ACT 332 CH 17

If a company owns more than 50% of another company's shares of common stock, how will financial statement reporting be different for U.S. firms compared to non-U.S. firms? U.S. firms will provide only parent company financial statements, whereas non-U.S. firms will provide both consolidated and parent company financial statements. U.S. firms will provide both consolidated and parent company financial statements, whereas non-U.S. firms will provide only parent company financial statements. U.S. firms will provide only consolidated financial statements, whereas non-U.S. firms will often provide both consolidated and parent company financial statements. U.S. firms will provide both consolidated and parent company financial statements, whereas non-U.S. firms will provide only consolidated financial statements.

U.S. firms will provide only consolidated financial statements, whereas non-U.S. firms will often provide both consolidated and parent company financial statements. In contrast to U.S. firms, financial statements of non-U.S. companies often include both consolidated (group) statements and parent company financial statements. All other options would not apply.

The fair value method of valuation is typically used by an investor when it holds ________ of the investee's equity securities. more than 50% more than 80% less than 20% 20%-50%

A company applies the fair value method to holdings below 20 percent. A company applies the equity method to investment holdings between 20 percent and 50 percent of ownership.

Which of the following is true of impairments? A.) They are recognized as a realized loss if the impairment is judged to be temporary. B.) They are based on discounted cash flows for securities. C.) They are based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments. D.) They are evaluated at each reporting date for every investment.

A company should evaluate every held-for-collection investment, at each reporting date, to determine if it has suffered impairment—a loss in value such that the fair value of the investment is below its carrying value. If the company determines that an investment is impaired, it writes down the amortized cost basis of the individual security to reflect this loss in value. All other options would be incorrect.

Gainey Resources purchased $100,000 worth of 8%, $1,000 par value, 10-year term bonds from Camarena Company on July 18, 2017, for $103,200. Beginning in 2019, Camarena has been unable to pay their bond interest payments, and the market price of the bonds has continued to drop. In 2020, the market price of the bonds was $65,700. After testing, Gainey decided that they would likely never recover more than 80% of their initial investment. According to Gainey, these bonds A.) should be amortized more rapidly than normal. B.) should be written off completely. C.) have suffered impairment. D.) have suffered unrecoverable loss.

A company should evaluate every held-for-collection investment, at each reporting date, to determine if it has suffered impairment—a loss in value such that the fair value of the investment is below its carrying value.When it is probable that a company will be unable to collect all amounts due under the terms of the transaction, the receivable is permanently written off by a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

Under which of the following circumstances is the investment account decreased if the investor is using the equity method? When the fair value of the investment declines. When dividends are paid by the investee. When dividends are paid by the investor. When the investee records net income.

All cash dividends received by the investor from the investee also decrease the investment's carrying amount. The equity method recognizes that investee's earnings increase investee's net assets, and that investee's losses and dividends decrease these net assets. All other options would not pertain to the equity method.

How are unrealized holding gains and losses reported for equity securities? A.) As a separate component of stockholders' equity. B.) As part of net income. C.) As other comprehensive income. D.) As an addition to (deduction from) the equity securities account balance.

As part of net income. Companies report trading securities at fair value, with unrealized holding gains and losses reported as part of net income. Unrealized holding gains and losses would be reported in other comprehensive income for available for sale securities.

How should the acquiring company account for an equity security if they have little or no influence over the investee company? By using the equity method By consolidation By using the fair value method By using the effective-interest method

By using the fair value method If an acquiring company has 20 percent to 50 percent over the investee company, the investor has significant influence. If an acquiring company has more than 50 percent over the investee company, the investor has controlling interest.

What reporting approach do companies use for available-for-sale securities that reduces the volatility of net income? A.) They report the securities at fair value on the balance sheet but do not report changes in the Fair Value Adjustment account until the securities are sold. B.) They report the securities at fair value in the Fair Value Adjustment account but do not report the securities on the balance sheet until after the securities are sold. C.) They report the securities at the amortized cost on the balance sheet and report them at fair value in the Fair Value Adjustment account. D.) They report the securities at fair value on the balance sheet but do not report changes in fair value as part of net income until after the securities are sold.

Companies report available-for-sale securities at fair value on the balance sheet but do not report changes in fair value as part of net income until after selling the security. This approach reduces the volatility of net income.

Which of the following statements about accounting for investments in debt securities classified as trading securities is TRUE? Any discount or premium is amortized. Unrealized gains are not recorded A discount is reported separately. A premium is reported separately.

Companies report trading securities at fair value, with unrealized holding gains and losses reported as part of net income. Similar to held-to-maturity or available-for-sale investments, companies are required to amortize any discount or premium. All other options would be false.

For which type of security is fair value NOT a relevant means for evaluating the cash flows associated with that security? Select answer from the options below Interest-yielding securities Held-to-maturity securities Available-for-sale securities Trading securities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Companies account for held-to-maturity securities at amortized cost, not fair value.

Equity securities are held as a passive investment if the investor holds ________ of the investee's stocks. over 80% between 20% and 50% between 50% and 80% less than 20%

Holdings between 20 percent and 50 percent (equity method) an investor has significant influence. Holdings of more than 50 percent (consolidated statements) an investor has controlling interest.

How long are trading securities generally held? Lless than 3 weeks Lless than 3 months More than 12 months Lless than 6 months

Lless than 3 months Since trading securities are held with the intention of selling them in a short period of time, three months is the general amount of time they are held. 12 months and 6 months would be too long to hold trading securities since trading requires frequent buying and selling.

Which of the following indicates that an investing company has significant influence over an investee company? A.) The investing company's CEO is on the board of directors for the investee company. B.) The investing company has consolidated financial statements that include the investee company's financial standings. C.) The investing company purchases finished products from the investee company. D.) The investing company uses the fair value method to account for their ownership of the investee company's stocks.

Other examples of significant influence include participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. All other options would not be a correct answer for an investor having significant influence over the investee company.

Hendrix Industries owns 35% of Petty Insurance's common stock. Werner Industries owns 55% of Spence Insurance's common stock. What type of accounting method will each investor company use for their investment? They will both use the equity method. Hendrix will use the fair value method, and Werner will use the equity method. Hendrix will use the equity method, and Werner will use the fair value method. They will both use the fair value method.

They will both use the equity method. Each investor will have the ability to exercise significant influence over the operating and financial policies of the investee, Petty Insurance and Spence Insurance. In instances of "significant influence" (generally an investment of 20 percent or more), the investor must account for the investment using the equity method. Since both companies own common stock over 20%, the fair value method would not apply.

Ahn Fences purchased 7,400 shares of Carrion Landscaping's common stock for $362,600. This was equal to 50% of Carrion's retained earnings balance. Carrion Landscaping currently has 46,000 shares of $10 par value common stock outstanding. How should Ahn Fences account for their long-term investment? The equity method The amortized cost method The consolidation method The fair value method

Under the fair value method, a company reports the equity investment at fair value each reporting period irrespective of the investee's earnings or dividends paid to it. A company applies the equity method to investment holdings between 20 percent and 50 percent of ownership.

A company that holds less than 20% of another company's equity securities should value the securities using the ________ method in their financial statements. equity par value consolidation fair value

When an investor has an interest of less than 20 percent, it is presumed that the investor has little or no influence over the investee. In such cases, if market prices are available subsequent to acquisition, the company values and reports the investment using the fair value method. Consolidation and equity would mean holding between 20-50% and more than 50%.

If an investing company considers itself to be a single economic entity with an investee company, it will likely issue ________ financial statements. consolidated parent company parent company and subsidiary subsidiary

consolidated Consolidated financial statements treat the parent and subsidiary corporations as a single economic entity. (Advanced accounting courses extensively discuss the subject of when and how to prepare consolidated financial statements.) Whether or not consolidated financial statements are prepared, the parent company generally accounts for the investment in the subsidiary using the equity method. All other options would be considered other names for the investor and the investee.

An investee is a company that has had its bonds purchased by another company. had its common stock purchased by another company. purchased another company's bonds. purchased another company's common stock.

had its common stock purchased by another company. The degree to which one corporation (investor) acquires an interest in the common stock of another corporation (investee) generally determines the accounting treatment for the investment subsequent to acquisition. An investor purchases another company's common stock.

Andy is journalizing the receipt of interest on securities. In doing so, he enters debits to Interest Receivable and Debt Investments and a credit to Interest Revenue. This entry indicates that the payment was received for securities classified as ________ securities. available-for-sale held-to-maturity or available-for-sale held-to-maturity trading

held-to-maturity or available-for-sale When there is a transfer from held-to-maturity to available-for-sale, the separate component of stockholders' equity is increased or decreased by the unrealized gain or loss at the date of transfer.

If an investor has holdings of between 20-50% of an investee company's stocks, they have A.) significant influence over the investee company and consolidate the investee's financial statements with their own. B.) significant influence over the investee company and use the fair value method. C.) little to no influence over the investee company and use the fair value method. D.) significant influence over the investee and use the equity method.

significant influence over the investee and use the equity method. Significant influence may be indicated in several ways. Examples include representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. The other options would include little or no influence or total control over an investee's company.