ACCT370: Financial Statement Analysis Read & Interact: Revsine, Collins, Johnson, Mittelstaedt, & Soffer: Chapter 17

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.

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

$315,000 Reason: $300,000 + ($150,000 x 30%*) - $30,000 = $315,000 *(30,000 shares/100,000 total shares = 30% ownership)

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.

Ownership of less than ______ of another company's voting shares is presumed to be a passive investment by GAAP.

20%

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 credit to the intercompany receivables for $100,000. A debit to the intercompany payables 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 principal payment. Present value of expected remaining coupon payments.

securities are investments that are part of an actively managed investment portfolio designed to achieve gains.

Blank 1: Trading

Available-for-sale securities are presented at in the balance sheet.

Blank 1: fair Blank 2: value

An entity that gains a controlling financial interest in another entity is referred to as the company.

Blank 1: parent, acquirer, or acquiring

Which of the following is not a use of a variable interest entity?

Giving equity investors voting rights

Which of the following statements is true regarding the current accounting standards for goodwill?

Goodwill should be tested for impairment on at least an annual basis and in certain conditions between annual dates.

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.

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.

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.

Which of the following are true of goodwill?

It is not amortized. It exists because strong companies are generally worth more than the sum of their individual net assets.

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 is originally recorded at cost. The Investment account is increased when the investee reports income.

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 assess in determining whether an equity method investment impairment is other than temporary include

whether the decline in value has been over an extended period of time. whether the investee has recorded any impairment charges. whether there has been a deterioration in the investee's financial condition.

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. Reason: $200,000 x 8% = $16,000 $214,047 x 7% = $14,983 Bond premium amortization $16,000 - $14,983 = $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.

Identify the true statement regarding held-to-maturity securities.

The investment account is adjusted for the amortization of premium or discount each period.

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

Which of the following are true for Other-Than-Temporary Impairment (OTTI)?

The portion of the impairment related to the credit loss is recognized in net income. The portion of the impairment related to other factors is recognized in other comprehensive income.

Which of the following are true regarding available-for-sale securities?

They require an fair value adjustment at each balance sheet date. They are presented in the balance sheet at fair value.

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

a debit to Income tax expense-deferred for $350 a credit to Deferred tax asset/liability for $350

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

The stockholders' equity accounts of the subsidiary are eliminated

against the Investment account. to avoid double-counting net assets of the subsidiary. to avoid double-counting the ownership interests in the subsidiary.

Minority-passive equity investments generally

are accounted for at fair value. have changes in fair value accounted for in net income.

The process of recording credit losses for available-for-sale securities is complicated by the fact that these securities

are reported at fair value.

Investments in debt securities may be classified as

available-for-sale securities. held-to-maturity securities. trading securities.

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.

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 current or noncurrent.

A joint venture is created when two companies each own ______ of an entity and operate it together.

exactly 50%

Fair value adjustments tax effects are deferred because

gains and losses are not recognized until a security is sold under income tax law.

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.

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 20% to 50% ownership, substantial influence, and uses the equity method to account for the investment.

minority active

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

Critics argue that joint ventures are used to

misrepresent the firms' liabilities. evade loan covenants.

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%

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

Examples of what may trigger impairment testing of goodwill includes each of the following except

recognition of a goodwill impairment loss in the financial statements of the parent.

A journal entry to record the sale of available-for-sale securities would

remove the bonds from the balance sheet. eliminate the associate accumulated other comprehensive income balance. recognize the entire holding period gain or loss.

Investments are only classified as held-to-maturity if management has

the ability and intent to hold the investment to maturity.

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.

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.