Reading 21:Intercorporate Investments LOS d ～ Q44-47

black, report, income, investment, class

Q44. Company P will report investment income on its income statement as:

If no public market If trading security If available-for-sale security

A) $4,000 $4,000 $4,000

B) $4,000 -$1,000 $4,000

C) $4,000 $4,000 -$1,000

Q45. The California Wines owns 40% of a joint venture, Western Vineyards. Vineyard's income statement for this

period is as follows:

Revenues

$10,000

Less: cost of goods sold (COGS)

7,500

Gross profit

$2,500

Less: selling and administrative expenses

500

Operating income

$2,000

Less: interest expense

500

Earnings before taxes

$1,500

Less tax

600

Net income

$900

California Wines purchases 30% of the output of Vineyard. The amount of revenues, COGS, and net income of Vineyard to be included in the California Wine's income statement under proportionate consolidation are, respectively:

A) $0; $0; $0.

B) $2,800; $1,800; $360.

C) $4,000; $3,000; $360.

Q46. Which of the following statements about proportionate consolidation and the equity method is FALSE?

A) 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.

B) 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.

C) Total assets under proportionate consolidation will most likely exceed the total assets reported under the equity method.

Q47. Which of the following statements about proportionate consolidation is TRUE?

A) Minority interest is computed and shown on a proportionate consolidation balance sheet and income statement.

B) Under the proportionate consolidation method, all asset and liability accounts are added together using original historical costs.

C) The porportionate consolidation method is employed by analysts to better reflect the economic reality of the relationship between an investor and affiliate company which is currently accounted for under the equity method.