Reading 21- LOS D(Part 1) ～ Q16－20

答案和详解如下：

16.If Prudhomme Inc. acts on Xavier Prudhomme’s recommended investment and accounts for this investment using the equity method, what is the value of Quality on the balance sheet of Prudhomme as of December 31, 2004?

A)  $1,425,000.

B)  $1,500,000.

C)  $1,575,000.

D)  $1,250,000.

The correct answer was A)

Xavier Prudhomme recommended buying a 25% interest in Quality, which would be considered to give Prudhomme Inc. significant influence over Quality. The equity method is used when an investor has significant influence over an investee. Recall that he believed that this purchase could be made at a 10% discount from market value. Prudhomme’s actual dollar investment in Quality plus Prudhomme’s share of net income less Prudhomme’s share of dividends determines the carrying value of the acquired stock.

($6.00 * 250,000 * 0.9) + ($600,000 * 0.25) – ($300,000 * 0.25) = $1,425,000.

17.If Prudhomme Inc. acts on Xavier Prudhomme’s recommended investment and considers its shares of Quality to be trading securities, what is the effect of its ownership of Quality on Prudhomme’s income statement for FY2004?

A)  +$75,000.

B)  -$100,000.

C)  -$175,000.

D)  +$150,000.

The correct answer was D)

The equity method is used when an investor has significant influence over an investee, even if the company considers the investment trading securities. Prudhomme’s income will include 25 percent of Quality’s net income, or (.25 * $600,000) = $150,000. In applying the equity method, dividends and changes in market value do not affect income.

18.If Prudhomme Inc. had purchased 750,000 shares of Quality for cash at a 10 percent 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)  $600,000.

C)  $525,000.

D)  $250,000.

The correct answer was C)

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 ($600,000 * 0.25)= $150,000, 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.

19.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)  $50,000.

B)  $0.

C)  $500,000.

D)  $600,000.

The correct answer was A)

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 x $0.10) = $50,000.

20.Company X owns 15 percent of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is:

A)  $63,000.

B)  $51,000.

C)  $48,000.

D)  $60,000.

The correct answer was D)

Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20 percent guideline. The value of the investment account is equal to the beginning balance plus the proportionate income of company S minus the dividends received from company S, which equals 48,000 + (0.15 x 100,000) − (0.15 x 20,000) = 60,000.