Chap14 - CHAPTER 14 QUESTIONS 1 Companies make investments...

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Unformatted text preview: CHAPTER 14 QUESTIONS 1. Companies make investments in the secu- rities of another company to provide a safety cushion of available funds and to store a temporary excess of cash. Compa- nies also invest in other companies to earn a return, to secure influence, or to gain con- trol. 2. Statement No. 115 applies to many debt and equity securities. All debt securities with a readily determinable fair value fall under its scope. Debt securities that do not have a readily determinable fair value are accounted for under the rules outlined in FASB Statement No. 114 . Equity securities with a readily determinable fair value that are not accounted for (1) using the equity method (i.e., greater than 20% ownership) or (2) as investments in consolidated sub- sidiaries are accounted for using the rules outlined in Statement No. 115 . 3. A security is classified as held to maturity if the business has the intent and the ability to hold the security to maturity. 4. To be classified as a trading security, the security must have a readily determinable fair value and must be purchased and held for the purpose of selling it to generate profits on short-term differences in price. 5. Under the fair value option, a company has the option to report, at each balance sheet date, any or all of its financial assets and li- abilities at their fair values on the balance sheet date. The unrealized gains and losses from changes in the fair values of fi- nancial assets and liabilities accounted for using the fair value option are reported in the income statement. 6. The classification of investment securities under International Financial Reporting Standards ( IAS 39 ) is essentially the same as the classification under U.S. GAAP ( SFAS No. 115 ). 7. (a) The stated rate of interest is used to determine the amount of the annuity to ived. be rece (b) The market or effective rate of interest is used in the present value computa- tions to determine the present value of both the principal sum and the annuity. 8. The effective-interest method computes in- terest revenue by multiplying the effective interest rate by the carrying value of the in- vestment. 9. When a company does not own more than 50% of a company, other factors may be considered to determine if control exists. Such factors include owning a large minor- ity voting interest with no other shareholder owning a significant block of stock or hav- ing a majority voting interest in determining who is on the company’s board of directors. When these other factors exist, then control may be assumed and consolidation would be appropriate. 10. (a) Factors that may indicate the ability of a minority-interest investor to exercise significant influence over an investee’s operating and financial policies are as follows: 1. Representation on the board of di- rectors of the investee....
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Chap14 - CHAPTER 14 QUESTIONS 1 Companies make investments...

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