Fair Value, Equity, and Consolidation - ANS What are the 3 approaches to reporting
investments allowed by GAAP?
Consolidation - ANS Required when investor's ownership exceeds 50% of investee, except
"where control does not actually rest with the majority shareholders"
Fair Value - ANS 0-20%
Equity Method - ANS 20-50%
Consolidation - ANS 50-100%
Equity Method - ANS Requires that the investment insures "significant" influence
Downstream Sale - ANS Investor sells inventory to the investee
Upstream Sale - ANS Investee sells inventory to the investor
Yes - ANS Does a change from fair value to equity method require a retroactive adjustment?
No - ANS Does a change from equity to fair value method require a retroactive adjustment?
deciding influence level with 20-50% ownership, off-balance sheet financing, and potential
manipulation of performance ratios - ANS What are 3 criticisms of the equity method?
Merger, Acquisition, and Takeover - ANS What are the 3 different types of business
combinations?
Vertical Integration, Cost Savings, Quick Access to New Markets, Economies of Scale, and
Diversification of Business Risk - ANS What are the 5 reasons why companies combine?
D - ANS When an investor uses the equity method to account for investments in common
stock, cash dividends received by the investor from the investee should be recorded as
a. A deduction from the investor's share of the investee's profits
b. Dividend income
c. A deduction from the stockholders' equity account, dividends to stockholders
d. A deduction from the investment account
B - ANS Which of the following does not indicate an investor company's ability to significantly
influence an investee?
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