Chapter 16

1. A minority passive investment is one in which the shareholder has no ability to influence the acquired company's operating and financial policies. (T/F)

2. Minority passive investments of less than 20% of the voting stock are classified as either trading securities or available-for-sale securities. (T/F)

3. Equity securities designated by the investor to be held for a short period of time are classified as available-for-sale securities. (T/F)

4. Trading securities are typically purchased by the investor to generate profits on holding gains. (T/F)

5. GAAP presumes that ownership of less than 20% of another company's voting shares constitutes a passive investment. (T/F)

6. An investment of 50% or more of a company's voting shares will require the investor to prepare consolidated financial statements. (T/F)

7. An investment of 30% of a company's voting shares must be accounted for using the equity method. (T/F)

8. An unrealized loss does not reduce income from operations for an equity securities investment classified as trading securities. (T/F)

9. The realized gain on an investment classified as trading securities is calculated by comparing the selling price to the original cost. (T/F)

10. The unrealized gain from an investment classified as available-for-sale reduces income from operations. (T/F)

11. The upward or downward adjustment to reflect fair value of trading securities is a direct debit or credit to a market adjustment account. (T/F)

12. When trading securities are sold, the amount of the realized gain or loss is the selling price of the securities relative to the most recent mark-to-market price. (T/F)

13. Unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income. (T/F)

14. When the ownership percentage of voting stock exceeds 20 percent, GAAP presumes that the investor is able to exert significant influence over the investee company. (T/F)

15. When the ownership percentage of voting stock exceeds 20 percent, GAAP requires that the investor use the equity method to account for the investment. (T/F)

16. The investment account is decreased by the dividends received by the investor when the investor uses the equity method to account for the stock investment. (T/F)

17. The investment account is adjusted for the investor's share of the reported income of the investee when the investor uses the equity method to account for the stock investment. (T/F)

19. A company can elect to use the fair value option to account for equity method investments at any time. (T/F)

20. Once a company decides to use the fair value option to account for an equity method investment, the decision is irrevocable. (T/F)

21. Under the fair value method of accounting for equity investments, unrealized gains and losses as well as dividends received from the investee are reported in the investor's income statement. (T/F)

22. When two companies form a joint venture and each company owns exactly 50% of the joint venture, both parent's will account for the joint venture using the equity method. (T/F)

23. Consolidated financial statements must be prepared when a corporation acquires more than 50% of the voting stock of another corporation. (T/F)

24. Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to avoid double counting. (T/F)

25. SFAS No. 160 requires retroactive application and use of the acquisition method to account for business combinations. (T/F)

26. If a parent owns less than 100% of a subsidiary's stock, the non-controlling shareholders represent the minority interest. (T/F)

27. The stockholders' equity reported on a consolidated balance sheet includes the equity of both the parent company and the subsidiary company. (T/F)

28. The minority interest's share of the net assets of a consolidated entity is shown as a contra-asset on the consolidated balance sheet when the purchase method is used. (T/F)

29. When using purchase accounting to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values at the date of purchase regardless of whether there is a noncontrolling interest. (T/F)

30. When using the acquisition method to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values regardless of the level of ownership attributable to the minority shareholders. (T/F)

31. The amount of goodwill recognized on a consolidated balance sheet will always be the same when accounting for a business combination under either the acquisition method or the purchase method. (T/F)

32. U.S. GAAP requires comparative financial statements to be retroactively adjusted to include data for the acquired company for periods prior to the acquisition. (T/F)

33. A variable interest entity must be consolidated into the financial statements of the sponsoring entity if the sponsoring entity is subject to a majority of the risk of loss from the variable interest entity activities and/or is entitled to receive a majority of variable interest entity's residual returns. (T/F)

34. When consolidating foreign subsidiaries, the foreign subsidiary's financial numbers must be translated into the parents' currency unit. Under U.S. GAAP, if the foreign subsidiary is merely an extension of the parent, the current rate method is used. (T/F)

35. Monetary assets that arise from foreign currency transactions are shown in the financial statements at their dollar equivalent using the exchange rate in effect at the financial statement date. (T/F)

36. Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are translated using the current exchange rate at the balance sheet date. (T/F)

37. Any foreign translation gains or losses using the current rate method should be put directly into the owner's equity account. (T/F)

38. Under the temporal method, foreign translation gains and losses are reported on the income statement. (T/F)

39. In a pooling of interests, both companies are assumed to combine their resources with neither having a controlling interest over the other. (T/F)

40. The consolidated financial statements under a pooling of interests combine the market values of the two entities. (T/F)

41. Minority ownership occurs when a corporate investor owns less than which one of the following percentages of the stock of another company?

42. A minority active ownership is represented by

43. Equity securities designated by the investor to be held for a short period of time are classified as

44. Minority passive equity securities designated by the investor to be held for the long-term are

45. Bond investments made to generate trading gains are classified as

46. Minority active equity investments are accounted for by the

47. The unrealized holding gain or loss on trading securities is recorded on

48. The fair value adjustment for available-for-sale securities results in

51. Refer to Table 16-1. Perry should record the of the Baker dividend as

53. Refer to Table 16-1. If the securities purchased are classified as available-for- sale securities, Perry should record the year-end adjustment as

57. Which of the following properly describes a difference between the accounting for a trading security relative to the accounting for an available-for-sale security for a particular investment?

59. The Kerry Company began operations during 2008 and purchased shares of Molson Corporation stock during the year. The market value of the Molson stock had increased as of the end of 2008. Kerry should have classified this investment as a trading security but mistakenly classified it as an available-for-sale security. Which of the following properly describes the impact of this error?

60. When the ownership percentage of stock exceeds 20 percent, GAAP presumes that the investor

61. When an investor owns less than 20 percent of the investee company, the investor may still be able to exert influence over the investee company if the other stock is

62. When an investor is capable of influencing the investee company's dividend policy, the investor is able to augment its own reported income when using

63. A minority active investment is accounted for by the

69. When the cost of the investor's shares exceeds the underlying book value at the acquisition date, the investor must amortize any excess that is attributable to inventory, or depreciable assets. The rationale for this amortization is

75. Which of the following does not properly describe the accounting for an investment using the equity method when the fair value option has been elected?

76. If the parent company owns more than 50% of the subsidiary's voting stock, consolidated financial statements are

77. If one company owns exactly 50% of the voting shares of another company

78. The parent company's investment account would include an element which is representative of

79. Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to

80. Which of the following statements does not properly describe the accounting for business combinations?

81. The Parent Company purchased 80% of the Sub Corporation's voting stock on January 1, 2009. The Parent Company used the acquisition method to prepare the consolidated balance sheet. Which of the following is not an accurate description of the consolidated balance sheet on January 1, 2009?

87. Which of the following statements does not accurately describe the accounting for goodwill as outlined within SFAS 142?

88. The disclosure rules pertaining to U.S. GAAP accounting for business combinations complicates financial analysis for which of the following reasons?

89. Which of the following criteria is applicable with respect to determining when a variable interest entity (VIE) must be consolidated into the sponsoring firm's financial statements?

91. On November 1, 2008, A U.S. company sold merchandise to a foreign company for 375,000 francs. The payment in francs is due on January 31, 2009. The spot rate was as follows: $.20 per franc on November 1, 2008; $.21 per franc on December 31, 2008; and $.19 per franc on January 31, 2009 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction?

92. Which of the following correctly describes the accounting for assets and liabilities that were created from foreign currency transactions?

93. When consolidating foreign subsidiaries, the foreign subsidiary's financial numbers must be translated into the parents' currency unit. Under U.S. GAAP if the foreign subsidiary is a self contained unit the

94. Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are translated using the

95. When accounting for a non-free-standing foreign subsidiary, translation exchange rates are accounted for using the temporal method which involves reporting all revenue accounts at the

96. When accounting for a non-free-standing foreign subsidiary, translation exchange rates are accounted for using the temporal method which involves reporting all cost of goods sold accounts at the

97. When accounting for self-contained foreign subsidiaries, the parent company uses which one of the following methods for the translation of its financial statements into dollars?

98. If Sun Company acquired Star, Inc. in a pooling of interests transaction, the entry would have used which one of the following to account for the pooling?

99. Pooling of interests method for accounting for business combinations has been criticized because it tends to allow recording of acquisitions

100. Financial analysts must be wary of business acquisitions accounted for as pooling of interests because this method tends to inflate the