equity method. Below are the 2002 balance sheets and income statements for companies X and S, in thousands of dollars. Company | S | X | | | | Sales | 200 | 1,000 | Cost of goods sold | 140 | 700 | Operating expenses | 20 | 100 | Income from investment in S | 0 | 12 | Earnings before taxes | 40 | 188 | Taxes | 10 | 47 | Net income | 30 | 141 | | | | Cash | 10 | 50 | Accounts receivable | 20 | 100 | Inventories | 20 | 100 | Other current assets | 20 | 100 | Property, plant, and equip. | 130 | 610 | Investment in S | 0 | 40 | Total assets | 200 | 1,000 | | | | Liabilities | 100 | 500 | Stockholders’ equity | 100 | 500 |
Company X purchases 25 percent of the output of company S, and $4,000 of the receivables of company S are from company X. If the investment is treated using the proportionate consolidation method, the cost of goods sold for company X will be: A) $756,000. B) $736,000. C) $742,000. D) $840,000. 8.Company X owns 15 percent of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is: A) $3,000. B) $12,000. C) $0. D) $15,000.
9.Which of the following statements is INCORRECT regarding the accounting for business combinations according to U.S. Generally Accepted Accounting Principles (GAAP)? A) Using the equity method of accounting for an investment in another company, the income to the parent company will consist of dividends, interest, and capital gains from its investment in the other company. B) Using the equity method, the parent's proportionate share of the affiliate's income is included in the income of the parent. C)
In the case of the consolidation of two companies, the revenues and expenses of both companies are added together, with any inter-company transfers removed and reported on the parent's income statement. D) The guidelines recommend using the consolidation method if one company owns more than 50% of another company. |