SMCH14 - CHAPTER 14 STOCK IN VESTMENTS ANSWERS TO QUESTIONS...

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Solutions Manual, Chapter 14 375 CHAPTER 14 STOCK IN VESTMENTS ANSWERS TO QUESTIONS 1. Corporations purchase the stock of other corporations when they have excess cash they would like to invest, when they want to insure a supply of raw materials, and when they want to expand their businesses. 2. The general rule is that marketable equity securities should be classified for balance sheet purposes according to the intent of the owner. If they were purchased principally for sale in the near term, they should be classified as trading securities. If they were purchased to be held longer than the near term, they should be classified as available-for-sale securities. 3. FASB Statement No. 115 requires that marketable equity securities be valued at their fair market value for (1) all securities classified as trading securities taken as a whole and (2) all securities classified as available-for-sale securities taken as a whole. 4. The equity method is used for long-term investments of 20%-50% and for long-term investments of less than 20% where the investor has significant influence over the investee. 5. Usually the only action required by an investor upon the receipt of a stock dividend is to change the number of shares recorded as owned and to change the cost per share. Similarly, in a stock split the only action required is to change the number of shares and their per-share cost. Neither the stock dividend nor the stock split is looked upon as a revenue-producing transaction, unless the stock dividend consists of the distribution of a different type of class of stock from that held. 6. Par value is of little significance to the investing corporation, and most often is not even relevant to the investing corporation. 7. The purpose of preparing consolidated financial statements is to show the assets, liabilities, stockholders' equity, revenues, expenses, and dividend accounts as if the parent and its subsidiaries were a single economic enterprise. 8. Consolidated financial statements must be prepared when one company owns more than 50% of the outstanding voting common stock of another company (and, thus, exercises control over the other company), unless control is temporary or if it does not rest with the majority owner. 9. Elimination entries are required to show all account balances as if the parent and its subsidiaries were a single economic enterprise. Otherwise, the same resources would appear more than once on the consolidated statements, and transactions between the two companies would appear on the statements. For instance, if no elimination entries were made for intercompany debt, the consolidated balance sheet would contain amounts owed to the consolidated enterprise by the consolidated enterprise. The elimination entries appear only on the consolidated statement work sheet. These
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This note was uploaded on 02/08/2011 for the course ACCT 2101 taught by Professor Turner during the Spring '08 term at Georgia Institute of Technology.

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SMCH14 - CHAPTER 14 STOCK IN VESTMENTS ANSWERS TO QUESTIONS...

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