Q55. Which of the following best describes the differences between the non-marketable securities cost method and

     the equity method for accounting for intercorporate investments?

A)   Under the non-marketable cost method, the balance sheet valuation reflects changes in the market value of the security whereas under the equity method, recognized income only includes dividends received from the affiliate company.

B)   Under the cost method, the balance sheet valuation of the investment remains at cost whereas under the equity method, the balance sheet valuation reflects changes in the retained earnings of the affiliate company.

C)   Under the cost method, the income recognized by the investor is the dividends received from the investee firm whereas under the equity method, the balance sheet valuation reflects changes in the market value of the affiliate's shares.

Q56. Which of the following statements regarding a comparison of the equity method with the consolidation method is

    FALSE?

A)   Operating Income will tend to be higher under consolidation relative to the equity method.

B)   Total Equity will be the same under both methodologies.

C)   ROE will tend to be higher under the equity method relative to consolidation.

Q57. Which of the following methods is NOT considered U.S. GAAP?

A)   Consolidation method.

B)   Cost method.

C)   Proportionate consolidation method.

Q58. 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.

Q59. On December 31, 2006 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2007

     Company S earns $2,000 and pays a dividend of $500. If Company P uses the cost 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 Sheet                            Income Statement                      Cash

A)      $5,375                                          $500                                        $125

B)      $5,000                                          $0                                             $0

C)      $5,000                                          $125                                        $125

答案和详解如下：

Q55. Which of the following best describes the differences between the non-marketable securities cost method and

     the equity method for accounting for intercorporate investments?

A)   Under the non-marketable cost method, the balance sheet valuation reflects changes in the market value of the security whereas under the equity method, recognized income only includes dividends received from the affiliate company.

B)   Under the cost method, the balance sheet valuation of the investment remains at cost whereas under the equity method, the balance sheet valuation reflects changes in the retained earnings of the affiliate company.

C)   Under the cost method, the income recognized by the investor is the dividends received from the investee firm whereas under the equity method, the balance sheet valuation reflects changes in the market value of the affiliate's shares.

Correct answer is B)

Under the non-marketable securities cost method, the balance sheet valuation remains at cost unless a permanent impairment of value has been declared -- in which case the security's value is written down. On the income statement, the investor simply includes dividend receipts from the investee as income.

Under the equity method, the balance sheet valuation is adjusted each period by the investor's pro-rata share of the change in retained earnings of the affiliate firm. Income is simply the investor's pro-rata share of the affiliate's income.

Q56. Which of the following statements regarding a comparison of the equity method with the consolidation method is

    FALSE?

A)   Operating Income will tend to be higher under consolidation relative to the equity method.

B)   Total Equity will be the same under both methodologies.

C)   ROE will tend to be higher under the equity method relative to consolidation.

Correct answer is C)         

Both net income and equity will be the same regardless of whether the equity method or consolidation is used to account for an intercorporate investment. Hence, ROE = net income / equity, will remain unchanged. Operating income tends to be higher under consolidation because minority interest is reported below the operating line in most cases on a consolidated income statement.

Q57. Which of the following methods is NOT considered U.S. GAAP?

A)   Consolidation method.

B)   Cost method.

C)   Proportionate consolidation method.

Correct answer is C)         

U.S. GAAP only recognizes the cost, equity and consolidation 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.

Q58. 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.

Correct answer is C)

The proportionate consolidation results in the SAME net income and equity as the equity method.

Q59. On December 31, 2006 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2007

     Company S earns $2,000 and pays a dividend of $500. If Company P uses the cost 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 Sheet                            Income Statement                      Cash

A)      $5,375                                          $500                                        $125

B)      $5,000                                          $0                                             $0

C)      $5,000                                          $125                                        $125

Correct answer is C)

The carrying value on the balance sheet = $5,000 or the original investment. The income and cash recognized are equal to the dividend of $125.

thanks