Financial Accounting CH 1 & 18

When an equity-method investment account balance is reduces to zero due to a current ear investee loss, the investor should?

Accrue no addition losses discontinue use of the equity method and not establish a negative balance leave the investment account balance at a zero until subsequent investee profits eliminate all unrecognized losses

Mr. Armstrong agrees to donate $100,000 to New Hopeful College once land has been acquired for a new football field. Mr. Armstrong gives $12,000 of this money immediately to show the he is sincere. The land had just been bought but no construction has begun. How is this donation reported by the school assuming it qualifies as a private NFP organization?

All $100,000 is reported as contribution revenue

Which of the following describes a circumstances when the equity method is appropriate for financial reporting?

An investor has the ability to exercise significant influence over an investees decisions and operations

Cincinnati Art and Health League is a private NFP entity. D'angelo donates 1,000 shares of stock to this organization near the end of Year Two. The organization has a policy whereby donated stocks and bonds are liquidated upon receipt so that the money can be put to use. These shares are sold for $28,000. How is this cash inflow reported on a statement of cash flows?

As an operating activity

Mr. Abraham donates $1 million in cash to a private NFP entity. The money must be used to cover a major part of the construction costs of a new science laboratory. How is this amount reported?

As temporarily restricted net assets because the money has to eventually be spent for a specifically designated purpose

What are some common economic consequences of financial statements on the reporting firm?

Certain financial statement performance metrics may affect the ability of a firm to raise capital in debt or equity markets Failure to maintain certain financial statement ratios may cause a firm to violate debt covenants Managerial compensation may depend on a reported net income

In employing the accrual basis, the equity method recognizes income for the investor?

as earnings are reported by the investee

When one firm cam influence the decisions of another firm through its ownership of voting shares, transactions between the two firms?

cannot be considered independent do not provide an objective basis for financial reporting

When an investor establishes control over an investee, financial reporting requires the ___ of he investors and investees financial statements?

consolidation

A criticism of the 20%-50% ownership guideline for applying the equity method is that?

contractual agreements may be more indicative of significant influence or control than ownership percentage a firm can argue that less that 50% ownership indicates a lack of control and thus avoid consolidation of an investee

Under the equity method, as the owners' equity of an investee company increases through the earnings process, the investment account of the investor company?

increases

The term used to describe inventory sales between an investor company and its equity-method investee is ___-___ sales?

intra-entity

Zell Company sells inventory at a $10000 gross profit to its equity method investee, Sam Company. Before the end of the year, Sam resells all of this inventory to an outside, unrelated entity. as a result of these activities, Zell Company should?

recognize the entire $10000 gross profit on its income statement

When an equity method investee company activities require of other comprehensive income (OCI), the investor company?

records its proportionate share of the investees OCI as AOCI on its financial records

When an investee sells inventory to its investor company, such intra-entity sales are commonly referred to as ____ sales?

upstream

Holden company pays $340,000 for a 40% investment in Sparrow Company. The investment provides Holden with the ability to exercise significant influence over Sparrow's operations. At the date of the investment, Sparrow has a book value of $600,000. Sparrow has a patent (5yr remaining life) with a zero carrying amount but a fair value of $250,000. How much goodwill should Holden record as a result of this transaction?

($600,000+$250,000) x 40% = $340,000 so no goodwill

Students at West Coast University (a private's NFP entity) receive considerable financial aid because tuition costs are high. This part year, students were charged $50 million for student tuition and fees but were also given $40 million in financial aid. Which of the following is true about the financial reporting?

A direct reduction of $40 million is reported to the student tuition and fees revenue

What income statement account should an investor use to defer its proportional share of intra-entity gross profit remaining in ending inventory from sales to an investee?

Equity in Investee Income

The Hanson Organization is a private not-for-profit entity. Officials are beginning to prepare financial statements. What group is in charger of the accounting principles that this organization must follow?

FASB has the authority over the accounting principles to be used by private not-for-profit organizations

When an equity method investment suffers a permanent decline in value, the investor recognizes an impairment loss and write down the investment account to ____ value?

Fair

Central Museum pays $1 million in cash to acquire Stockdon Museum. Stockdon has one asset. It is a large building with a net book value or $670,000 today and a fair value of $900,000. Both museums are private NFP entities. Stockdon Museum had historically operated using grants and has no significant source of revenues. In reporting this combination, the premium of $100,000 will be reported as good will? T/F

False Because the acquired entity has no significant source of revenue, the premium of $100,000 is not reported as goodwill but rather as a reduction in net assets on the statement of activities.

Which of the following is true about the financial reporting of a private NFP entity?

Financial reporting is similar to for-profit reporting unless differences exist in the nature of the transaction or the needs of the users.

When provisions and contracts grant firm A decision-making power over firm B's operations and financing policies?

Firm A must include Firm B in its consolidated financial statements

When an investor purchases an investment for an amount excess of the investees book value, how is the excess amount allocated?

First to specifically identified assets and liabilities with any remainder allocated to goodwill

Under the equity method, the excess of the investment cost over the proportionately-owned acquisition-date fair value of the investees net identifiable assets is allocated to the assets ____?

Goodwill

The equity method in accounting for an equity investment is applied when the investor company?

Has representation on the investees board of directors participates in policy-making decisions of the investee

Tyrone Weatherly is a carpenter. He spent 50 hours building a small patio behind the office of a private NFP entity. Weatherly charges $30 per hour but did this work for free. How should the private NFP entity record this?

Increase assets and contributions revenue by $1500

Clyde Washburn pledges money to a private NFP entity. The money will be paid in 18 months and must be used to furnish clothing for children living in poverty. Immediately after receiving this ledge, how is the action reported by the private NFP entity?

It is reported as contribution revenue within the restricted net assets column of the statement of activities.

Which of the following is a common characteristic of not-for-profit entities?

Many, but not all, received significant amounts of contributions

Jim Jones mows the grass free for each week for a private NFP entity in his home town. How should the entity report this contribution?

No recording should be made of this contributed service

Which of the following represent potential conditions where one firm has the ability to control the operations of another?

One firm had contractual arrangements that provided decision-making power over another firm One firms owns more than 50% of the voting stock of another firm

To provide consistency in application, what is the FASBs general quantitative guidelines for application go the equity method?

Ownership of 20-50% if the voting stock of an investee

If an increase in an investment now provides as investor wit the ability to exercise significant influence over an investee, the change to the equity method f investment accounting is applied on a ____ basis?

Perspective

Which of the following accounting approaches is used when an investment share is increased and the investment now qualifies for the equity method?

Prospective approach

What are some general criticisms of the equity method for investments in the ownership shares of another firm?

Significant influence and control may not be properly defined by existing quantitative guidelines By not including the investees assets and liabilities in the investors financial statement amounts, performance metric may be biased The liabilities of equity-method investees do not appear in the body if the investors financial statements

Holding Helping Hands is a private not-for-profit entity that is currently producing financial statements. On which statement will the charity report its assets and liabilities?

Statement of financial position

The Village Museum, a private NFP entity, buys a large art work on January 1, Year One. At the end of Year One, no depreciation is recognized in c=connection with this property Which of the following is most likely to be true?

The Museum plans to preserve the art work so that it will have an extraordinary long life

The Shenandoah Art Museum is a private NFP organization. A donor conveys title to a painting by Picasso. It is worth $230,000. It will; be exhibited by the museum and carefully guarded. If the painting is ever sold, the proceeds can be used to cover operating costs of the museum. Which of the following is true about this work of art?

The art work should be reported as an asset at $230,000

A private NFP entity incurs a cost of $45,000. Company officials are trying to determine whether this cost is a program services cost or as a supporting services cost. Which of the following is true?

The entity would prefer to report the amount as a program services cost.

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value on applying the equity method?

The equity method will likely expense excess costs allocated to different assets categories over different useful lives.

What is goodwill associated with an equity method investment?

The excess of the cost of the investment that cannot be attributed to a specific investee asset or liability

The fair value option for reporting investments that would otherwise be accounted for under the equity method requires?

The inclusion in net income changes in the fair value of an equity investment an irrevocable election to elect fair value as the measurement attribute for an equity investment the valuation of the equity method investment at fair value as of the investors balance sheet date

Under the fair-value method of accounting for an investment in another firms ownership shares, the investor recognizes income when?

The investee pays a dividend The fair value of the investees shares increase

Even though a business from owns 25% of another company's voting shares, the equity method should not be applied if?

The investor is unable to exercise significant influence over the investee after several tries, the investor is unable to gain a seat on the investees board of directors the 75% owners of the investee make decisions without consulting the investor

Under the fair-value method of accounting for an investment in another firms ownership shares, the investor increases its investment account when?

The investor purchases shares of the investee the fair value of the investees shares increases

In applying the equity method?

The investor recognizes its proportionate share of the investees income

Why does the equity method record investee dividends declared as reductions to the investment account?

The investors equity in the investee decreases when it becomes entitled to receive a dividend

George Simmens University is a private not-for-profit entity. In Year One, the school receives a pledge for $1 million to be paid in Year Four. Which of the following is reported in Year One at the time of the pledge?

The pledge is reported at its present value less an allowance for any expected uncollected amount.

When an investor sells inventory to its equity-method investee, how is the reported sales balance on the investors income statement affected?

The sales account remains unaffected

An intra-entity inventory sale occurs between an investor and its equity-method investee. What factors determine the amount of gross profit from the sale to be deferred as of the end of the year?

The sellers gross profit percentage The investors proportionate ownership of the investee The amount of the intra-entity sale remaining in ending inventory

Which of the following is true about board designated net assets reported by a private NFP entity?

They are considered unrestricted net assets because their use has not been stipulated by an external donorpppazaaaqsaaaawa

Which of the following is not a general characteristic of a NFP entity?

They must receive all funding through donations

How should an investor recognize previously deferred gross profits from purchases from its equity-method investee?

Through a credit to Equity in Investee Income

When an investor sells inventory that had been purchased from its equity-method investee, the investor recognizes any related deferred gross profit?

True

Under the equity method, the investor records its share of investee dividends as?

a decrease to the investment account

As opposed to the cash basis of accounting, the equity method follows the ____ basis for recognizing investment income.

accrual

An investor originally purchased 5% of an investee and appropriately applied the fair-value method to account for its investment. Later, the investor purchased sufficient additional shares to qualify the investment for the equity method. How should the investor account for the newly qualified equity investment?

add the cost of the shares to the current basis of its previous 5% investment

Which of the following are included in net income for an investment in equity shares accounted for under the fair-value method?

dividend from the investee

An investor that accounts for an equity investment under the cost method records income from the investment based on its share of ____ declared from the investee?

dividends

According to the International Accounting Standards, when an investor has significant influence over an investee, the investor much account for its investment using the ____ method?

equity

The ability to exercise significant influence over the operating and financial policies of an investee company is the sole criterion for application of the ____ method?

equity

As of the date the equity method becomes applicable for an investment, the investor allocates its purchase pice to its share of the investees assets and liabilities based on their individual ___ ___ values?

fair market

When should an investor recognize an impairment loss for its equity method investment?

if evidence exists that the investor will not be able t recover the investments carrying amount and the decline in value is other that temporary

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%?

in applying the equity method, the liabilities of the investee company are not combines with those on the investors balance sheet

What factors indicate if the equity method should be used for an investment in another firms equity securities?

investor representation on the investees bird of directors Technological dependency between the investor and investee Investor participation in the policy-making process of the investee

In 2015, the Coca-Cola Company accounts for its investments on Monster Beverage Corporation using the equity method because?

it possessed significant influence over Monster Beverage

Under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to the investors _____ share of the investee?

ownership

Which of the following represents reasons why a firms stock price differs from its underlying book value?

perceived worth of the firms net assets general economic conditions expected future profitability of the firm

Although goodwill arising from business combinations is subject to periodic impairment reviews, goodwill implicit in an equity method investment is not. Equity method investments are tested in their entirely for ____ declines in value.

permanent

If an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method?

the investments total fair value as of the date the investment qualifies for the equity method

When an investor sells a portion of an equity-method investment?

the investor recognizes a gain or loss on a sale. the investment account should reflect a balance current as of the date of sale. the investor continues to apply the equity-method of the investor continues to have the ability to exercise significant influence over the invest.