Chapter 16
Intercorporate Investments
True-False
1. For an investor each share of common stock and each share of preferred stock owned usually
entitles the owner to one vote.
2. The realized gain on a passive investment in equity securities is calculated by comparing the
selling price to the original cost.
3. The upward or downward adjustment to reflect fair value of equity investment securities is a
direct debit or credit to a fair value adjustment account.
4. An unrealized loss on investment securities results in a deferred tax asset because the loss
reduces pre-tax income but has no effect on taxable income.
5. 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.
6. When the investor pays $100,000 to acquire 40% of a company’s outstanding voting shares at
a time when the fair value of the company’s net assets are $175,000, the resulting goodwill
amount is $30,000.
7. When two companies form a joint venture and each company owns exactly 50% of the joint
venture, both parents will account for the joint venture using the equity method.
8. Consolidated financial statements must always be prepared when a corporation acquires more
than 50% of the voting stock of another corporation.
9. Under purchase method accounting for a business combination, the subsidiary’s assets and
liabilities are reported on the consolidated balance sheet at 100 per cent of their fair values at the
date of purchase regardless of whether there is a noncontrolling interest.
10. 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.
11. Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are
translated using the current exchange rate at the balance sheet date.
12. Any foreign translation gains or losses using the current rate method should be reported as
other comprehensive income.
13. IFRS does not permit use of the fair value option for equity-method investments.
14. While both IFRS and GAAP require companies to consolidate entities they control, IFRS
defines control more narrowly than GAAP.
15. When a company has available-for-sale debt securities, the interest income pattern in the
income statement is identical to the interest income pattern under the held-to-maturity
classification.
Multiple-Choice Questions
16. A minority ownership interest generally occurs when an investor owns less than which of the
following percentages of the stock of an investee company?
a. 20%
b. 30%
c. 40%
d. 50%
17. A minority active ownership is represented by
a. less than 20% ownership.
b. 20% or more but less than 50% ownership.
c. more than 50% ownership.
d. more than 60% and less than 70% ownership.
18. Investments in debt securities that the investor intends to hold for a short time and that are
purchased in an attempt to profit from near-term price changes are classified as
a. available-for-sale securities.
b. trading securities.
c. fair value securities.
d. adjusted historical cost securities.
19. Prior to the 2018 effective date of accounting for minority passive equity investments,
investments in stock securities designated by the investor to be held for the long-term are
classified as
CHAPTER 16 Intercorporate Investments
a. trading securities.
b. available-for-sale securities.
c. fair value securities.
d. adjusted historical cost securities.
20. In 2018 under the rules for minority passive investments in equity securities, which of the
following statements is not correct?
a. There will no longer be a distinction between trading securities and available-for-sale
securities for minority passive equity investments.
b. The income statement and balance sheet treatment will be the same as the current accounting
for available-for-sale securities.
c. Cash flows from the purchase and sale of equity securities will be classified based on the
nature and purpose of the investment.
d. An exception will be for investments where fair value is not readily determinable.
21. Which of the following statements regarding minority passive investments in equity
securities is not correct for 2018 and thereafter?
a. Net income will be less volatile under the new methods.
b. Companies will book a cumulative adjustment at the beginning of the year of transition.
c. In the balance sheet (or in the notes), financial assets will be broken out by measurement
category (fair value vs. cost) and by form of asset (securities vs. loans and receivables).
d. The key effect of this adjustment will be a reclassification between accumulated other
comprehensive income and retained earnings.
22. Which of the following statements regarding minority passive investments in stock securities
is correct for 2018 and thereafter?
a. The new standard is likely to increase income statement volatility, as fair value changes will
all be reported in other comprehensive income.
b. There are no exceptions permitted under the new guidance.
c. The income statement and balance sheet treatment will be the same as the current accounting
for trade securities.
d. Companies will book a cumulative adjustment at the end of the year prior to transition.
23. Investments in debt securities made to generate trading gains are classified as
a. available-for-sale securities.
b. trading securities.
c. held to maturity securities.
d. minority securities.
24. Minority active equity investments are accounted for by the
a. fair value method.
b. purchase method.
c. equity method.
d. cost.
25. In accounting for minority passive equity investments in 2018 and thereafter, the unrealized
holding gain or loss on equity securities is recorded on
a. the income statement in the period after the security price change.
b. the income statement in the period of the security price change.
c. the balance sheet as a deferred charge in the period of the security price change.
d. the balance sheet as a separate component of stockholders’ equity.
26. A company purchased shares of stock of another company for $75,000 during 2018. The
shares’ fair value was $79,000 at the end of 2018 and $81,000 at the end of 2019. Which of the
following statements correctly describes the investor’s accounting for the investment?
a. A realized gain of $4,000 was recorded during 2018.
b. An unrealized gain of $6,000 was recorded during 2019.
c. An unrealized gain of $2,000 was recorded during 2019.
d. A realized gain of $2,000 was recorded during 2019.
Use the following to answer questions 27 and 28:
REFERENCE: Ref. 16_01
Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2017, for
$20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2017 for $24,000. Baker paid
$2,400 of previously declared dividends to Perry on December 31, 2017. At the end of 2017, the
fair value of the Able stock was $18,000 and the fair value of the Baker stock was $28,000. The
27. Perry should record the receipt of the Baker dividend as
a. DR Cash 240
CR Dividend income 240
b. DR Dividends receivable 2,400
CR Dividend income 2,400
c. DR Cash 2,400
CR Investment in Baker 2,400
d. DR Cash 2,400
CR Dividends receivable 2,400
28. Perry should record the year-end adjustment as
a. DR Fair value adjustment—Trading securities 2,000
CR Unrealized holding gain on
Trading securities—Income 2,000
b. DR Unrealized holding gain on equity
securities—Income 2,000
CR Fair value adjustment
—Trading securities 2,000
c. DR Fair value adjustment—Trading securities 2,000
CR Unrealized holding loss on Trading
securities—Income 2,000
d. DR Fair value adjustment—Trading securities 2,000
CR Realized holding gain on
Trading securities 2,000
29. Of the following items, which would not be a circumstance that may trigger goodwill
impairment?
a. Loss of key personnel
b. Unanticipated competition
c. Adverse action imposed by a regulator
d. Recognition of an inventory loss in the financial statements of the parent
Use the following to answer questions 30 – 32:
REFERENCE: Ref. 16_02
Central Investments bought 4,000 shares of Benet Company common stock on January 1, 2018,
for $20,000, and 4,000 shares of Roy Company common on July 1, 2018, for $24,000. Benet
declared dividends on December 31, 2018 of $3,000. At the end of 2018, the fair value of Roy
was $30,000 and the fair value of Benet was $28,000. At the end of 2019, the fair value of Roy
was $32,000 and the fair value of Benet was $24,000. These investments are reported in the
long-term asset section of Central’s balance sheet. Central owns 8% of Benet Company and 12%
of Roy Company.
[QUESTION]
REFER TO: Ref. 16_02
30. Assume that the Roy Company stock was sold during 2020 for $31,000. The proper
accounting recognition at the date of sale was
a. an unrealized loss $1,000.
b. a realized gain of $7,000.
c. a realized gain of $6,000.
d. a realized loss of $1,000.
31. The 2019 year-end adjustment resulted in
a. a $12,000 reduction of net income.
b. a $2,000 reduction of net income.
c. a $2,000 increase in stockholders’ equity.
d. a realized gain of $2,000
32. How much income was reported on the 2018 income statement?
a. $240
b. $14,240
c. $14,000
d. $0
33. The Shasta Corporation began operations in 2018. Shasta’s portfolio of minority passive
investments reported the following on December 31, 2018:
CHAPTER 16 Intercorporate Investments
Equity Investments
Cost $450,000
Fair value $395,000
Which of the following is correct with respect to the accounting for Shasta’s investment
portfolio?
a. Net income was decreased $55,000 during 2018.
b. Net income and total stockholders’ equity were decreased $55,000 as of December 31,
2018.
c. Net income was increased $55,000 during 2018.
d. Net income and total stockholders’ equity were increased $55,000 as of December 31,
2018.
34. Almond Industries owns an investment that experienced a decline during 2019 that has been
judged to be “other than temporary”. The investment is held in Almond’s minority passive
equity investment portfolio. It was purchased in March 2018 at a cost of $460,000. At the end
of 2018, the fair value of the investment was $520,000. At the end of 2019, the fair value of the
investment is $410,000. What amount of loss will Almond Industries report on its income
statement for the year ending December 31, 2019 related to this investment?
a. an unrealized loss of $110,000.
b. an unrealized loss of $50,000.
c. an unrealized loss of $60,000.
d. a realized loss of $50,000.
35. Which of the following statements does not properly reflect the new rules for accounting for
minority equity investment securities, if fair value is not readily determinable?
a. Firms may opt to report at fair value or report at cost.
b. If reported at cost, the reported value is to be updated when there is an observable
transaction.
c. If reported at cost, the reported value is updated when circumstances indicate the asset’s
value is impaired.
d. If there are changes in carrying value, they are not to be reported in net income.
36. Palmon Industries owns an investment that experienced a decline during 2019 that has been
judged to be “other than temporary”. The investment is held in Palmon’s available-for-sale debt
securities portfolio, and Palmon expects to sell the impaired security before recovery of its
amortized cost basis less current-period credit loss. The debt security was purchased in March
2018 at a cost of $460,000. At the end of 2018, the fair value of the investment was $520,000
and its amortized cost basis was $454,000. At the end of 2019, the fair value of the investment is
$410,000 and its amortized cost is $448,000. What amount of loss will Palmon Industries report
on its income statement for the year ending December 31, 2019 related to this investment?
a. an unrealized loss $110,000.
b. an unrealized loss of $38,000.
c. an unrealized loss of $44,000.
d. an unrealized loss of $50,000.
37. Ralmond Industries owns an investment that experienced a decline during 2019 that has been
judged to be “other than temporary”. The investment is held in Ralmond’s available-for-sale
CHAPTER 16 Intercorporate Investments
debt portfolio, and Ralmond does not expect to sell the security and it is unlikely that Ralmond
will be required to sell the security before recovery of its amortized cost basis less any current–
period credit loss. It was purchased in March 2018 at a cost of $460,000. At the end of 2018,
the fair value of the investment was $520,000 and its amortized cost basis was $454,000. At the
end of 2019, the fair value of the investment is $410,000 and its amortized cost is $448,000. At
the end of 2019, the present value of expected cash flows associated with the security discounted
at the effective interest rate implicit when it was originally acquired is $432,000. What amount
of loss will Ralmond Industries report on its income statement for the year ending December 31,
2019 related to this investment?
a. an unrealized loss $16,000.
b. an unrealized loss of $38,000.
c. an unrealized loss of $44,000.
d. an unrealized loss of $22,000.
38. When the ownership percentage of stock exceeds 20 percent but is less than 50 percent,
GAAP presumes that the investor
a. has no influence to exert over the investee company.
b. is only investing for a short-term trading position.
c. is able to exert influence over the investee company.
d. is trying to take over the investee company.
39. 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
CHAPTER 16 Intercorporate Investments
a. closely held by a few investors.
b. widely distributed across a few investors.
c. widely distributed across a large number of individual investors.
d. controlled a small group of investors.
40. 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
a. minority passive accounting treatment.
b. minority active accounting treatment.
c. majority active accounting treatment.
d. the equity method.
41. A minority active investment is accounted for by the
a. cost method.
b. equity method.
c. lower of cost or market method.
d. speculative investment method.
Use the following to answer questions 42 and 43:
REFERENCE: Ref. 16_03
42. Ramsey’s share of Vapor’s income for 2018 is
a. $14,000
b. $28,000
c. $42,000
d. $40,000
43. What is the balance in the investment account as of December 31, 2018?
a. $70,000
b $98,000
c. $56,000
Use the following to answer questions 44 – 46:
REFERENCE: Ref. 16_04
On January 1, 2018, the Regal Company purchased 30% of the outstanding voting stock of the
Air Corporation for $300,000; the book value of Air’s net assets at the date of purchase was
44. The income reported by Regal during 2018 pertaining to the Air investment was
a. $ 9,000
b. $22,500
c. $31,500
d. $19,500
45. Regal has elected the fair value option to account for equity method investments. The fair
value of the Air investment as of December 31,2018 was $295,000. The income reported by
Regal during 2018 pertaining to the Air investment was
a. $ 9,000
b. $22,500
c. $19,500
d. $ 4,000
46. Regal has elected the fair value option to account for equity method investments. The fair
value of the Air investment as of December 31,2018 was $295,000. The carrying value of the
Air investment on December 31, 2018 was
a. $295,000
b. $300,000
c. $310,500
d. $313,500
47. At the acquisition date of an active investment, when the cost of the shares acquired exceeds
the underlying book value, the investor is required to amortize any excess that is attributable to
separately identifiable assets have an indefinite life. Which of the following is a separately
identifiable asset that might not be recognized on the investee’s balance sheet?
a. Goodwill
b. Land
c. Patent
d. Inventory
Use the following to answer questions 48 – 52:
REFERENCE: Ref. 16_05
On January 1, 2018, Como Company purchased 45% of the outstanding common shares of the
Lite Company for $200,000. The net assets of Lite Company totaled $400,000. The inventory
had a book value of $100,000 and a fair value of $120,000. Excess cost attributable to inventory
is written off in 2018. During 2018, Lite Company earned $200,000 and declared a dividend of
$40,000 for the year.
[QUESTION]
REFER TO: Ref. 16_05
48. The amount of goodwill implicit in Como’s transaction is
a. $ 9,000.
b. $11,000.
c. $20,000.
d. $22,000.
49. The excess amount paid for Lite Company attributable to inventory is
a. $ 9,000.
b. $11,000.
c. $20,000.
d. $22,000.
50. The amount of the excess cost over book value attributable to inventory written off in 2018 is
a. $3,000.
b. $4,500.
c. $7,500.
d. $9,000.
51. The carrying value of the Lite investment at the end of 2018 is
a. $200,000
b. $290,000
c. $272,000
d. $263,000
52. The fair value of the Lite stock investment at the end of 2018 was $210,000. Which of the
following amounts are correct assuming that Como elected to use the fair value option to
account for the Lite investment?
2018 December 31, 2018
Income carrying value
a. $28,000 $210,000
b. $81,000 $263,000
c. $91,000 $273,000
d. $18,000 $210,000