tango_gs

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.

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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.

tango_gs

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.

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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

tango_gs

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.

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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.

tango_gs

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.

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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.

tango_gs

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.

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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.

tango_gs

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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.

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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)

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After the acquisitions, the liabilities reported by company X will be:

A) $460,000.

B) $480,000.

C) $300,000.

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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)

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After the acquisitions, minority interest reported by Company X will be:

A) $72,000.

B) $168,000.

C) $0.

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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)

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Company X will report revenue for 2007 of:

A) $2,400,000.

B) $2,280,000.

C) $2,000,000.

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Revenues will equal the revenue of Company X and D, which is 2,000,000 + 400,000. (Study Session 6, LOS 22.a)

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Company X will report income for 2007 of:

A) $247,000.

B) $246,400.

C) $258,400.

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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)

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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.

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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)

tango_gs

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.

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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.

tango_gs

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.

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Although the equity method is permitted under IFRS, proportionate consolidation is the preferred accounting method.

tango_gs

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.

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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.

tango_gs

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.

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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.