Module Quiz 13.1
1. A Usually an ownership interest between 20% and 50% would indicate the ability to significantly influence. However, in this case, Tall is unable to influence Short as evidenced by its failure to obtain board representation; thus, Tall’s ownership interest should be considered an investment in financial assets. (LOS 13.a)
Module Quiz 13.2
1. B Initially, the carrying value of all security investments is cost.
initial cost = $950 + 250 = $1,200 (LOS 13.a)
2. B Fair value through OCI and fair value through profit or loss securities are carried at market value on the balance sheet. Also, both classifications call for recognition of unrealized losses and gains. Market value at t = 1 is $850 + $180 = $1,030. Unrealized loss is ($850 – $950) + ($180 – $250) = –$170. Note that the recognition differs. With fair value through OCI securities, the recognition is only on the balance sheet. With fair value through profit or loss securities, the recognition impacts the income statement.
(LOS 13.a)
3. C The increase in value requires that investment securities be written up to $900 +
$350 = $1,250. Because these are equity securities, the amortized cost classification is not available. (LOS 13.a)
4. A Classifying the shares as fair value through profit or loss requires both realized and unrealized gains and losses to be recognized on the income statement. As a result, this would have the effect of greater reported earnings volatility. There is actually a $220 unrealized gain between t = 1 and t = 2; the gain is unrealized because the shares were not actually sold. The net gain of $50 between the acquisition date and t = 2 is
unrealized; therefore, by classifying as fair value through OCI, the gain is not
recognized on the income statement (it goes directly to equity). Classification as either fair value through profit or loss or as fair value through OCI securities results in the same fair market value of $1,250 reported on the balance sheet at t = 2. (LOS 13.a) 5. B Debt securities at amortized cost are securities that meet both the cash flow and
business model test. They are carried at amortized cost ($1,200), and no unrealized or realized gains or losses are recognized until disposition. Because these securities were purchased at par, there is no amortization of premium/discount. (LOS 13.a)
Module Quiz 13.3
1. A With the equity method, the proportional share of the affiliate’s income (%
ownership × affiliate earnings) is reported on the investor’s income statement.
(LOS 13.a)
2. B $1,500,000 + 0.4($500,000 − $125,000) = $1,650,000. (LOS 13.a)
3. C $500,000 × 0.4 = $200,000; dividends are not included in income under the equity method. (LOS 13.a)
4. A $125,000 × 0.4 = $50,000; the dividend is cash flow = $50,000. (LOS 13.a) Module Quiz 13.4, 13.5, 13.6
1. A $6,000,000 + 0.2(–$450,000) − 0.2($600,000) = $5,790,000. (Module 13.5, LOS 13.a)
2. A 0.2(–$450,000) = –$90,000. (Module 13.6, LOS 13.a)
3. A After removing the investment gains in 2016 and 2017, operating income is $500 each year. Based on a growth trend of 0%, the appropriate operating income forecast for 2018 is also $500.
2016 2017 Sales and operating revenues $1,000 $1,140
Operating costs 500 640
Adjusted operating income 500 500
(Module 13.6, LOS 13.a)
4. B Total assets = $1,200,000 + $360,000 − $120,000 = $1,440,000. (Module 13.5, LOS 13.a)
5. B Minority interest income = $60,000(0.2) = $12,000.
Consolidated net income (after minority interest income is subtracted) = $300,000 +
$60,000 − $12,000 = $348,000. (Module 13.4, LOS 13.a)
6. B The beginning balance of the minority interest is $30,000 ($150,000 S equity × 20%). The minority interest is increased by the minority share of Company S’s income of $12,000 ($60,000 × 20%) and is decreased by the minority share of the dividends paid by Company S of $3,000 ($15,000 × 20%). Thus, the ending balance is $39,000 ($30,000 + $12,000 − $3,000). Note that the value of goodwill at the time of
acquisition is zero; hence, there is no need to specify whether full or partial goodwill accounting is used. (Module 13.4, LOS 13.a)
Module Quiz 13.7
1. B In testing goodwill for impairment, the carrying value of the reporting unit (including goodwill) is compared to the fair value of the reporting unit. Once an impairment has been detected, the loss is equal to the difference in the book value of the goodwill and the implied value of the goodwill. (LOS 13.a)
2. B Adam is required to perform an annual impairment test. The carrying value cannot exceed the fair value; if it does, then an impairment has taken place and the goodwill must be written down. (LOS 13.a)
Module Quiz 13.8
1. B Company C would include minority interest (50% of $800) along with its own equity of $5,950 in the consolidated financial statements. (Module 13.5, LOS 13.a)
2. C Company C would include all the assets of JVC and remove its equity investment in the consolidated balance sheet. $13,450 − $400 + $4,400 = $17,450. (Module 13.6, LOS 13.a)
3. A COGS = $7,000 Company C + 50% of $2,000 JVC = $8,000.
Net income of $930 is not affected by proportionate consolidation. (Module 13.8, LOS 13.a)
4. B Under U.S. GAAP (and IFRS), equity method is required to be used to account for joint ventures. Only in rare cases is proportionate consolidation allowed. (Module 13.8, LOS 13.b)
Module Quiz 13.9
1. C The equity method typically yields a higher measure of net profit margin.
Consolidation is most likely to result in a net profit margin somewhere between the profit margins of the two entities. (LOS 13.c)
Video covering this content is available online.
The following is a review of the Financial Reporting and Analysis (1) principles designed to address the learning outcome statements set forth by CFA Institute. Cross-Reference to CFA Institute Assigned Reading #14.
READING 14: EMPLOYEE