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标题: Financial Reporting and Analysis【 Reading 22】Sample [打印本页]
作者: tango_gs    时间: 2012-3-29 11:25     标题: [2012 L2] Financial Reporting and Analysis【Session 6- Reading 22】Sample

Under which of the following is a minority interest account most likely to appear on the consolidated balance sheet?
A)
II only.
B)
I only.
C)
Both I and II.


Proportionate consolidation is similar to a business acquisition, except the investor only reports the proportionate share of the assets, liabilities, revenues, and expenses of the joint venture. Since only the proportionate share is reported, no minority owners’ interest is necessary.
作者: tango_gs    时间: 2012-3-29 11:27

Luna Life Insurance is a publicly traded corporation with total assets in excess of $500 million. Joy Manning, CFA, has served as Luna’s chief investment officer for the past decade. Recent poor performance of Luna investment portfolio has led to the formation of a special task force to review Luna’s investment holdings as well as its operating policies. The task force is composed of two current Luna board members (who are not employees of Luna) and three independent investment professionals. Their assignment is to thoroughly review Luna’s financial statements for evidence of impropriety or mishandling of corporate assets. The task force is expected to complete their review within one month and report back to Luna’s board of directors shortly thereafter. Luna’s most recent financial statements reflect approximately $200 million in various equity holdings and $100 million in debt instruments. A broad classification of the portfolio (in millions of $) as of December 31, 2006 is as follows:
Held-to-MaturityAvailable-for-SaleTrading
Equity$0$125$75
Debt$50$25$25
In the footnotes, there is a reference to $10 million of available-for-sale securities that were transferred to the held-to-maturity portfolio last year. The securities were transferred at fair market value, and an unrealized loss of $1 million was included in that period’s income. Several members of the task force believe the transaction deserves further analysis to determine if the securities’ transfer between portfolios was executed in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities” as Manning has represented. Also, in 2006, Luna transferred $5 million of shares in ABC Corp from the available-for-sale portfolio to the trading portfolio. In association with this transaction, $1 million in unrealized gains were included in the year’s income. The task force observes that after the transfer, there are $2.5 million of ABC Corp remaining in the available-for-sale portfolio. Manning has stated that the firm’s desire to reduce exposure to the equity market was the reason for selling only a portion of the position in ABC Corp. In addition, the group is performing its own analysis on the impact of last year’s acquisition of a 20% stake in Instate, a regional provider of commercial insurance. Instate reported $15 million in earnings for the year ending December 31, 2006, and paid approximately $1 million in dividends. Manning directed Luna’s accountants to record the purchase using the equity method, and thus has included a proportional share of Instate’s net income for the year. The acquisition was effective as of January 1st of 2006, and operating results for the investment stake in Instate are incorporated into Luna’s 2006 financial statements. The group will perform basic analysis both with and without the operating results of Instate in order to better evaluate what financial impact the inclusion of Luna’s results had on Instate’s overall performance. With regard to the $50 million of debt securities currently classified as held-to-maturity on Luna’s financial statements:
A)
they are carried at their amortized cost and cannot be sold prior to maturity except under unusual circumstances.
B)
unrealized gains and losses are excluded from income but reported as a separate component of shareholders’ equity.
C)
the cost method of accounting should be used on the income statement while the market method should be used on the balance sheet.


When debt securities are classified as held-to-maturity, the company has both the intent and ability to hold them until they reach their respective maturities. Only under unusual, isolated circumstances can a company liquidate prior to maturity. Note that only debt securities can be classified as held-to-maturity; equity securities cannot. (Study Session 6, LOS 22.a)
Although the appropriate classification of investments is determined at the purchase date, management can reevaluate the classifications at the end of each financial period and adjust accordingly. When transferring debt securities from the available-for-sale portfolio to held-to-maturity, which of the following rules is most likely in accordance with SFAS 115? Available-for-sale securities transferred to held-to-maturity are transferred at:
A)
fair market value, and any unrealized gains or losses remain in equity but are subsequently amortized over the remaining life of the security.
B)
fair market value, and any unrealized gains or losses are included in income in the period of transfer.
C)
their amortized cost, and any unrealized gains or losses remain in equity but are subsequently amortized over the remaining life of the security.


When transferring debt securities between portfolios, available-for-sale securities transferred to held-to-maturity are transferred at fair market value, and any unrealized gains or losses remain in equity but are subsequently amortized over the remaining life of the security. Note that this only applies to debt securities because equity securities cannot be classified as held-to-maturity. (Study Session 6, LOS 22.a)
Analysts should be wary of which of the following equity transactions a company may use to manipulate its reported earnings to reflect a higher net income? A company can move shares that have appreciated in value from:
A)
held-to-maturity to the trading portfolio.
B)
trading to the available-for-sale portfolio.
C)
available-for-sale to the trading portfolio.


Because shares of the same company can be classified as separate investments, a company could move those securities with unrealized gains to the trading portfolio, and thus recognize the gains, while leaving those securities with unrealized losses in the available-for-sale portfolio. Equity shares cannot be classified as held-to-maturity. (Study Session 6, LOS 22.a)

An intercorporate investment must typically meet which of the following set of guidelines in order to be reported under the equity method?
% ownershipDegree of influence
A)
20% - 50%significant influence
B)
20% - 50%no significant influence
C)
Less than 20%no significant influence


The parent-company must have at least 20% ownership and/or significant influence over the management of the affiliate. Over 50% ownership would require the consolidation method. (Study Session 6, LOS 22.a)
Luna has recorded its investment in Instate utilizing the equity method of accounting for intercorporate investments. According to FASB, which of the following statements most accurately reflects the impact on an investor’s financial statements by using the equity method?
A)
The investing firm can include a proportionate share of the investee’s income in its earnings, regardless of whether or not there are actual cash flows (i.e. dividends).
B)
The investing firm will not make any adjustments to its financial statements to reflect its proportionate share of the investee’s net assets, but will reference the investment in the footnotes.
C)
Market values can be compared with the carrying amount for analysis purposes, but only market values may be used in the financial statements.


The proportionate share of the investee’s income is included in the parent’s income statement. Changes in the market value of the investee are not reflected in the investing firm’s income statement so long as the decline in value is not considered to be permanent. (Study Session 6, LOS 22.b)
Suppose Luna had accounted for the Instate acquisition using the passive method for investments in financial assets rather than the equity method of accounting for intercorporate investments. Explain how the different methods would most likely impact Luna’s financial statements? Under the equity method, Luna will report:
A)
lower net income than under the passive method for investments in financial assets.
B)
higher interest coverage ratios and return on investment than under the passive method for investments in financial assets.
C)
improved debt coverage than under the passive method for investments in financial assets.


In this scenario where the investee reported positive earnings and paid out less than 100% of its earnings as dividends, the parent will report higher income, thus resulting in higher interest coverage ratios and return on investment. (Study Session 6, LOS 22.c)
作者: tango_gs    时间: 2012-3-29 11:28

Company A acquired a 50% stake in Company T on January 1, 2003 by paying T’s shareholders $100,000 in cash. Pre-acquisition balance sheets for the two firms are presented below:

Balance Sheet

Company A
Company T
Current assets$400,000$60,000
Fixed assets600,000100,000
Total$1,000,000$160,000
Current liabilities$50,000$ 30,000
Common stock350,00060,000
Retained earnings600,00070,000
Total$1,000,000$160,000

What are the post-acquisition balance sheet values for total assets for Company A under the equity and acquisition methods of accounting respectively?
A)
$1,000,000 and $1,060,000.
B)
$1,060,000 and $1,000,000.
C)
$1,060,000 and $1,060,000.


Using the equity method will result in a decrease of the current asset account to $300,000 because of the cash outflow. However, a new non-current asset called "Investment in Company T" will be added to the balance sheet. This amount will be $100,000, so the total assets will remain unchanged. Under acquisition, total assets will be $1,060,000 (400,000 + 60,000 + 600,000 + 100,000 – 100,000).
作者: tango_gs    时间: 2012-3-29 11:28

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)
$10,000.
C)
$25,000.


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.
作者: tango_gs    时间: 2012-3-29 11:29

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 marketable securities balance amount shown on the balance sheet is:
A)
$3,000,000.
B)
$3,200,000.
C)
$3,100,000.


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 impact of the marketable securities on net income is:
A)
$270,000.
B)
$70,000.
C)
$140,000.


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.
作者: tango_gs    时间: 2012-3-29 11:29

Which of the following statements regarding asset securitizations and special purpose entities (SPEs) is most accurate?
A)
When receivables are securitized, the sponsor reports the cash inflow as an investing activity in the cash flow statement.
B)
If the sponsor has no recourse, then the transaction is nothing more than a collateralized borrowing.
C)
The SPE usually issues debt to purchase receivables from the sponsor.


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.
作者: tango_gs    时间: 2012-3-29 11:31

James White is preparing for the Level II CFA exam and is concerned about his knowledge of accounting for marketable equity securities. He has the following data from a previous take-home assignment from his MBA program:
SecurityCost2005 Value2006 Value
ABC$80$75$85
HIJ$20$30$35
XYZ$40$20$45

The portfolio includes 100 shares of each firm; the securities are 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.


Accounting standards require 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.

Which of the following statements regarding the income statement and balance sheet treatment of securities classified as available-for-sale 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 reported in income.
C)
fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.


Accounting standards require 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, 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.

Which of the following statements regarding the income statement and balance sheet treatment of securities classified as trading securities is most accurate? They are carried at:
A)
fair market value on the balance sheet with unrealized gains and losses reported in income.
B)
cost on the balance sheet with unrealized gains and losses reported in income.
C)
fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as separate component of shareholders' equity.


Accounting standards require 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, 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.

If the securities are classified as trading securities the balance sheet value for the portfolio at year-end 2005 is:
A)
$12,500, and record no gains or losses.
B)
$12,500, and record an unrealized loss of $1,500.
C)
$14,000, and record no gains or losses.


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.

If the securities are classified as trading securities the balance sheet value for the portfolio at year-end 2006 is:
A)
$16,500, and record an unrealized gain over the past year of $2,500.
B)
$16,500, and record an unrealized gain over the past year of $4,000.
C)
$14,000, and record an unrealized gain over the past year of $2,500.


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
作者: tango_gs    时间: 2012-3-29 11:32

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


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.
In exchange for providing lower-cost financing to an SPE, lenders typically require additional financial support from a sponsor, which may be in the form of additional collateral or guarantees. In return, the sponsor will typically receive which of the following risk and return profiles?
A)
Pro-rata share of the actual risk and a pre-determined fixed rate of return on the project.
B)
Pro-rata share of the actual risks and returns 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.
According to FIN 46(R), if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions?
A)
The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support.
B)
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.
C)
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.


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.
In order to be considered a VIE under FIN 46(R), an entity must meet certain conditions. Which of the following statements about QuickTime is most accurate? Under FIN 46(R), QuickTime is:
A)
not considered a VIE because the outside investor does not have any decision making rights.
B)
considered a VIE because the outside investor's capital contribution is not sufficient to finance QuickTime's operations.
C)
considered a VIE because outside investors share the residual gains and losses at liquidation with Evergreen.


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.
As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions?
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.
Assuming that QuickTime is considered a VIE in accordance with FIN 46(R), which of the following statements regarding the consolidation of QuickTime on Evergreen's financial statements is most accurate?
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.
作者: tango_gs    时间: 2012-3-29 11:33

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

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.
A)
Both are incorrect.
B)
Both are correct.
C)
Only one is correct.


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.
作者: tango_gs    时间: 2012-3-29 11:33

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.
作者: tango_gs    时间: 2012-3-29 11:34

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

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.
A)
Both are correct.
B)
Both are incorrect.
C)
Only one is correct.


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.
作者: tango_gs    时间: 2012-3-29 11:35

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.
作者: tango_gs    时间: 2012-3-29 11:35

Accounting standards for passive intercorporate investments establish 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.


Accounting standards for passive intercorporate investments include, 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.
作者: tango_gs    时间: 2012-3-29 11:36

Which of the following statements regarding securities classified as held to maturity is most accurate?
A)
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.
B)
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.
C)
Only debt securities can be classified as "held to maturity" securities.


Only debt securities, which the firm has the positive intent and ability to hold until final maturity, may be classified as held to maturity.
作者: tango_gs    时间: 2012-3-29 11:36

Which of the following securities will most likely be characterized as an available-for-sale security?
A)
Debt securities that a company has a positive intent and ability to hold to maturity.
B)
Equity securities representing 30% ownership in another firm.
C)
Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes.


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.
作者: tango_gs    时间: 2012-3-29 11:37

Company X owns 15% of company S and exerts significant influence 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:
A)
$63,000.
B)
$60,000.
C)
$48,000.


Because company X exerts significant influence 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.
作者: tango_gs    时间: 2012-3-29 11:39

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)
$115,000.
C)
$175,000.



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.

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)
$227,500.
B)
$52,500.
C)
$65,400.



The cash flow to Birtch will be ($700,000)(0.30)(0.25) = $52,500.
作者: tango_gs    时间: 2012-3-29 11:40

Global Life Insurance (GLI) reported the following portfolio information:
   2010 Q12010 Q22010 Q32010 Q4
Shares purchased (sold)1,000(200)7000
Total shares quarter-end1,0008001,5001,500
Purchase price50.0045.00
Sale price45.00
Quarter-end market price52.0043.0052.0060.00
Total dividends500400750750

For the purpose of this question, assume that stocks can be classified as held to maturity.What is the income from the portfolio if the securities are classified as trading, available-for-sale, and held-to-maturity, respectively?
TradingAvailable-for-saleHeld-to-maturity
A)
$19,900$19,900-$6,600
B)
$19,900$1,400$1,400
C)
-$6,600$1,400$1,400

Trading income is calculated as dividends plus all gains and losses (realized and unrealized). Total dividends are 2,400. GLI realized a loss on the sale of 200 shares at 45.00 per share for a total realized loss of 1,000. GLI has an unrealized gain of 8,000 (800×(60-50)) on the shares purchased in Q1 and 10,500 (700×(60-45)) the shares purchased in Q3, or total unrealized gains of 18,500. Therefore, total income under the trading classification is 19,900 (2,400 - 1,000 + 18,500). Under the available-for-sale and held-to-maturity classifications income is calculated as dividends plus realized gains and losses. Therefore, total income is 1,400 (2,400 + (-1,000)).
This item set requires a bit of imagination as equity securities cannot really be HTM.
What is the balance sheet carrying value of the securities under each of the classifications at year-end?
TradingAvailable-for-saleHeld-to-maturity
A)
$71,500$71,500$71,500
B)
$90,000$71,500$71,500
C)
$90,000$90,000$71,500


Under the trading and available-for-sale classifications the balance sheet carrying values are the market values of the shares or 90,000 = (1,500 × 60).

For held-to-maturity securities the carrying value is the amortized cost, or 71,500 = ((800 × 50) + (700 × 45)).
What is the rate of return (income/year-end carrying value) under each of the three methods?
TradingAvailable-for-saleHeld-to-maturity
A)
22.11%1.56%1.96%
B)
23.22%23.22%29.23%
C)
2.67%2.67%3.36%


Trading = 22.11% (19,900/90,000)

Available-for-sale = 1.56% (1,400/90,000)

Held-to-maturity = 1.96% (1,400/71,500).
作者: tango_gs    时间: 2012-3-29 11:40

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)
$3.5 million.
B)
$2.6 million.
C)
$2.5 million.

Trading securities are measured at fair market value.
(100,000)($35) = $3,500,000

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)
$3.5 million.
B)
$2.6 million.
C)
$2.5 million.

Available-for-sale securities are measured at fair market value.
(100,000)($35) = $3,500,000
作者: tango_gs    时间: 2012-3-29 11:41

Carter Schmitz, Inc. (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.


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.
作者: tango_gs    时间: 2012-3-29 11:41

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:
A)

acquisition method
B)

investment in financial assets method.
C)

equity method.


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 this investment in financial assets. 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.
作者: tango_gs    时间: 2012-3-29 11:42

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:
A)
equity method.
B)
lower of cost or market method.
C)
acquisition method.


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.
作者: tango_gs    时间: 2012-3-29 11:42

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:
A)
$3,000.
B)
$15,000.
C)
$12,000.


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.
作者: tango_gs    时间: 2012-3-29 11:43

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?
A)
Acquisition.
B)
The purchase method.
C)
Proportionate consolidation.


When the parent company has at least a 50% ownership stake and control over the subsidiary, the acquisition method is used
作者: tango_gs    时间: 2012-3-29 11:43

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)
Equity method.
B)
Acquisition 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.
作者: tango_gs    时间: 2012-3-29 11:45

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 investment in financial assets method, IFRS the equity method.
B)
When the ownership is less than 20%, both US GAAP and IFRS require the investment in financial assets method.
C)
When the ownership is less than 20%, both US GAAP and IFRS require the equity method.


When the percentage ownership is less than 20% (with no significant influence over the investee firm), both US GAAP and IFRS require the investment in financial assets method. (Study Session 6, LOS 22.a)
For instances in which Omricon holds exactly 50% of the outstanding equity of the investee firm’s equity (i.e., the investee firm is a joint venture), which of the following statements is most accurate?
A)
IFRS and US GAAP both permit a choice between the equity method and proportional consolidation.
B)
US GAAP requires that the equity method be used; IFRS permits a choice between the equity method and proportional consolidation.
C)
IFRS requires that the equity method be used; US GAAP 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), IFRS allows for the choice between the equity method and proportionate consolidation, while US GAAP requires the equity method. (Study Session 6, LOS 22.b)
The three classifications for passive investments in securities that trade in secondary markets are:
A)
trading securities, available-for-sale securities, held-to-maturity securities.
B)
marketable 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 6, LOS 22.a)
When a passive investment in marketable equity securities is classified as available-for-sale:
A)
US GAAP requires that unrealized gains and losses are reported on the income statement, while under IFRS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.
B)
IFRS 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.
C)
US GAAP and IFRS require that unrealized gains and losses are reported as equity in other comprehensive income on the balance sheet.


When a passive investment in marketable equity securities is classified as available-for-sale, US GAAP and IFRS require that unrealized gains and losses are reported as equity in other comprehensive income on the balance sheet. (Study Session 6, LOS 22.b)
With respect to Lee’s statement concerning securities that are currently worth less than when they were acquired, a security should be considered impaired when the:
A)
decline in value is permanent, its value should be written down to the new fair value, and a loss reported on the income statement.
B)
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.
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 6, LOS 22.a)
In most situations, when IFRS allows for a choice between the equity method and proportionate consolidation, the use of the equity method will result in:
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 6, LOS 22.c)
作者: tango_gs    时间: 2012-3-29 11:45

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 investments in Portfolios 1 and 2, respectively, is most accurate?
Portfolio 1Portfolio 2
A)
Unrealized amounts reported on balance sheet.Assets reported at fair value.
B)
Unrealized amounts reported on income statement.Assets reported at fair value.
C)
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.
作者: tango_gs    时间: 2012-3-29 11:46

Trading securities are defined as:
A)
debt and equity securities acquired with the intent of selling them in the near future.
B)
debt and equity securities that are very liquid and easy to sell.
C)
equity securities representing 20% to 50% ownership in a public firm.


Debt and equity securities acquired with the intent of selling them in the near future are likely to be considered trading securities.
作者: tango_gs    时间: 2012-3-29 11:47

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.

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.
作者: tango_gs    时间: 2012-3-29 13:11

Which of the following securities would most likely be characterized as a held-to-maturity security?
A)
Debt or equity securities.
B)
Equity securities.
C)
Debt securities.


Only debt securities, that a company has a positive intent and ability to hold to maturity, can be characterized as a held-to-maturity security.
作者: tango_gs    时间: 2012-3-29 13:12

Which of the following statements about the various classifications of securities held by a firm is least accurate?
A)
Trading securities are, by definition, current assets because the firm intends to trade these securities in the near term.
B)
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.
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.
作者: tango_gs    时间: 2012-3-29 13:12

Accounting standards for intercorporate investments establish 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)
securities held-to-maturity.
B)
and equity trading securities.
C)
and equity securities available-for-sale.


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
作者: tango_gs    时间: 2012-3-29 13:13

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)
If equity and debt securities are available-for-sale securities, any realized and unrealized gains and losses are reported in the income statement.
C)
Debt held-to-maturity is reported in the balance sheet at amortized cost.


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.
作者: tango_gs    时间: 2012-3-29 13:13

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; No.
B)
Yes; Yes.
C)
No; No.


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.
作者: tango_gs    时间: 2012-3-29 13:13

Accounting standards for passive intercorporate investments include a category of securities that is carried on the company balance sheet at cost. This category of securities is called debt:
A)
and equity trading securities.
B)
securities held-to-maturity.
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.
作者: tango_gs    时间: 2012-3-29 13:15

Prior to 2007, Company X had never made any acquisitions of other companies. However, on January 2, 2007, it went on a buying spree, purchasing 10% of Company A for $10,000; 30% of Company B for $20,000; 40% of Company C for $80,000; and 70% of Company D for $168,000.

Below are the balance sheets for the five companies (in thousands) just prior to the purchase.

Company

X

A

B

C

D


Cash

400

10

20

30

40


Other assets

1,600

90

180

270

360


Total assets

2,000

100

200

300

400


Liabilities

300

40

80

120

160


Equity

1,700

60

120

180

240


Total

2,000

100

200

300

400


During 2007, the companies generated the following sales, income, and dividends:

Company

X

A

B

C

D


Revenue

2,000

100

200

300

400


Net income

200

10

20

30

40


Dividends

4

8

12

16

The company accounts for the acquisitions based on typical ownership proportion guidelines. After the acquisitions, the other assets reported by Company X will be:
A)
$1,962,000.
B)
$2,070,000.
C)
$1,878,000.


Company X will treat the acquisition of Company A as an investment in financial assets, the acquisitions of Companies B and C using the equity method, and the acquisition of Company D using the acquisition method. The investments in Companies A, B, and C, will be reported, while Company D's financial statements will be consolidated with Company X. The other asset balance will be the starting balance plus the investments in Companies A, B, and C, plus the other asset amount for Company D, which equals 1,600,000 + 10,000 + 20,000 + 80,000 + 360,000 = 2,070,000. (Study Session 6, LOS 22.a)
After the acquisitions, the liabilities reported by company X will be:
A)
$460,000.
B)
$480,000.
C)
$300,000.


Liabilities will be equal to the starting balance plus the liability balance for Company D, which equals 300,000 + 160,000 = 460,000. (Study Session 6, LOS 22.a)
After the acquisitions, minority interest reported by Company X will be:
A)
$72,000.
B)
$168,000.
C)
$0.


Minority interest will be equal to the proportion not owned of Company D multiplied by the equity of Company D, which is (1 − 0.7) × 240,000 = 72,000. (Study Session 6, LOS 22.a)
Company X will report revenue for 2007 of:
A)
$2,400,000.
B)
$2,280,000.
C)
$2,000,000.


Revenues will equal the revenue of Company X and D, which is 2,000,000 + 400,000. (Study Session 6, LOS 22.a)
Company X will report income for 2007 of:
A)
$247,000.
B)
$246,400.
C)
$258,400.


Income will equal the income of X, plus 10% of the dividends for A, plus 30% of the income of B, plus 40% of the income of C, plus the income of D less the minority interest, which is 200,000 + (0.1 × 4,000) + (0.3 × 20,000) + (0.4 × 30,000) + (40,000) − (0.3 × 40,000) = 246,400. (Study Session 6, LOS 22.a)
The change in the investment account (the account that reflects all non-consolidated investments in other companies) between January 3 and December 31 is:
A)
$27,600.
B)
$11,400.
C)
$10,800.


The investment account will not change for company A, and there is no investment account for Company D. The investment account will increase from the proportionate income of Companies B and C, and will decrease from the dividends received from Companies B and C. The changes will be (0.3 × 20,000) + (0.4 × 30,000) − (0.3 × 8,000) − (0.4 × 12,000) = 10,800. (Study Session 6, LOS 22.a)
作者: tango_gs    时间: 2012-3-29 13:15

Under U.S. GAAP rules, where an investor owns 41% of the voting shares of an investee and is able to control the investee, which of the following methods of accounting is most appropriate to use?
A)
Equity method.
B)
Acquistion method.
C)
Proportionate consolidation method.


It is possible to control with less than a 50% ownership interest. In this case, the investment is still considered controlling and the acquisition method would be most appropriate.
作者: tango_gs    时间: 2012-3-29 13:15

Under IFRS rules, which of the following accounting treatments is most preferred for joint ventures where there is shared control?
A)
Equity method.
B)
Proportionate consolidation method.
C)
Acquisition method.


Although the equity method is permitted under IFRS, proportionate consolidation is the preferred accounting method.
作者: tango_gs    时间: 2012-3-29 13:16

Under U.S. GAAP rules, where an investor owns a significant number (39%) of the voting shares of an investee but has no involvement in policy making and no Board of Directors’ representation, which of the following investment classifications is most appropriate to characterize the situation?
A)
Investment in financial assets.
B)
Investment in associates.
C)
Significant influence.


Investment in financial assets is the correct classification here because there is no significant influence (i.e. no involvement in policy marking, no Board of Directors’ representation). Although the ownership interest level is significant at 39% (it is between 20% and 50%), the lack of control classifies the investment as an investment in financial assets.

Significant influence is not in investment classification per se. It is a measure of relative degree of influence.
作者: tango_gs    时间: 2012-3-29 13:16

The factors that determine the required accounting methods for intercorporate investments under both U.S. GAAP and IFRS rules are:
A)
degree of influence and whether the acquiring firm has the intent and ability to hold the securities to maturity.
B)
purchase cost compared with book value of the interest purchased.
C)
percentage of ownership and/or degree of influence.


The factors that determine the required accounting method for intercorporate investments are percentage of ownership and/or degree of influence over the investee firm. The principal accounting methods are cost, equity, and consolidation under both U.S. GAAP and IFRS rules.
作者: tango_gs    时间: 2012-3-29 13:17

Proportionate consolidation is:
A)
recommended under U.S GAAP for jointly controlled entities, but is not normally permitted under IFRS.
B)
recommended under IFRS and U.S. GAAP for jointly controlled entities.
C)
recommended under IFRS for jointly controlled entities, but is not normally permitted under U.S. GAAP.


Recommended under IFRS for jointly controlled entities, but is not normally permitted under U.S. GAAP.
作者: tango_gs    时间: 2012-3-29 13:19

Which of the following methods is NOT considered U.S. GAAP?
A)
Acquisition method.
B)
Cost method.
C)
Proportionate consolidation method.


U.S. GAAP only recognizes the cost (as part of investmentes in financial assets), equity and acquisition methods. The proportionate consolidation is an analytical tool for analysts to evaluate joint venture entities properly, but it is not considered to be U.S. GAAP.
作者: tango_gs    时间: 2012-3-29 13:19

Which of the following statements regarding special purpose entities (SPEs) is most accurate?
A)
Under IFRS, one indication of control is when a sponsoring entity has a residual interest in the SPE.
B)
According to U.S. GAAP, a variable interest entity (VIE) could be a SPE that has at-risk equity that is sufficient to finance its own activities without additional financial support.
C)
According to U.S. GAAP, if a SPE is considered a VIE, it must be only consolidated by the entity that absorbs the majority of the risks.

IFRS continues to use the term special purpose entity. The sponsoring entity must consolidate if it controls, “in substance,” the SPE. Indications of control include a sponsoring entity that: Under U.S. GAAP rules, a VIE could include a SPE that has at-risk equity that is insufficient to finance the entity’s activities without additional financial support.

If a SPE is considered a VIE, it must be consolidated by the primary beneficiary. The primary beneficiary is the entity that absorbs the majority of the risks OR receives the majority of the rewards.
作者: tango_gs    时间: 2012-3-29 13:21

Rocky Mountain Air Cargo is a privately held commercial aviation company serving the western United States. It publishes financial statements in accordance with U.S. GAAP and uses a fiscal year that matches the calendar year.
Rocky Mountain was in good financial shape heading into 2003, with assets of $50 million at the beginning of the fiscal year. That year, it earned $3 million in net income and was easily able to maintain its traditional 50% dividend payout ratio. However, Rocky Mountain had a very difficult year in 2004, reporting a loss of $800,000. It managed to pay $1 million in dividends, but the decision to pay dividends in such a weak financial year further undermined the company’s fiscal stability.
Flitenight Air Lines, a publicly-traded aviation firm serving the central and Midwestern United States, wanted to expand its range of service by coordinating its flight schedule with airlines serving different geographic regions of North America. One of these airlines was Rocky Mountain Air Cargo.
To cement the relationship, Flitenight’s CEO, John “Bulldog” Basten, decided to make a significant investment in Rocky Mountain Air Cargo. He was easily able to convince both boards of the wisdom of the deal, and, in his usual brash style, personally negotiated the terms with his counterpart at Rocky Mountain, Buck Matthews. Flitenight Air Lines acquired a 20% stake in Rocky Mountain Air Cargo (with an option to purchase 40% more) for $10 million cash. The deal closed on January 1, 2003 and Flitenight accounted for the investment using the equity method.
Basten was not happy to find that he had invested right at the peak of Rocky Mountain’s profitability and wound up with a money-losing airline. He had a difficult conversation with Matthews in early 2005, complaining about the impact of the Rocky Mountain investment on Flitenight’s financials. Basten pointed out that he had a loss on his books: the original $10 million investment in Rocky Mountain was carried at only $9,940,000 on Flitenight’s December 31, 2004 balance sheet. Matthews countered that this was just an accounting entry: on a cash basis, Flitenight had a gain of 5% on its investment over the two years.
Matthews’ insistence that the investment had earned money for Flitenight did not sit well with Basten. Basten decided that Rocky Mountain was clearly being mismanaged and concluded it was time to gain control of the company.
Basten assured Neil Glenn, the Chairman of Flitenight’s board, that he could turn Rocky Mountain around. He promised Glenn that, in 2005, Rocky Mountain would once again achieve $3 million in earnings and a 50% payout ratio. “With those results,” Basten promised Glenn, “our asset accounts will value the Rocky Mountain investment at $10,240,000 on our December 31, 2005 balance sheet – so we’ll show a gain on our original investment.” Glenn was skeptical of anyone’s ability to turn the airline around so quickly. Even so, Glenn assured Basten, “If it takes you longer to turn it around, at least we’ll have the dividend income on our 2005 cash flow statements.”Basten notified Matthews and Rocky Mountain’s board that Flitenight intended to exercise its option. At the direction of Basten and Glenn, Flitenight purchased the additional shares for cash and gained control of Rocky Mountain on December 31, 2004. In 2003, Flitenight would reflect its investment in Rocky Mountain on its income statement by recording:
A)
$300,000.
B)
−$200,000.
C)
$600,000.


Under the equity method, Flitenight would record $600,000 (= $3 million × 0.2) on its 2003 income statement as its share of Rocky Mountain's earnings. The dividends received by Flitenight are already included as part of its share of Rocky Mountain’s net income in the equity method. (Study Session 6, LOS 22.b)
Since the coordination of flight schedules implies a stronger economic link between Rocky Mountain and Flitenight Air Lines than that implied merely by the ownership percentage, a proportionate consolidation is being considered. Which of the following statements regarding the acquisition method and the proportionate consolidation method is most accurate?
A)
Both are provisions of U.S. GAAP.
B)
Both report all of the affiliate’s liabilities on the parent’s balance sheet.
C)
The proportionate consolidation method differs from the acquisition method in its treatment of minority interest.

A proportionate consolidation is not a provision of U.S. GAAP, although it has been adopted under IFRS. An analyst would perform a proportionate consolidation on a firm that is currently accounted for using the equity method if a stronger link exists between the two firms than is implied by the ownership percentage. A joint venture is a typical example in which a proportionate consolidation would be used.
A proportionate consolidation will lead to the same results as the acquisition method except that the acquisition method reports minority interest in the financial statements and the proportionate consolidation method does not. In a proportionate consolidation, the parent's proportionate share of asset and liability accounts (net of intercorporate transfers) is simply added to the parent’s financials. Note that the equity accounts are not added together. (Study Session 6, LOS 22.b)

If Flitenight were to account for its Rocky Mountain investment as an investment in financial assets instead of the equity method, Flitenight’s 2004 income statement would reflect its investment in Rocky Mountain by including which of the following?
A)
Only a loss of $160,000.
B)
Only income of $200,000.
C)
Nothing, since the cost of the acquisition is not adjusted until the asset is sold.


If Flitenight accounted for its Rocky Mountain investment as an investment in financial assets, in 2004 it would record on its income statement $200,000 (= $1 million × 0.2) in dividends. That method would not be a permissible choice for Flitenight, however, since it controls more than 20% of Rocky Mountain. (Study Session 6, LOS 22.b)
Under the acquisition method, minority interest is considered:
A)
equity under IFRS and US GAAP.
B)
equity under IFRS and a liability under US GAAP.
C)
a liability under IFRS and US GAAP.


Under the acquisition method, minority interest is now considered equity under IFRS and US GAAP. Prior to SFAS 160 minority interest was considered either a liability or a mezzanine(hybrid) item under US GAAP. (Study Session 6, LOS 22.c)
Regarding Basten’s and Matthews’ statements about the gain/loss that Flitenight had at the end of 2004 on its investment in Rocky Mountain, which is most accurate?
A)
Basten’s statement is correct and Matthews’ statement is correct.
B)
Basten’s statement is incorrect and Matthews’ statement is correct.
C)
Basten’s statement is correct and Matthews’ statement is incorrect.

If Flitenight accounted for its Rocky Mountain investment using the equity method, the value of the investment as of December 31, 2004, would be:  
Flitenight’s original $10 million investment + (Flitenight’s share of Rocky Mountain’s 2003 earnings less dividends Flitenight received in 2003) + (Flitenight’s share of Rocky Mountain’s 2004 earnings less dividends Flitenight received in 2004).
Since we know that Flitenight owns 20% of Rocky Mountain and consequently receives 20% of the dividends that Rocky Mountain pays, we can calculate:

Value of Rocky Mountain on Flitenight’s books at the end of 2004 =
$10 million + (0.20 × $3 million in 2003 earnings − 0.20 × $1.5 million in 2003 dividends) + (0.20 × −$800,000 in 2004 earnings − 0.20 × $1 million in 2004 dividends) =
$10 million + ($600,000 − $300,000) + (−$160,000 − $200,000) =
$10,000,000 + $300,000 − $360,000 = $9,940,000

Basten’s statement is correct.
On a cash basis, Flitenight spent $10 million to acquire its stake in Rocky Mountain, and received $500,000 (= $300,000 in 2003 dividends + $200,000 in 2004 dividends) in dividends over the two years. $500,000 in cash return on a $10,000,000 cash investment equals 5% over the two years. Matthews’ statement is also correct. (Study Session 6, LOS 22.b)

Regarding Basten’s and Glenn’s statements about the impact of Rocky Mountain on Flitenight’s 2005 balance sheet and cash flow statement, which is most accurate?
A)
Basten’s statement is incorrect and Glen’s statement is correct.
B)
Basten’s statement is incorrect and Glen’s statement is incorrect.
C)
Basten’s statement is correct and Glen’s statement is correct.

The equity method of accounting is used when the parent has significant influence over the investee but does not exercise control. The acquistion method is required when the parent controls, directly or indirectly, more than 50% of the voting stock.
Once Flitenight exercised its option to purchase the additional 40% of Rocky Mountain’s stock (for total ownership of 60%) on December 31, 2004, it could no longer use the equity method and had to switch to the acquistion method. In the acquistion method, Flitenight’s investment in Rocky Mountain is no longer listed as a separate asset on the balance sheet (all of Rocky Mountain’s assets and liabilities are combined with Flitenight’s, with the minority interest shown as equity), so Basten’s statement is incorrect. In the acquistion method, parent company cash flows exclude those between parent and investee, so Glenn’s statement is also incorrect. (Study Session 6, LOS 22.b)
作者: tango_gs    时间: 2012-3-29 13:21

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using proportionate consolidation will appear:
A)
less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
B)
more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
C)
less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.


All else being equal, leverage measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the value of the liabilities on the balance sheet, while the level of book equity remains the same.
作者: tango_gs    时间: 2012-3-29 13:22

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, net profit margin measures for a firm using proportionate consolidation will appear:
A)
less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
B)
more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
C)
less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.


All else being equal, net profit margin measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of sales, while the level of net income remains the same.
作者: tango_gs    时间: 2012-3-29 13:23

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, return on asset measures for a firm using proportionate consolidation will appear:
A)
more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
B)
less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.
C)
less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.


All else being equal, return on asset measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of book assets, while the level of net income remains the same.
作者: tango_gs    时间: 2012-3-29 13:23

Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s balance sheet?
A)
Acquisition method.
B)
Equity method.
C)
Both methods result in reporting the same balances for assets and liabilities.


The consolidation method will reflect the highest assets and liabilities. The equity method would reflect the lowest.
作者: tango_gs    时间: 2012-3-29 13:23

Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s balance sheet?
A)
Acquisition method.
B)
Equity method.
C)
Both methods result in reporting the same balances for assets and liabilities.


The consolidation method will reflect the highest assets and liabilities. The equity method would reflect the lowest.
作者: tango_gs    时间: 2012-3-29 13:24

Which of the following methods of accounting for investments will reflect the highest net income on a company’s income statement?
A)
Both methods report the same net income.
B)
Acquisition method.
C)
Equity method.


Both methods will report the same net income
作者: tango_gs    时间: 2012-3-29 13:25

A company reports an intercorporate investment using the acquistion method. Which of the following statements is most accurate?
A)
The use of the acquistion method by a company will generally report the most favorable results.
B)
The use of the proportionate consolidation method by a company will generally report the most favorable results.
C)
The use of the acquistion method by a company will generally report the least favorable results.


The equity method will provide the most favorable results, while the acquistion method will provide the least favorable results.
作者: tango_gs    时间: 2012-3-29 13:25

Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for longer-term investment and liquidity purposes. The impact of the Marino holding on the Milburne income statement is:
A)
-$4,700.
B)
-$5,000.
C)
$300.


These securities are to be classified as available for sale and hence, all unrealized gains and losses are posted to a securities valuation reserve on the balance sheet. Hence, the only income statement impact is the $300 dividend = 0.02 × $15 × 1,000.
作者: tango_gs    时间: 2012-3-29 13:25

Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for near-term trading purposes. The impact of the Marino holding on the Milburne income statement is:
A)
-$4,700.
B)
-$5,000.
C)
$300.


Since these securities are to be classified as trading securities, both the dividend received and the unrealized loss are posted to the income statement. The dividend is computed as 0.02 × $15 × 1,000 = $300 whereas the unrealized loss is $5,000 = ($15 - $20) × 1,000. The net income statement impact is $300 - $5,000 = -$4,700.
作者: tango_gs    时间: 2012-3-29 13:26

On December 31, 2008 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2009, Company S earns $2,000 and pays a dividend of $500. If Company P uses the equity method of accounting, what values will be reported on the balance sheet and income statement? How much cash will be recognized from the investment?
Balance SheetIncome StatementCash
A)
$5,500$0$0
B)
$5,375$125$125
C)
$5,375$500$125

The carrying value on the balance sheet is $5,375, the income statement will show $500 of income, and the cash recognized is equal to the dividend of $125.
Using the equity method, for 2008, Company P will:
At the end of 2008, the carrying value of Company S on Company P’s balance sheet will be ($5,000 original investment + $500 proportional share of Company S earnings – $125 dividend received = $5,375).
作者: tango_gs    时间: 2012-3-29 13:26

Fiduciary Investors held two portfolios of marketable equity securities:

Assume that Fiduciary reclassified securities ($10 million carrying value, $8 million market value) from Portfolio B into Portfolio A under U.S. GAAP. If no previous write downs were made, Fiduciary must:
A)
charge $2 million to the equity section of its balance sheet.
B)
do nothing to its income statement or equity section of its balance sheet.
C)
charge $2 million to its income statement.


U.S. GAAP allows investment managers some latitude in reclassifying investment assets from “trading” to “available-for-sale.” Unrealized gains and losses are recognized on the income statement. IFRS severely restricts reclassification out of the held-for-trading category.
作者: tango_gs    时间: 2012-3-29 13:27

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 Anderson Company accounts for the Birschbach Company shares using the equity method, 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.

Under the equity method market value is ignored so the carrying value of the shares is the original investment + proportional share of earnings − dividend received.
[(100,000)($25)] + [(100,000)($2.50 − 1.50)] = $2,600,000

For the year 2000, the investment income that Anderson Company reports on its investment in Birschbach Company shares, assuming it accounts for the shares as an available-for-sale investment, is:
A)
$150,000.
B)
$250,000.
C)
$100,000.

Under the available-for-sale accounting method unrealized gains and losses are not recognized on the income statement so the only impact on the income statement is the dividend received:
(100,000 shares)($1.50 per share) = $150,000
作者: tango_gs    时间: 2012-3-29 13:28

On December 15, 2009, the Zeisler Company faces a financial crisis. Zeisler’s industry has gone into recession and net income has declined to nearly zero. Jeremiah Welch, the company’s CFO, is extremely concerned that, when the final figures for 2009 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger a provision in the lending agreement allowing lenders to put Zeisler’s debt back to the firm and likely force Zeisler into bankruptcy.
With only two weeks before the close of the firm’s fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm’s controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler’s reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2009.
Dupree suggests that Zeisler’s equity investments might be useful in staving off bankruptcy. Zeisler acquired 100,000 shares of the Market Square Corporation on January 1, 2009, at $25 per share. Market Square paid dividends during 2009 of $1.50 per share and was expected to have earnings for 2009 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for $72 per share. General Nuclear has no dividends and is expected to report a loss for 2009. Both securities are classified on the financial statements as available-for-sale.
Dupree added that Zeisler also holds several million dollars of Market Square’s debt securities, classified as a held-to-maturity investment. The holding in Market Square represents a small fraction of Zeisler’s total fixed-income investments, all of which are also classified as held-to-maturity. The investment in Market Square’s debt differs significantly from Zeisler’s other investments in fixed-income securities in that Market Square’s debt is trading slightly above Zeisler’s cost while Zeisler’s other fixed-income investments are all trading significantly below Zeisler’s cost because of a general increase in market interest rates. Welch points out, however, that even if the firm were to sell all its marketable securities, the proceeds would not be sufficient to pay off the debt and avert bankruptcy.
Dupree left the meeting with Welch for a moment to check the stock market. She found that Market Square was trading at $35 per share and General Nuclear was at $43. This new information gave Dupree an idea.
Dupree suggested to Welch, “We could reclassify our equity investment in Market Square as trading before year-end. That will help raise our ROA for this year.” Welch pointed out that a reclassification of the equity investment from available-for-sale to trading would reduce Zeisler’s reported net income because the firm would be required to stop including the dividends it receives from Market Square in net income.
Welch suggested that, instead of reclassifying Market Square’s equity, they sell Market Square’s debt. That would reduce Zeisler’s debt-to-assets ratio because the unrealized gain in the market value of the Market Square debt would be realized when the security was sold. Dupree added that the firm could also liquidate the General Nuclear investment to raise cash without affecting the firm’s reported ROA for 2009. Welch and Dupree decided to liquidate the two assets to help improve the firm’s financial position.What is the investment income that Zeisler Company will report for the year 2009 on its investment in Market Square Corporation shares if it continues to account for the shares as an available-for-sale investment?
A)
$200,000.
B)
$150,000.
C)
$250,000.

The investment income for available-for-sale securities includes dividends, interest, and realized gains. In this case, the investment income from Market Square Corporation would be the dividends it paid to the number of shares Zeisler owns:
100,000 shares × $1.50 per share = $150,000. (Study Session 6, LOS 22.c)


If Zeisler were to account for the Market Square Corporation shares as trading securities, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be:
A)
$2.75 million.
B)
$3.50 million.
C)
$2.50 million.


Trading securities are carried at fair market value:
100,000 shares × $35 per share = $3,500,000. (Study Session 6, LOS 22.c)

If Zeisler reclassified the common stock of General Nuclear as a trading security, what effect would it have on Zeisler’s 2009 income statement?
A)
Net income would increase.
B)
Reclassifying the security would have no effect on the income statement because gains and losses would be recognized in equity.
C)
Net income would decline.


Reclassifying a security from available-for-sale to trading requires unrealized gains and losses to be recognized in income. Since Zeisler’s investment in General Nuclear has an unrealized loss, net income would be reduced. (Study Session 6, LOS 22.c)
Regarding the statements made by Dupree and Welch about reclassifying Zeisler’s equity investment in Market Square to trading:
A)
Welch’s statement is correct; Dupree’s statement is incorrect.
B)
Welch’s statement is incorrect; Dupree’s statement is correct.
C)
Welch’s statement is incorrect; Dupree’s statement is incorrect.


Welch’s statement is incorrect because dividends and interest are recognized as income both when the securities are classified as trading and when they are classified as available-for-sale.
Dupree’s statement is correct. Reclassifying the securities from available-for-sale to trading will significantly raise Zeisler’s near-zero net income by allowing Zeisler to recognize the unrealized gain in income when the security is reclassified. It will have no material effect on asset value because the shares will be carried at fair market value as trading securities and were already carried at fair market value (with the net unrealized gain in equity) as available-for-sale securities. Even though it may appear that equity would decline by the amount of the unrealized gain if the securities were reclassified, the unrealized gain will flow through income in 2009 and thus return to equity. Consequently, reclassifying the equity securities of Market Square would help increase Zeisler’s ROA by raising net income and having little effect on assets. (Study Session 6, LOS 22.c)

If Zeisler were to account for the Market Square Corporation shares using the equity method, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be:
A)
$2.60 million.
B)
$2.75 million.
C)
$3.50 million.


Under the equity method the market value of the stock is ignored but the proportionate share of the earnings are added to the original investment and the proportionate share of the dividends are subtracted from the earnings. Hence, we have the original investment + (earnings − dividends) = total value of the investment.
[(100,000 shares)($25)] + [(100,000 shares)($2.50 earnings − 1.50 dividend)] = $2,600,000. (Study Session 6, LOS 22.c)

Regarding the statements made by Welch about reclassifying Zeisler’s debt investment in Market Square to trading, and Dupree's statement on General Nuclear:
A)
Welch’s statement is correct; Dupree’s statement is incorrect.
B)
Welch’s statement is correct; Dupree’s statement is correct.
C)
Welch’s statement is incorrect; Dupree’s statement is incorrect.


Welch’s statement is incorrect because accounting standards require a firm that sells a held-to-maturity security before maturity to carry its remaining held-to-maturity securities at market value instead of cost. Since the Market Square debt is the only fixed-income investment trading above Zeisler’s cost, and it represents only a small part of Zeisler’s total fixed-income portfolio, the net effect of selling the Market Square debt would be to reduce assets (not raise them) because it would require Zeisler to mark down all its other fixed-income investments. A decline in assets would effectively increase the debt to assets ratio.
Dupree’s statement is also incorrect. The investment in General Nuclear would be carried on the books at fair market value, with the unrealized loss in equity. Selling the asset and converting it to cash would not materially affect total assets. However, selling the General Nuclear shares would reduce net income because the realized loss would have to be recognized in income. Thus, the sale would reduce reported ROA. (Study Session 6, LOS 22.c)
作者: tango_gs    时间: 2012-3-29 13:29

On January 9, 2006, Company X paid $2,000,000 for 100,000 shares of stock in Company S. Originally the company intended on holding the securities for the foreseeable future. As of December 31, the stocks were valued at $2,200,000. In 2006, Company S had earnings per share of $0.90 and paid dividends per share of $0.20. In late December 2006, the company decided to place the securities in their active marketable securities portfolio.What is the impact of this change in status on the value of the assets of Company X?
A)
$200,000.
B)
$70,000.
C)
$0.


The stocks were classified as debt and equity securities available for sale, but now they will be classified as debt and equity trading securities. However, although it will affect net income, the change in status will not impact the reported value of the assets. According to SFAS 115, securities transferred from available-for-sale to trading securities are transferred at fair market value and unrealized gains or losses would be included in income.
What is the impact of this change in status on the income and the stockholders' equity of Company X?
A)
Stockholders' equity will rise by $200,000, but income will not change.
B)
Income will rise by $200,000, but stockholders' equity will not change.
C)
Income and stockholder's equity will rise by $200,000.


The stocks were classified as debt and equity securities available for sale, but now they will be classified as debt and equity trading securities. The gain would have been reported in the securities valuation account in the equity section and not on the income statement, but now will be reported as income.
作者: tango_gs    时间: 2012-3-29 13:29

Which of the following statements about proportionate consolidation and the equity method is least accurate?
A)
In a proportionate consolidation, the analyst adds the investor's pro-rata share of each of the affiliate's asset and liability accounts to the historical cost financial statements of the investor.
B)
The equity balance under a proportionate consolidation will differ from that of the equity method because the investor records his pro-rata share of the equity of the affiliate firm in a proportionate consolidation.
C)
Total assets under proportionate consolidation will most likely exceed the total assets reported under the equity method.


The equity balance of the investor will remain unchanged irrespective of whether or not the equity method or proportionate consolidation is employed.
作者: dirk01    时间: 2012-3-29 13:33

Joseph Haggs, CFA, is an analyst working for Garvess Jones, a large publicly traded investment-baking firm. Haggs covers the Internet sector. Recently, one of the more successful companies Haggs covers, Simpson Corporation, made an aggressive move to acquire another Internet company, Bailey Corporation (BC). BC is a company specializing in graphics and animation on the World Wide Web and has 1,000,000 shares outstanding. Simpson also holds minimal investments in other technology companies both public and private. In 1999 Simpson saw an opportunity to substantially increase its share in BC. Simpson feels that their sophisticated animation can greatly improve Simpson's market share and sees an acquisition as an opportunity to expand their business. The relevant financial data are in the following tables.

Bailey Corporation

Selected Financial Data, Years Ended December 31

(in Thousands)



Item

1998

1999

2000


Sales

$50,000

$60,000

$70,000


Less: cost of goods sold (COGS)

37,000

43,700

47,250


Earnings before interest & taxes (EBIT)

13,000

16,300

22,750


Less: Interest

10,000

13,000

19,000


EBT

3,000

3,300

3,750


Less: Taxes

1,000

1,100

1,250


Net Income

$2,000

$2,200

$2,500


Dividends Paid

$1,000

$1,200

$1,500


Total Shares Outstanding

1,000,000


Simpson’s Purchase Transactions in BC’s Stock

Date

January 1, 1998

January 1, 1999

January 1, 2000


Number of Shares

10,000

290,000

700,000


Price per Share

10

11

15


Because this is the largest acquisition in Simpson's history, Mr. Haggs' supervisor has asked him to prepare a report for Garvess Jones' clients detailing the affects of the acquisition on Simpson's financial statements.Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1999. Which is the correct method?
A)
Acquisition method.
B)
Equity method.
C)
Investment in Financial Assets method.


When a company owns an influential but non-controlling interest in another company, commonly 20-50%, it must account for it under the equity method.
Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1998. Which is the correct method?
A)
Equity method.
B)
Acquisition method.
C)
Investment in Financial Assets method.


When a company owns a non-influential and non-controlling interest in another company the investment must be carried at cost. Simpson must carry its BC investment at cost for 1998.
Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 2000. Which is the correct method?
A)
Acquisition method.
B)
Equity method.
C)
Pooling-of-interests method.


When a company's interest in another exceeds 50% it is considered to have controlling interest and must consolidate the financial statements.
Haggs wants to make sure that he assumes the proper accounting method when he does his analysis. The acquisition of BC stock will lead to Simpson's total net cash flow equaling which of the following for the year ending December 31, 1999?
A)
$−3,190,000.
B)
$−2,830,000.
C)
$360,000.


Simpson paid a total of $−3,190,000 (290,000 shares × $11) however, they also received a dividend from BC of $360,000. For 1999 Bailey Corporation is paying $1.20 in dividends per share (1,200,000 / 1,000,000). As of December 1999, Simpson has purchased 300,000 shares of BC (= 290,000 + 10,000). So dividends received is 300,000 × $1.20 = $360,000. This will make the total cash flow for the year $−2,830,000.
作者: dirk01    时间: 2012-3-29 13:34

Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash.

Pre-acquisition Balance Sheets
December 31, 2001

  

TME Corp.

Abcor, Inc.

Current assets

$80,000

$38,000

Other assets

28,000

15,000

Total assets

$108,000

$53,000

  

  

  

Current liabilities

$60,000

$32,000

Common stock

15,000

14,000

Retained earnings

33,000

    7,000

Total liabilities and equity

$108,000

$53,000

What will be the post-acquisition current ratio, using both the acquistion method and the equity method, respectively, for TME?
The choices below represent Acquisition and Equity, respectively.
A)
1.01, 0.92.
B)
1.04, 1.11.
C)
1.21, 1.02.


With the acquisition method: The current assets are ($80,000 + $38,000 - $25,000) = $93,000. The current liabilities are ($60,000 + $32,000) = $92,000. The current ratio is $93,000/$92,000 = 1.01. With the equity method: The current assets are ($80,000 - $25,000) = $55,000. The current liabilities are $60,000. The current ratio is $55,000/$60,000 = 0.92.
Using the acquistion method to account for the acquisition, what will be the post-acquisition current assets of TME?
A)
$93,000.
B)
$105,000.
C)
$118,000.


Using the acquisition basis of accounting, the post-acquisition level of the current assets is the amount of the current assets prior to acquisition minus the amount of cash used for the acquisition. ($80,000 + 38,000 – 25,000) = $93,000.
Using the acquistion method to account for the acquisition, which of the following is closest to the post-acquisition amount that will be recorded as the minority interest under US GAAP?
A)
$10,700.
B)
$6,300.
C)
$21,000.


Since only 70% of Abcor was purchased by TME there is a minority interest that must be accounted for, equal to the percentage of Abcor not owned by TME times Abcor’s fair value.
Abcor’s fair value = 25,000/0.7 = 35,714.29
Under US GAAP, only full goodwill.
Minority interest = 35,714.29 (0.3) = 10, 714.29
作者: dirk01    时间: 2012-3-29 13:34

The proportionate consolidation method results in:
A)
different net income from the equity method.
B)
same equity as the cost method.
C)
same net income as the equity method.


The proportionate consolidation results in the SAME net income and equity as the equity method
作者: dirk01    时间: 2012-3-29 13:34

The proportionate consolidation method will least likely achieve the same results as the acquisition method because:
A)
of the use of the equity method on the income statement.
B)
there are no minority interests.
C)
no joint ventures are included.


Proportionate consolidations and acquisitions are the same except for the exclusion of minority interests in proportionate consolidations.



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