ACCT370 Chapter17
Fair value adjustments tax effects are deferred because
gains and losses are not recognized until a security is sold under income tax law.
An entity that is acquired through a controlling financial interest by another entity is referred to as a _____ .
subsidiary
Investments are only classified as held-to-maturity if management has
the ability and intent to hold the investment to maturity.
Which of the following are true regarding available-for-sale securities?
the ability and intent to hold the investment to maturity.
Which of the following would result in an investment being written down and a charge taken against net income if the impairment is considered not to be temporary?
If the fair value of an equity method investment is below its carrying value.
Which of the following are true for Other-Than-Temporary Impairment (OTTI)?
The portion of the impairment related to other factors is recognized in other comprehensive income. The portion of the impairment related to the credit loss is recognized in net income.
A joint venture is created when two companies each own ______ of an entity and operate it together.
exactly 50%
On January 1, 2021, Johnson Company acquired 100% of the shares of Schisel, Inc. Johnson paid $100,000 for the investment, which is $40,000 more than the book value of Schisel's identifiable net assets. Johnson attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2021, and the rest to goodwill. Johnson will show
goodwill of $25,000 in the consolidated financial statements.
Minority-passive equity investments generally
have changes in fair value accounted for in net income. are accounted for at fair value.
An entity that is acquired through a controlling financial interest by another entity is referred to as a .
subsidiary
The CECL credit loss associated with held-to-maturity securities is calculated as
the difference between amortized cost and present value of expected cash flows from the investment.
The amount of the loss accrued according to the Current Expected Credit Loss rules is generally the difference between
the present value of the expected cash flows and the amortized cost of the investment.
The stockholders' equity accounts of the subsidiary are eliminated
to avoid double-counting net assets of the subsidiary. to avoid double-counting the ownership interests in the subsidiary. against the Investment account.
Other-Than-Temporary Impairment (OTTI) is not an issue for ______ because these are already marked to fair value through the income statement.
trading securities
The Current Expected Credit Loss rules are generally not applicable to
trading securities.
Investments in debt securities may be classified as
trading securities. available-for-sale securities. held-to-maturity securities.
For equity method investments, the fair value option can be elected
when the firm first acquires the investment that is eligible for equity method treatment.
Factors that should be assessed in determining whether an equity method investment impairment is other than temporary include (Check all that apply.)
whether the investee has recorded any impairment charges. whether there has been a deterioration in the investee's financial condition. whether the decline in value has been over an extended period of time.
Ownership of less than ______ of another company's voting shares is presumed to be a passive investment by GAAP.
20%
Which of the following are true of goodwill?
- It exists because strong companies are generally worth more than the sum of their individual net assets. - It is not amortized.
Critics argue that joint ventures are used to
- misrepresent the firms' liabilities. - evade loan covenants.
Vieu Company bought 30,000 shares of the voting common stock of Williams Corporation in January 2021 for $300,000. In December, Williams announced $150,000 net income for 2021 and declared and paid a cash dividend of $1 per share on the 100,000 shares of outstanding common stock. The carrying value in the investment account at the end of the year would be
315000 Reason: $300,000 + ($150,000 x 30%*) - $30,000 = $315,000 *(30,000 shares/100,000 total shares = 30% ownership)
Suppose that Pace Corporation borrowed $100,000 from Sparrow Corporation, its fully owned subsidiary. Which of the following would be included in the consolidating worksheet?
A debit to the intercompany payables for $100,000. A credit to the intercompany receivables for $100,000.
Which of the following are needed to calculate the credit loss associated with held-to-maturity securities?
Amortized cost of investment. Present value of expected remaining coupon payments. Present value of expected principal payment.
Park Company paid $200,000 to purchase 100% of the outstanding common stock of Stream Incorporated on January 1, 2021. Stream's buildings were undervalued by $60,000 as of January 1, 2021; the buildings had a ten-year remaining life as of the date of acquisition. How does this affect the consolidated income statement in the first year?
Depreciation of $6,000 must be recognized.
Available-for-sale securities are presented at _____ _____ in the balance sheet.
Fair Value
Which of the following is a difference between trading securities and available-for-sale securities?
Fair value adjustments are recognized in net income for trading securities and in OCI for available-for-sale securities.
Regardless of other factors, ownership of less than 20% of another company's voting shares must always be considered a passive investment.
False Reason: The 20% presumptive cutoff may be rebutted by evidence that the investment is active rather than passive.
Which of the following is not a use of a variable interest entity?
Giving equity investors voting rights
Which of the following statements is correct with respect to preparing consolidated financial statements?
Intercompany sales are eliminated with a debit to Sales and a credit to Cost of goods sold. Only transactions with third parties are reflected in the consolidated financial statements.
According to GAAP, how is business fair value determined when there is a less than 100% acquisition?
It is the sum of the controlling interest fair value and the noncontrolling interest fair value.
Which of the following are true of the equity method?
It is used when the investor has the ability to exert significant influence over the investee. The Investment account is increased when the investee reports income. The investment is originally recorded at cost.
Identify the true statement regarding held-to-maturity securities.
The investment account is adjusted for the amortization of premium or discount each period.
The process of recording credit losses for available-for-sale securities is complicated by the fact that these securities
are reported at fair value.
Park Corporation owns 80% of Recreation Company. During the current year, Park sold goods to Recreation for $80,000. The inventory originally cost Park $60,000. Recreation sold 60% of the inventory during the year. Which of the following statements is correct with respect to preparing Park's current year consolidated financial statements?
Sales will be decreased by $80,000.
Haynes Company purchases a ten-year $200,000 bond with an 8% coupon interest rate for $214,047 which indicates a 7% effective yield. This investment was made on January 1, 2021, and is considered a held-to-maturity investment. The bonds have a fair value of $213,500 on December 31, 2021. Which of the following statements is true?
The adjusting entry at December 31, 2021, includes a credit to Investment in Bonds for $1,017.
Which of the following is not true about the fair value option for equity method investments?
The fair value option is revocable.
When an available-for-sale investment is sold, which of the following is included in the income statement?
The full holding period gain or loss.
Which of the following is not true when the cost of the shares acquired exceeds the underlying book value at acquisition date?
The investor is required to assign any excess to goodwill and amortize it over a period not to exceed 20 years.
Suppose that Pace Corporation borrowed $100,000 from Sparrow Corporation, its fully owned subsidiary. How would this loan be treated on the consolidated financial statements?
The loan would be eliminated for both the parent and the subsidiary
Haynes Company purchases a ten-year $200,000 bond with an 8% coupon interest rate for $214,047 which indicates a 7% effective yield. This investment was made on January 1, 2021, and is considered an available-for-sale debt security. The bonds have a fair value of $213,500 on December 31, 2021. Which of the following statements is true? (Select all that apply)
They would report a gain of $470 for the year ending December 31, 2021, which would be included in Other Comprehensive Income. The adjusting entry at December 31, 2021, includes a credit to Investment in Bonds for $1,017.
Whittaker Corporation has two investments in equity trading securities. They purchased Company A for $50,000 and Company B for $40,000 during 2020. At the end of the year, the fair values of these investments are $52,500 and $38,500 respectively. The journal entry for the 2020 year end adjustment would include
a debit to Fair value adjustment - trading securities for $1,000
Whittaker Corporation has two investments in equity trading securities. They purchased Company A for $50,000 and Company B for $40,000 during 2020. At the end of the year, the fair values of these investments are $52,500 and $38,500 respectively. Their marginal tax rate is 35%. The journal entry for this tax effect would include (check all that apply.)
a debit to Income tax expense-deferred for $350 a credit to Deferred tax asset/liability for $350 Reason: [($50,000 + $40,000) - ($52,500 - $38,500)] x 35%
Joshua Corporation has two investments in available-for-sale securities. They purchased Investment A for $60,000 and Investment B for $75,000 during 2020. At the end of the year, the fair values of these investments are $61,475 and $72,500 respectively. The journal entry for the year end adjustment would include
a debit to Other comprehensive income for $1,025.
According to the economic unit concept of consolidation,
a subsidiary must be consolidated as a whole regardless of the parent's level of ownership.the parent must measure and recognize the subsidiary as a whole at business fair value.
An investor has a(n) ______ investment when the investor has the ability to exert significant influence over an investee's decisions.
active
For a consolidated entity with a noncontrolling interests, the return on parent company equity is equal to net income attributable to the parent company divided by average parent company equity, where parent company equity includes
common equity and preferred stock.
Which of the following statements is true regarding the current accounting standards for goodwill?
common equity and preferred stock.
For a consolidated entity with a noncontrolling interest, the return on total equity is equal to net income divided by average total equity, where total equity includes
common equity, preferred stock, and noncontrolling interests.
The process of combining a subsidiary's financial statements with the parent's financial statements is referred to as
consolidation.
A ______ equity investment generally has more than 50% ownership, effective control, and accounts for the investment through full consolidation.
controlling
Under the equity method dividends received from an investee company
decrease the investment account.
What is the critical issue regarding a VIE?
determining when the sponsoring entity must consolidate the VIE.
Available-for-sale securities may be classified as
either short-term or long-term investments
A journal entry to record the sale of available-for-sale securities would (check all that apply).
eliminate the associated accumulated other comprehensive income balance. remove the bonds from the balance sheet. recognize the entire holding period gain or loss.
Net income attributable to noncontrolling interests
is not an expense in the consolidated income statement. will be a reduction in arriving at net income attributable to controlling shareholders.
When there is a credit loss on available-for-sale securities, the fair value adjustment
is split between credit loss and noncredit loss.
A ______ equity investment generally has less than 20% ownership, no substantial influence, and uses fair value measurement with unrealized gains and losses reported in the income statement.
minority passive
An investor is generally said to have a controlling financial interest when they own ______ of the outstanding voting shares of another entity.
more than 50%
Fair value adjustments for trading securities are recognized in _____ _____ .
net income
The equity interest in a subsidiary not attributable directly or indirectly to the parent is known as the (select all that apply)
noncontrolling interest minority interest
It is unusual for held-to-maturity security to be sold prior to maturity because
they are only classified so because management has both the ability and the intent to hold the investment to maturity.