Q27. If Prudhomme Inc. had purchased 750,000 shares of Quality for cash at a 10% discount from market value on December 31,

    2003 and considered its shares of Quality to be available for sale, what would be the minority interest on the December 31, 2004 balance sheet?

A)   $450,000.

B)   $525,000.

C)   $250,000.

Q28. Assume Prudhomme's only investment in Quality was the purchase of 500,000 shares of Quality for cash at market value on

     December 31, 2003 and Prudhomme considers its shares of Quality to be available for sale. On December 31, 2004, Quality

     declares bankruptcy and Quality's stock price tumbles to $0.10 per share. What is the value of Quality on the balance sheet of

     Prudhomme as of December 31, 2004?

A)   $500,000.

B)   $50,000.

C)   $0.

Q29. Getry Corporation has just made an intercorporate investment in another company’s securities and will use the

     cost method of accounting to record the transaction. When using the cost method of accounting, which of the

     following is NOT done?

A)     A change in the market value of the securities, whether realized or unrealized, is reported in the income statement.

B)     The premium or discount on debt securities is amortized over the life of the issue.

C)     If the parent company determines the investment value is permanently impaired, even though the security is not sold, the value is written down and the loss is recognized.

答案和详解如下：

Q27. If Prudhomme Inc. had purchased 750,000 shares of Quality for cash at a 10% discount from market value on December 31,

    2003 and considered its shares of Quality to be available for sale, what would be the minority interest on the December 31, 2004 balance sheet?

A)   $450,000.

B)   $525,000.

C)   $250,000.

Correct answer is B)

Since Prudhomme has a controlling interest in Quality, the consolidation method is used. The balance sheet minority interest at the time of acquisition is the minority interest of (1 − 0.75) = 25% times owners’ equity of (1,000,000 + 800,000) = $1.8 million for a total of $450,000. The balance sheet minority interest on December 31, 2003 is computed by taking the previous minority interest of $450,000, adding the 2004 income statement minority interest in income of $150,000(= $600,000 × 0.25), and subtracting the minority interest dividend share of ($300,000 × 0.25) = $75,000. Thus the 2004 minority interest becomes$450,000 + $150,000 − $75,000) = $525,000.

Q28. Assume Prudhomme's only investment in Quality was the purchase of 500,000 shares of Quality for cash at market value on

     December 31, 2003 and Prudhomme considers its shares of Quality to be available for sale. On December 31, 2004, Quality

     declares bankruptcy and Quality's stock price tumbles to $0.10 per share. What is the value of Quality on the balance sheet of

     Prudhomme as of December 31, 2004?

A)   $500,000.

B)   $50,000.

C)   $0.

Correct answer is B)

Consolidation is not appropriate when control is temporary or the parent does not control the subsidiary, even if it owns more than 50% of the subsidiary’s stock. Bankruptcy is an instance when control is relinquished. Prudhomme's investment is therefore carried at fair value on the balance sheet. 

(500,000 shares × $0.10) = $50,000.

Q29. Getry Corporation has just made an intercorporate investment in another company’s securities and will use the

     cost method of accounting to record the transaction. When using the cost method of accounting, which of the

     following is NOT done?

A)     A change in the market value of the securities, whether realized or unrealized, is reported in the income statement.

B)     The premium or discount on debt securities is amortized over the life of the issue.

C)     If the parent company determines the investment value is permanently impaired, even though the security is not sold, the value is written down and the loss is recognized.

Correct answer is A)

The cost method requires security values to be reported on the balance sheet at cost. It is the market method that requires recording publicly traded securities at market value and recording changes in market value, realized or unrealized, in the income statement.

thx