土豆妮

Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company’s balance sheet?

A) Equity method.

B) Both methods result in reporting the same balances for assets and liabilities.

C) Consolidation method.

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The consolidation method will reflect the highest assets and liabilities. The equity method would reflect the lowest.

土豆妮

Which of the following methods of accounting for investments will reflect the highest net income on a company’s income statement?

A) Both methods report the same net income.

B) Consolidation method.

C) Equity method.

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Both methods will report the same net income.

土豆妮

A company reports an intercorporate investment using the consolidation method. Which of the following statements is most accurate?

A) The use of the consolidation method by a company will generally report the most favorable results.

B) The use of the consolidation method by a company will generally report the least favorable results.

C) The use of the proportionate consolidation method by a company will generally report the most favorable results.

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The equity method will provide the most favorable results, while the consolidation method will provide the least favorable results.

土豆妮

Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for longer-term investment and liquidity purposes. The impact of the Marino holding on the Milburne income statement is:

A) -$4,700.

B) -$5,000.

C) $300.

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These securities are to be classified as available for sale and hence, all unrealized gains and losses are posted to a securities valuation reserve on the balance sheet. Hence, the only income statement impact is the $300 dividend = 0.02 × $15 × 1,000.

土豆妮

Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne plans to hold the shares of Marino for near-term trading purposes. The impact of the Marino holding on the Milburne income statement is:

A) -$5,000.

B) $300.

C) -$4,700.

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Since these securities are to be classified as trading securities, both the dividend received and the unrealized loss are posted to the income statement. The dividend is computed as 0.02 × $15 × 1,000 = $300 whereas the unrealized loss is $5,000 = ($15 - $20) × 1,000. The net income statement impact is $300 - $5,000 = -$4,700.

土豆妮

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using proportionate consolidation will appear:

A) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

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All else being equal, leverage measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the value of the liabilities on the balance sheet, while the level of book equity remains the same.

土豆妮

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, net profit margin measures for a firm using proportionate consolidation will appear:

A) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

C) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

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All else being equal, net profit margin measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of sales, while the level of net income remains the same.

土豆妮

When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, return on asset measures for a firm using proportionate consolidation will appear:

A) more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

B) less favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method.

C) less favorable than those for a comparable firm using consolidation, and more favorable than those for a comparable firm using the equity method.

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All else being equal, return on asset measures for a firm using proportionate consolidation will appear more favorable than those for a comparable firm using consolidation, and less favorable than those for a comparable firm using the equity method. This is because the choice of accounting method will affect the level of book assets, while the level of net income remains the same.