CFA论坛 - Powered by Discuz! Board

LOS a: Describe the classification, measurement, and disclosure under the International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities (SPEs, VIEs).

Cosmo Inc. (Cosmo) invests in two portfolios – Portfolio 1 and Portfolio 2. Portfolio 1 contains securities with an overall intent to profit within a month or two. Portfolio 2 contains equity securities with a moderate amount of acquisition and disposition activity. Which of the following treatments of Cosmo’s reporting of the minority passive investments in Portfolios 1 and 2, respectively, is most accurate?

Portfolio 1

Portfolio 2

Unrealized amounts reported on balance sheet.

Assets reported at fair value.

Unrealized amounts reported on income statement.

Assets reported at fair value.

Unrealized amounts reported on income statement.

Assets reported at cost.

Portfolio 1 contains held-for-trading securities because it is clear that the securities are acquired with the intent to profit over the near term. Therefore, the unrealized gains and losses would be reported immediately in the income statement.

Portfolio 2 contains available-for-sale securities. There are no debt securities and therefore, it cannot contain held-to-maturity securities. As well, there is no indication that the securities are acquired with the intent to profit over the near term. By default, the correct classification would be available-for-sale. Therefore, the securities (assets) would be reported at fair value.

Omricon Capital Associates specializes in making investments in the small cap market sector. In some cases the firm operates as a supplier of private equity for restructurings. In this instance, the firm views itself as having a value investment focus. In others, it acts as a venture capital firm. Here, the investment focus is usually growth. Finally, in some cases it simply takes passive investment positions in publicly-traded firms. The positions in marketable securities are sometimes considered trading positions, and other times the view is to hold for a longer period until valuation parameters are met or exceeded.

Omricon’s chief compliance officer, Raymond “Buzz” Richards has recently become concerned that the firm may not be correctly following the relevant accounting standards for these investments. To ensure that the rules are being effectively adhered to, he is seeking advice from the accounting firm of Merz-Brokaw and Associates on the matter. Sally Lee is the Merz-Brokaw partner heading up the consulting team assigned to review the situation.

The size of the investments ranges from a few percent of the firm’s outstanding equity, to positions of greater than 50%. Richards says that it has always been his understanding that the percentage of the equity held is the major determinant with respect to which accounting method applies. Lee reminds him that the firm’s intent for its investments also plays a role in determining how they are accounted for.

Some of the firm’s investments have not worked out as planned. Richards has conferred with the firm’s portfolio managers regarding securities being held by the firm that are worth less than when they were acquired, and has presented a list of these investments to Lee. His concern is what this implies for the accounting for these investments. Lee tells him that the issue here is whether or not the security can be considered impaired, and that designating a security as impaired implies that the decline in value is permanent.

Top managers at Omricon have asked Lee to help them evaluate the impact of the choice of accounting method on the firm’s profitability. Some members of the management team are of the belief that the accounting method does not affect financial measures because these are driven by underlying economic factors. Others believe that these measures can be affected by the accounting method chosen.

Which of the following statements concerning percentage ownership and accounting method is most accurate?

A)	When the ownership is less than 20%, US GAAP requires the cost or market method, IAS the equity method.

B)	When the ownership is less than 20%, both US GAAP and IAS require the cost or market method.

C)	When the ownership is less than 20%, both US GAAP and IAS require the equity method.

When the percentage ownership is less than 20% (with no significant influence over the investee firm), both US GAAP and IAS require the cost or market method. (Study Session 5, LOS 21.b)

A)	IAS and US GAAP both permit a choice between the equity method and proportional consolidation.

B)	IAS requires that the equity method be used; US GAAP permits a choice between the equity method and proportional consolidation.

C)	US GAAP requires that the equity method be used; IAS permits a choice between the equity method and proportional consolidation.

When the percentage ownership is exactly 50% (i.e., the investment is a joint venture), IAS allows for the choice between the equity method and proportionate consolidation, while US GAAP requires the equity method. (Study Session 5, LOS 21.b)

A)	marketable securities, available-for-sale securities, held-to-maturity securities.

B)	trading securities, available-for-sale securities, held-to-maturity securities.

C)	trading securities, marketable securities, held-to-maturity securities.

The three classifications for passive investments in securities that trade in secondary markets (i.e., marketable securities) are trading securities, available-for-sale securities, and held-to-maturity securities. (Study Session 5, LOS 21.b)

A)	US GAAP requires that unrealized gains and losses are reported on the income statement, while under IAS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.

B)	US GAAP requires that unrealized gains and losses are reported in comprehensive income on the balance sheet, while under IAS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.

C)	IAS requires that unrealized gains and losses are reported in comprehensive income on the balance sheet, while under US GAAP the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.

When a passive investment in marketable equity securities is classified as available-for-sale, US GAAP requires that unrealized gains and losses are reported on the balance sheet in comprehensive income in shareholders’ equity, while under IAS the firm can elect to report on either the income statement or as comprehensive income on the balance sheet. (Study Session 5, LOS 21.b)

A)	decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported on the income statement.

B)	decline in value is permanent, its value should be written down to the new fair value, and a loss reported on the income statement.

C)	decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported in comprehensive income in equity on the balance sheet.

A security should be considered impaired when the decline in value is “other than temporary”. That is to say that it is obviously not due to a temporary decline in the market. No one knows for sure if any decline in value is permanent, but in most cases it is obvious that it is not simply a market phenomenon. When this is the case, the asset’s value should be written down to the new fair value, and a loss reported on the income statement. (Study Session 5, LOS 21.b)

A)	ROA being higher and leverage being higher than under proportionate consolidation.

B)	ROA being lower and leverage being higher than under proportionate consolidation.

C)	ROA being higher and leverage being lower than under proportionate consolidation.

In most cases, the choice of the equity method will result in leverage being lower, net profit margin being higher, and ROA being higher than would be the case under proportionate consolidation. (Study Session 5, LOS 21.d)

Company X owns 15% 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 value of the investment account on December 31, 2002, is:

Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20% guideline. The value of the investment account is equal to the beginning balance plus the proportionate income of company S minus the dividends received from company S, which equals 48,000 + (0.15 x 100,000) ? (0.15 x 20,000) = 60,000.

Harter Company recently acquired a 40% stake in Compton Corp. for $40 million in cash by borrowing at 10%. Harter will account for this acquisition using which of the following methods:

A)	Consolidation.

B)	Equity method.

C)	Held to maturity debt securities method.

The 40% ownership stake would indicate significant control has been gained over the affiliate company. The equity method would be used.

Sawbuck Corporation recently acquired a 60% stake in Rawboard Inc. for $70 million in newly issued common stock. Given this information, which of the following methods should be used to account for the acquisition of Rawboard?

When the parent company has at least a 50% ownership stake and control over the subsidiary, the consolidation method is used.

Which of the following statements is least accurate regarding the accounting for business combinations according to U.S. Generally Accepted Accounting Principles (GAAP)?

A)	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.

B)	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.

C)	Using the equity method, the parent's proportionate share of the affiliate's income is included in the income of the parent.

Company X owns 15% of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2008, is $48,000. In 2009, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is:

Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20% guideline. The impact on the income statement is the proportionate income of company S, which is 0.15 × 100,000 = 15,000.

Company X owns 40% 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 X purchases 25% 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 COGS for company X will be:

COGS will be increased by the proportionate share of the COGS of company S, less the proportionate share of sales of S made to company X, which means COGS is equal to 700,000 + (0.4 × 140,000) ? (0.4 × 0.25 × 200,000) = 736,000.

The receivables will be increased by the proportionate share of the receivables of company S that are not from company X, which means receivables will be 100,000 + 0.4 × (20,000 ? 4,000) = 106,400.

Acme Corporation purchases a 3% interest in Bandy Company to become the single largest shareholder of Bandy. Acme will hold a seat on the Board of Directors of Bandy. Acme will account for its investment in Bandy using the:

Even though Acme’s interest is low at only 3%, they have significant influence by having a seat on Bandy’s Board of Directors. As such, they must use the equity method.

GTH Corporation has just purchased 18% of the common stock of Pittor Corporation, one of their major suppliers, making GTH the largest single shareholder in Pittor. The primary motivation for the purchase is that managerial problems at Pittor have resulted in quality control difficulties, thereby affecting the reliability of several critical component parts for GTH products. At the time of the purchase, GTH management announced they plan to be an active and significant influence on Pittor so the quality problems can be resolved. Given these circumstances, the accounting method used to record the intercorporate investment will most likely be the:

Less than 20% ownership of the acquired corporations common stock would ordinarily mean the cost or market method of accounting would be used to record the shares on the acquirer’s books. However, percentage ownership rules are guidelines only and the appropriate accounting method is dependant on the degree of influence the acquirer intends to exert. In this case, GTH has announced their desire to exert significant influence, hence, the equity method is the appropriate choice.

Evergreen Brothers is a large producer of bedding plants and shrubs that are sold to various retail nurseries and home improvement stores located across the western coast of the United States with approximately $85 million in annual sales. Evergreen grows its products at two facilities, one in Northern California and the other in the Southern part of the state. Each production facility currently distributes its products within an approximate 150 mile radius of its location. All aspects of the shipping and delivery of products have historically been provided by an independent, third-party distribution company.

Because of impressive growth in the company's sales over the past several years, management has decided to pursue plans to bring "in-house" the distribution of the company's products. They believe that the projected decreased freight costs as well as the increased efficiencies in more actively managing the distribution of their production should immediately yield increased profit margins. As an initial step, Evergreen has negotiated the price for ten delivery trucks, which could provide all distribution capacity needed for the company's Northern production facility for the upcoming season. Current plans are to continue the use of the independent distribution company for the needs of the firm's Southern facility for at least the next several years.

Under advice from the company's CFO, Evergreen has created a new special purpose entity (SPE), QuickTime, Inc., which will serve as the entity that will purchase the trucks from the dealer. The purchase will be financed through a combination of debt and equity, with the dealer lending 75% of the total cost. The loan is collateralized by both the trucks and Evergreen's guarantee of the debt, as required by the dealer.

Evergreen has arranged for an outside investor to provide the remaining 25% of the upfront costs of the equipment in exchange for 100% of QuickTime's nonvoting stock. In addition, the outside investor is guaranteed an 8% annual return for the life of the financing term. At the end of seven years, QuickTime will be liquidated and Evergreen will have the option of purchasing the equipment for its fair value at that time. The proceeds of the liquidation will be used to repurchase the outside investor's stock at par value. In the event that the liquidation value is insufficient to buy back the outside investor's stock, Evergreen has committed to fund the shortfall.

Management has given its tentative approval of the project and the proposed structure. Questions remain, however, as to the effect of the creation of QuickTime on Evergreen's financial statements. With the relatively recent issuance of FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities" (FIN 46(R)), the management of Evergreen has not had prior experience with the new consolidation requirements for SPEs.

Which of the following statements regarding special purpose entities (SPEs) is least accurate?

A)	An SPE can be formed to isolate specific assets from the sponsor, thus lowering the cost of capital by protecting the assets of the SPE in the event the sponsor experiences financial distress.

B)	In general, the equity investors in an SPE can expect to receive a limited rate of return on their investment in exchange for limited risk exposure.

C)	An SPE can be established as one of several legal forms, such as corporations, partnerships, or trusts, but must establish separate management from that of the sponsor.

An SPE can take on one of many legal forms, but does not necessarily have to have separate management or employees from that of the sponsor.

A)	Pro-rata share of the actual risks and returns on the project.

B)	Pro-rata share of the actual risk and a pre-determined fixed rate of return on the project.

C)	Pro-rata share of the actual returns on the project and a pre-determined fixed level of risk on the project.

By transferring the variability in the risk of a project to a sponsor, a lender can provide a lower cost of financing to the company that creates the SPE. In return, the sponsor will receive pro-rata profits or other residual interests in the project.

A)	The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm's percentage of voting control.

B)	The equity investors in the VIE must bear all of the SPE's risk up to a pre-determined level as outlined in the governing documents.

C)	The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support.

To qualify as a VIE under FIN 46(R), any one of four conditions must be met, one of which is the presence of an insufficient at-risk equity investment.

A)	not considered a VIE because the outside investor does not have any decision making rights.

B)	considered a VIE because outside investors share the residual gains and losses at liquidation with Evergreen.

C)	considered a VIE because the outside investor's capital contribution is not sufficient to finance QuickTime's operations.

The outside investor contributed 25% of the necessary capital, but this was not sufficient because the dealer additionally required Evergreen's guarantee in order to close the deal. This condition satisfies the requirements established by FIN 46(R) in order to be classified as a VIE.

A)	Holds the majority voting control of the VIE and shares management with the VIE.

B)	Holds the majority voting control of the VIE and has separate management from the VIE.

C)	Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE.

Unlike past accounting treatments of VIEs where consolidation was based upon voting control, FIN 46(R) recognizes the primary beneficiary of a VIE as that entity that absorbs the majority of the risks and enjoys the majority of the benefits of the VIE. The primary beneficiary is required to consolidate the VIE on their financial statements.

A)	The truck dealer is supplying the financing for the majority (75%) of QuickTime's debt, so Evergreen may not consolidate QuickTime on its financial statements.

B)	Because the outside investor holds only nonvoting stock, Evergreen holds the majority controlling financial interest in QuickTime and must consolidate QuickTime on its financial statements.

C)	Evergreen is exposed to the majority of QuickTime's risks and rewards, so Evergreen must consolidate QuickTime on its financial statements.

Before the issuance of FIN 46(R), consolidation was based upon possession of voting control of an entity. FIN 46(R) uses a risk/reward approach when determining which firm must consolidate the VIE on its financial statements. Since Evergreen is the sole entity exposed to variability in QuickTime's net income, as well asset value, QuickTime should be consolidated on their financial statements.

Firm A recently leased equipment used in its manufacturing plant. If the leased asset is worth less than $100,000 at the end of the lease, Firm A will pay the lessor the difference.

Firm B provided debt financing to an unrelated entity. The debt has a provision whereby Firm B cannot be repaid until all other senior debt is satisfied.

According to FASB Interpretation No. 46(R), do Firm A and Firm B have a variable interest?

A)	Both have a variable interest.

B)	Only one has a variable interest.

C)	Neither have a variable interest.

A lease residual guarantee and subordinated debt are both examples of variable interests. Firm A will experience a loss if the leased asset is worth less than $100,000 at the end of the lease. Firm B will experience a loss if the senior debt is not paid in full.

Which of the following statements about variable interest entities (VIE) are correct or incorrect?

Statement #1 is a correct statement. A lower cost of capital is a potential benefit of forming a VIE. Statement #2 is an incorrect statement. The organizational form can be a corporation, partnership, joint venture or trust. It is not necessary for the VIE to have separate management and employees.

Which of the following statements about special purpose entities (SPE) are correct or incorrect?

Both statements are incorrect. The sponsor does not usually have voting control over the SPE; the activities of an SPE are specifically detailed in governing documents created at the origination of the SPE. The structure of the SPE transfers the risks and rewards from the equity owners to the variable interest owners. In return, the equity owners usually receive a fixed rate of return.

Which of the following statements regarding qualifying special purpose entities (QSPE) is most accurate?

A)	Under IFRS, the sponsor can avoid consolidating asset securitizations by creating a QSPE.

B)	The QSPE has total control of the assets transferred from the sponsor.

C)	A QSPE can hold only certain financial and non-financial assets.

A QSPE can only hold financial assets (and the assets are usually receivables). As a legally separate, independent entity, the QSPE has total control of the assets transferred from the sponsor. Previously, under U.S. GAAP, the sponsor could avoid consolidating asset securitizations by creating a QSPE. QSPEs are no longer permitted under U.S. GAAP or IFRS.

Which of the following statements regarding asset securitizations and special purpose entities (SPEs) is most accurate?

A)	The SPE usually issues debt to purchase receivables from the sponsor.

B)	When receivables are securitized, the sponsor reports the cash inflow as an investing activity in the cash flow statement.

C)	If the sponsor has no recourse, then the transaction is nothing more than a collateralized borrowing.

SPEs are often created to securitize assets, usually receivables of the sponsor. Typically, the SPE issues debt to purchase the receivables from the sponsor and the debt is repaid as the receivables are collected.

When the receivables are securitized, the sponsor removes the receivables from the balance sheet and reports the cash inflow as an operating activity in the cash flow statement. If the sponsor still has recourse, the transaction is nothing more than a collateralized borrowing.

On January 9, 2006, Company X purchased $1,000,000 of government bonds and 100,000 shares of stock in Company S for $2,000,000. They are the first marketable securities purchased in the company's history. The company intends on holding the stock for the foreseeable future and holding the bonds to maturity. As of December 31, the bonds were valued at $900,000, and the stocks were valued at $2,200,000. The bonds paid $50,000 of interest and the stocks paid $20,000 of dividends. In 2006, Company S had earnings per share of $0.90.

The bonds are classified as debt securities held-to-maturity and are valued at cost. The stocks are classified as debt and equity securities available for sale and are valued at market value.

The bonds are classified as debt securities held-to-maturity, and the income generated from them is $50,000. The stocks are classified as debt and equity securities available for sale, and although the increased value is reported as an asset, the gain is reported in the securities valuation account in the equity section and not on the income statement. The effect of the stocks on income is the $20,000 of dividends.

Which of the following securities would most likely be characterized as a held-to-maturity security?

Debt securities, that a company has a positive intent and ability to hold to maturity, are most likely to be characterized as a held-to-maturity security.

SFAS No. 115 establishes different categories of securities with distinct ways of treating them on the financial statements of the company. One category requires the securities to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement. This category of security classification is called debt:

A)	and equity securities available-for-sale.

B)	securities held-to-maturity.

C)	and equity trading securities.

According to SFAS No.115, if securities are designated as debt and equity securities available-for-sale they can be sold to meet the liquidity and other needs of the company. As such, the securities are to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement.

Which of the following statements is INCORRECT regarding the classification of debt and equity security investments?

A)	If equity and debt securities are trading securities, any realized and unrealized gains and losses are reported in the income statement.

B)	Debt held-to-maturity is reported in the balance sheet at amortized cost.

C)	If equity and debt securities are available-for-sale securities, any realized and unrealized gains and losses are reported in the income statement.

In the case of available-for-sale securities, unrealized gains and losses are excluded from the income statement and are reported as a component of shareholders' equity.

According to SFAS No. 115, a category of securities is carried on the company balance sheet at cost. This category of securities is called debt:

A)	securities held-to-maturity.

B)	and equity trading securities.

C)	and equity securities available-for-sale.

When debt securities are purchased with both the intent and ability to hold them until they mature, they are recorded on the balance sheet at cost.

Which of the following statements about the various classifications of securities held by a firm is FALSE?

A)	A firm which invests in the debt securities of another firm cannot classify these securities as "held to maturity" if they have the positive intent and ability to hold the securities until final maturity.

B)	Trading securities are, by definition, current assets because the firm intends to trade these securities in the near term.

C)	Equity securities of other companies cannot be classified as "held to maturity" under SFAS 115.

Under SFAS 115, only debt securities, which the firm has the positive intent and ability to hold until final maturity, may be classified as held to maturity.

SFAS No. 115 establishes different categories of securities with distinct ways of treating them on the financial statements of the company. Which of the following categories requires realized and unrealized gains and losses to be reported as income? Debt:

A)	securities held-to-call.

B)	and equity trading securities.

C)	and equity securities available-for-sale.

The SFAS No. 115 category, debt and equity trading securities, is for securities that, when acquired, are intended to be resold within a near term time horizon. They are classified as current assets on the balance sheet, with any realized or unrealized gains and losses reported as income.

Which of the following statements is TRUE about securities classified as held to maturity?

A)	Only debt securities can be classified as "held to maturity" securities.

B)	Equity securities can be classified as "held to maturity" if the security pays a large and consistent dividend and management has decided to hold the security for more than five years.

C)	Equity securities can be classified as "held to maturity" if the firm's management has decided to hold the security for more than five years.

Under SFAS 115, only debt securities, which the firm has the positive intent and ability to hold until final maturity, may be classified as held to maturity.

In one of your evening MBA courses, you are about to take an accounting exam and are concerned about your knowledge of accounting for marketable equity securities. You have the following data from a previous take-home assignment:

You are assumed to own 100 shares of each firm. Under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," the securities will be classified as either held-to-maturity, available-for-sale, or trading securities.

Which of the following statements regarding the income statement and balance sheet treatment of securities classified as held-to-maturity is most accurate? They are carried at:

A)	cost on the balance sheet and coupon receipts are considered income.

B)	fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

C)	cost on the balance sheet with unrealized gains and losses reported in income.

SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a company to classify its securities into categories based upon the company's intent relative to the eventual disposition of the securities.

One of these categories, held-to-maturity securities, is composed of debt securities which a company has the positive intent and ability to hold to maturity. These securities are carried at the cost on the balance sheet and coupon receipts are considered income.

A)	cost on the balance sheet and coupon receipts are considered income.

B)	fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

C)	fair market value on the balance sheet with unrealized gains and losses reported in income.

One of these categories, available-for-sale securities, may be sold to address the liquidity and other needs of a company. Debt and equity securities classified as available-for-sale are carried at fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

A)	cost on the balance sheet with unrealized gains and losses reported in income.

B)	fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as separate component of shareholders' equity.

C)	fair market value on the balance sheet with unrealized gains and losses reported in income.

One of these categories, trading securities, is for debt and equity securities acquired for the purpose of selling them in the near term. These securities are measured at fair market value and are listed as current assets on the balance sheet. Unrealized and realized gains and losses are reported in income.

A)	$12,500, and record no gains or losses.

B)	$14,000, and record no gains or losses.

C)	$12,500, and record an unrealized loss of $1,500.

The original portfolio cost was: $8,000 + $2,000 + $4,000 = $14,000

In 2005: $7,500 + $3,000 + $2,000 = $12,500

Thus we write the portfolio down by $1,500 and take an unrealized loss.

A)	$16,500, and record an unrealized gain of $2,500.

B)	$14,000, and record an unrealized gain of $2,500.

C)	$16,500, and record an unrealized gain of $4,000.

The original portfolio cost was: $8,000 + $2,000 + $4,000 = $14,000

In 2005 the value of the portfolio was: $7,500 + $3,000 + $2,000 = $12,500

In 2006 the value of the portfolio was: $8,500 + $3,500 + $4,500 = $16,500

We write the balance sheet value up to current value and recognize an unrealized gain of $4,000.

Which of the following securities will most likely be characterized as an available-for-sale security?

A)	Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes.

B)	Debt securities that a company has a positive intent and ability to hold to maturity.

C)	Equity securities representing 30% ownership in another firm.

Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes are likely to be considered as available-for-sale.

A)	debt and equity securities that are very liquid and easy to sell.

B)	equity securities representing 20% to 50% ownership in a public firm.

C)	debt and equity securities acquired with the intent of selling them in the near future.

Debt and equity securities acquired with the intent of selling them in the near future are likely to be considered trading securities.

Maverick Incorporated formed a special purpose entity (SPE) to purchase and lease a 50,000 acre ranch. The SPE financed 95% of the purchase price with debt. The remaining 5% was financed with equity capital received from two separate independent investors. The lender would not make the loan without Maverick’s guarantee. How should Maverick treat the SPE in its financial statements if Maverick is the lessee?

A)	No firm must consolidate the SPE.

B)	Each equity investor must proportionately consolidate the SPE.

C)	Maverick must consolidate the SPE.

The 5% at-risk equity investment is not sufficient to support the activities of the SPE without Maverick’s guarantee. Thus, the SPE is considered a variable interest entity (VIE). Since Maverick is responsible for the guarantee, Maverick is the primary beneficiary and must consolidate the SPE.

According to FASB Interpretation No. 46(R), would an entity qualify as a variable interest entity (VIE) if the shareholders have insufficient equity capital at-risk and would an entity qualify as a VIE if the shareholders absorb the expected losses?

An entity is a VIE if there is insufficient equity capital at-risk. If shareholders absorb the expected losses, the entity would not be a VIE unless any of the other conditions apply.

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?

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.

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?

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.

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.

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.

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?

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.

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

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.

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.

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:

Trading securities are measured at fair market value.

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

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

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

Statement #1:	The sponsor usually maintains the decision-making power and voting control over the SPE.
Statement #2:	The equity owners of an SPE usually receive a rate of return that is tied to the performance of the SPE.

Security	Cost	2005 Value	2006 Value
1	$80	$75	$85
2	$20	$30	$35
3	$40	$20	$45

Company	S	X

Sales	200	1,000
Cost of goods sold (COGS)	140	700
Operating expenses	20	100
Income from investment in S	0	12
Earnings before taxes (EBT)	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

Statement #1	One potential benefit of a VIE is a lower cost of capital since the assets and liabilities of the VIE are isolated in the event the sponsor experiences financial difficulties.
Statement #2	The organizational form of a VIE must be either a partnership or a joint venture and it is necessary for the VIE to have separate management and employees.