Q70. 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 consolidation method and the proportionate consolidation method is most accurate?

A)   Both are provisions of U.S. GAAP.

B)   The proportionate consolidation method differs from the consolidation method in its treatment of minority interest.

C)   Both report all of the affiliate’s liabilities on the parent’s balance sheet.

Q71. If Flitenight were to account for its Rocky Mountain investment using the cost method 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.

Q72. Which of the following statements about the consolidation method and the equity method is least accurate?

A)   Both result in the same net worth.

B)   Only capital flows between parent and investee (such as dividends) appear in the cash flows of the parent.

C)   Both result in the same net income.

Q73. 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 incorrect and Matthews’ statement is correct.

B)   Basten’s statement is correct and Matthews’ statement is correct.

C)   Basten’s statement is correct and Matthews’ statement is incorrect.

答案和详解如下：

Q70. 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 consolidation method and the proportionate consolidation method is most accurate?

A)   Both are provisions of U.S. GAAP.

B)   The proportionate consolidation method differs from the consolidation method in its treatment of minority interest.

C)   Both report all of the affiliate’s liabilities on the parent’s balance sheet.

Correct answer is B)

A proportionate consolidation is not a provision of U.S. GAAP, although it has been adopted in IAS 31. 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 a normal consolidation except that the consolidation 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.

Q71. If Flitenight were to account for its Rocky Mountain investment using the cost method 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.

Correct answer is B)

If Flitenight accounted for its Rocky Mountain investment using the cost method, 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.

Q72. Which of the following statements about the consolidation method and the equity method is least accurate?

A)   Both result in the same net worth.

B)   Only capital flows between parent and investee (such as dividends) appear in the cash flows of the parent.

C)   Both result in the same net income.

Correct answer is B)

Under the consolidation method and the equity method, net income, net worth and ROE are all the same. The equity method includes only capital flows between parent and investee in the cash flows of the parent, but the consolidation method includes all cash flows of the subsidiary in the cash flow of the parent (with minority interest subtracted out).

Q73. 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 incorrect and Matthews’ statement is correct.

B)   Basten’s statement is correct and Matthews’ statement is correct.

C)   Basten’s statement is correct and Matthews’ statement is incorrect.

Correct answer is B)

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.

thanks