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Reading 21- LOS D(Part 2) ~ Q21-25

21Which 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.

D)  Under the cost method, the income recognized by the investor is the investor's pro-rata share of the investee's income whereas under the equity method, unrealized gains and losses on the affiliate's shares are posted to a security valuation reserve on the balance sheet.

 

 

22Assume that on the balance sheet date shown below TME Corporation acquires 70 percent of Abcor, Inc. common stock for $25,000 in cash.

Pre-acquisition Balance Sheets
December 31, 2001

 

TME Corp.

Abcor, Inc.

Current assets

$80,000

$38,000

Other assets

28,000

15,000

Total assets

$108,000

$53,000

 

 

 

Current liabilities

$60,000

$32,000

Common stock

15,000

14,000

Retained earnings

33,000

    7,000

Total liabilities and equity

$108,000

$53,000

What will be the post-acquisition current ratio, using both the consolidation method and the equity method, respectively, for TME?  The choices below represent Consolidation and Equity, respectively.

A)  1.21, 1.02.

B)  1.01, 0.92.

C)  0.98, 0.90.

D)  1.04, 1.11.

 

 

23Using the consolidation method to account for the acquisition, what will be the post-acquisition current assets of TME?

A)  $118,000.

B)  $105,000.

C)  $63,000.

D)  $93,000.

 

 

24Using the consolidation method to account for the acquisition, what will be the post-acquisition amount that will be recorded as the minority interest?

A)  $6,300.

B)  $21,000.

C)  $6,000.

D)  $14,700.

 

 

25Joseph Haggs, CFA, is an analyst working for Garvess Jones, a large publicly traded investment-baking firm. Haggs covers the Internet sector. Recently, one of the more successful companies Haggs covers, Simpson Corporation, made an aggressive move to acquire another Internet company, Bailey Corporation (BC). BC is a company specializing in graphics and animation on the World Wide Web and has 1,000,000 shares outstanding. Simpson also holds minimal investments in other technology companies both public and private. In 1999 Simpson saw an opportunity to substantially increase its share in BC. Simpson feels that their sophisticated animation can greatly improve Simpson's market share and sees an acquisition as an opportunity to expand their business. The relevant financial data are in the following tables.

Bailey Corporation

Selected Financial Data, Years Ended December 31

 (in Thousands)

 

Item

1998

1999

2000

Sales

$50,000

$60,000

$70,000

Less COGS

37,000

43,700

47,250

EBIT

13,000

16,300

22,750

Less Interest

10,000

13,000

19,000

EBT

3,000

3,300

3,750

Less Taxes

1,000

1,100

1,250

Net Income

$2,000

$2,200

$2,500

Dividends Paid

$1,000

$1,200

$1,500

Total Shares Outstanding:

1,000,000

 

Simpson’s Purchase Transactions in BC’s Stock

Date

January 1, 1998

January 1, 1999

January 1, 2000

Number of Shares

10,000

290,000

700,000

Price per Share

10

11

15

Because this is the largest acquisition in Simpson's history, Mr. Haggs' supervisor has asked him to prepare a report for Garvess Jones' clients detailing the affects of the acquisition on Simpson's financial statements.

Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1999. Which is the correct method?

A)  Equity method.

B)  Cost method.

C)  Consolidation method.

D)  Pooling-of-interests method.

 

答案和详解如下:

21Which 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.

D)  Under the cost method, the income recognized by the investor is the investor's pro-rata share of the investee's income whereas under the equity method, unrealized gains and losses on the affiliate's shares are posted to a security valuation reserve on the balance sheet.

 

The correct answer was 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.

 

22Assume that on the balance sheet date shown below TME Corporation acquires 70 percent of Abcor, Inc. common stock for $25,000 in cash.

Pre-acquisition Balance Sheets
December 31, 2001

 

TME Corp.

Abcor, Inc.

Current assets

$80,000

$38,000

Other assets

28,000

15,000

Total assets

$108,000

$53,000

 

 

 

Current liabilities

$60,000

$32,000

Common stock

15,000

14,000

Retained earnings

33,000

    7,000

Total liabilities and equity

$108,000

$53,000

What will be the post-acquisition current ratio, using both the consolidation method and the equity method, respectively, for TME?  The choices below represent Consolidation and Equity, respectively.

A)  1.21, 1.02.

B)  1.01, 0.92.

C)  0.98, 0.90.

D)  1.04, 1.11.

 

The correct answer was B)

With the consolidation method: The current assets are ($80,000 + $38,000 - $25,000) = $93,000. The current liabilities are ($60,000 + $32,000) = $92,000. The current ratio is $93,000/$92,000 = 1.01. With the equity method: The current assets are ($80,000 - $25,000) = $55,000. The current liabilities are $60,000. The current ratio is $55,000/$60,000 = 0.92.

 

23Using the consolidation method to account for the acquisition, what will be the post-acquisition current assets of TME?

A)  $118,000.

B)  $105,000.

C)  $63,000.

D)  $93,000.

 

The correct answer was D)

Using the consolidated basis of accounting, the post-acquisition level of the current assets is the amount of the current assets prior to acquisition minus the amount of cash used for the acquisition. ($80,000 + 38,000 – 25,000) = $93,000.

 

24Using the consolidation method to account for the acquisition, what will be the post-acquisition amount that will be recorded as the minority interest?

A)  $6,300.

B)  $21,000.

C)  $6,000.

D)  $14,700.

 

The correct answer was A)

Since only 70 percent of Abcor was purchased by TME there is a minority interest that must be accounted for, equal to the percentage of Abcor not owned by TME times Abcor’s net worth. (0.30)($53,000 – 32,000) = $6,300.

 

25Joseph Haggs, CFA, is an analyst working for Garvess Jones, a large publicly traded investment-baking firm. Haggs covers the Internet sector. Recently, one of the more successful companies Haggs covers, Simpson Corporation, made an aggressive move to acquire another Internet company, Bailey Corporation (BC). BC is a company specializing in graphics and animation on the World Wide Web and has 1,000,000 shares outstanding. Simpson also holds minimal investments in other technology companies both public and private. In 1999 Simpson saw an opportunity to substantially increase its share in BC. Simpson feels that their sophisticated animation can greatly improve Simpson's market share and sees an acquisition as an opportunity to expand their business. The relevant financial data are in the following tables.

Bailey Corporation

Selected Financial Data, Years Ended December 31

 (in Thousands)

 

Item

1998

1999

2000

Sales

$50,000

$60,000

$70,000

Less COGS

37,000

43,700

47,250

EBIT

13,000

16,300

22,750

Less Interest

10,000

13,000

19,000

EBT

3,000

3,300

3,750

Less Taxes

1,000

1,100

1,250

Net Income

$2,000

$2,200

$2,500

Dividends Paid

$1,000

$1,200

$1,500

Total Shares Outstanding:

1,000,000

 

Simpson’s Purchase Transactions in BC’s Stock

Date

January 1, 1998

January 1, 1999

January 1, 2000

Number of Shares

10,000

290,000

700,000

Price per Share

10

11

15

Because this is the largest acquisition in Simpson's history, Mr. Haggs' supervisor has asked him to prepare a report for Garvess Jones' clients detailing the affects of the acquisition on Simpson's financial statements.

Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1999. Which is the correct method?

A)  Equity method.

B)  Cost method.

C)  Consolidation method.

D)  Pooling-of-interests method.

 

The correct answer was A)

When a company owns an influential but non-controlling interest in another company, commonly 20-50%, it must account for it under the equity method.

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