Q19. Assuming the equity method of accounting is used, What will be the cash flow received by Birtch, due to their

investment in TRQ during 2002?

A)     $227,500.

B)     $52,500.

C)     $65,400.

Q20. On December 31, 2001 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2002,

Company S earns $2,000 and pays a dividend of $500. If Company P uses the equity method of accounting, what values will be

reported on the balance sheet and income statement? How much cash will be recognized from the investment?

A) Balance Sheet                              Income Statement       Cash

   $5,375                            $500                   $125

B) Balance Sheet                              Income Statement       Cash

  $5,500                               $0                 $0

C) Balance Sheet                              Income Statement       Cash

   $5,375                               $125            $125

Q21. Fiduciary Investors held two portfolios for marketable equity securities:

§        $50 million in Portfolio A was accounted for as available-for-sale.

§        $50 million in Portfolio B was accounted for as trading securities.

Assume that Fiduciary transferred $10 million in trading securities from Portfolio B into Portfolio A. It was determined that subsequent to the transfer these securities had a market value of $8 million. If no previous write downs were made, Fiduciary must:

A)   charge $2 million to its income statement.

B)   do nothing to its income statement or equity section of its balance sheet.

C)   charge $2 million to the equity section of its balance sheet.

答案和详解如下：

Q19. Assuming the equity method of accounting is used, What will be the cash flow received by Birtch, due to their

investment in TRQ during 2002?

A)     $227,500.

B)     $52,500.

C)     $65,400.

Correct answer is B)

The cash flow to Birtch will be ($700,000)(0.30)(0.25) = $52,500.

Q20. On December 31, 2001 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2002,

Company S earns $2,000 and pays a dividend of $500. If Company P uses the equity method of accounting, what values will be

reported on the balance sheet and income statement? How much cash will be recognized from the investment?

A) Balance Sheet                              Income Statement       Cash

   $5,375                            $500                   $125

B) Balance Sheet                              Income Statement       Cash

  $5,500                               $0                 $0

C) Balance Sheet                              Income Statement       Cash

   $5,375                               $125            $125

Correct answer is A)

The carrying value on the balance sheet is $5,375, the income statement will show $500 of income, and the cash recognized is equal to the dividend of $125.
Using the equity method, for 2001, Company P will:

§   Recognize $500 ($2000 × 0.25) on its income statement as equity in the net income of Company S.

§   Increase the investment in the Company S account on the balance sheet to $5,500, reflecting its share of the net assets of Company S.

§   Receive $125 in cash dividends from Company S and reduce its investment in Company S by that amount to reflect the decline in the net assets of Company S due to the dividend payment.

At the end of 2001, the carrying value of Company S on Company P’s balance sheet will be ($5,000 original investment + $500 proportional share of Company S earnings – $125 dividend received = $5,375).

Q21. Fiduciary Investors held two portfolios for marketable equity securities:

§        $50 million in Portfolio A was accounted for as available-for-sale.

§        $50 million in Portfolio B was accounted for as trading securities.

Assume that Fiduciary transferred $10 million in trading securities from Portfolio B into Portfolio A. It was determined that subsequent to the transfer these securities had a market value of $8 million. If no previous write downs were made, Fiduciary must:

A)   charge $2 million to its income statement.

B)   do nothing to its income statement or equity section of its balance sheet.

C)   charge $2 million to the equity section of its balance sheet.

Correct answer is C）

Reclassifications allow investment managers latitude in transferring investment assets from “trading” to “available-for-sale,” thus realizing losses from the income statement to the equity section of the balance sheet.

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