Equity Investments

Question 1

Why is the equity method used for certain investments?

a. to reflect fair market value changes of the investment.
b. to consolidate financial statements of the investee.
c. to reflect the investor’s proportionate share of the investee’s net assets and income.
d. to minimize taxes on investment income.

Answer 1

c. to reflect the investor’s proportionate share of the investee’s net assets and income.

Question 2

Which of the following most likely indicates significant influence over an investee?

a. the investor owns 5% of the investees stock.
b. the investor has a supply contract with the investee.
c. the investor has representation on the board of directors.
d. the investor regularly trades the investee’s stock.

Answer 2

c. the investor has representation on the board of directors.

Question 3

The fair value method best reflects which of the following?

a. book value of the investees net assets
b. the investors control over operations
c. the market’s current assessment of the investments value
d. the historical cost of the investment

Answer 3

c. the market’s current assessment of the investments value

Question 4

Under the equity method, goodwill is recognized when:

a. the investor pays less than book value of the investee
b. the investor pays more than the fair value of net identifiable assets
c. the investor receives high dividends
d. the market price of the investment decreases

Answer 4

b. the investor pays more than the fair value of net identifiable assets

Question 5

Which of the following is a limitation of the equity method?

a. it cannot be used for investments under 50%
b. it ignores the investors influence over investee operations
c. it does not reflect current market value of the investment
d. it includes investees liabilities in the investors balance sheet

Answer 5

c. it does not reflect current market value of the investment

Question 6

Which of the following statements is untrue regarding investments in equity securities?

a. if the investor owns less than 20 percent of outstanding voting common stock, the equity method is usually not used
b. if the investor owns more than 50 percent of the outstanding voting common stock the financial statements are consolidated.
c. if the investor owns 20-50 percent of the outstanding coting common stock, the equity method is required
d. if the investor owns less than 20 percent of outstanding voting common stock, the securities generally are reported at their fair value.

Answer 6

c. if the investor owns 20-50 percent of the outstanding coting common stock, the equity method is required