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Unformatted text preview: Module 6 Reporting and Analyzing Intercorporate Investments QUESTIONS Q6-1. a) Trading securities are reported at their fair market value in the balance sheet. b) Available-for-sale securities are reported at their fair market value in the balance sheet. c) Held-to-maturity securities are reported at their amortized cost in the balance sheet. Q6-2. An unrealized holding gain (loss) is an increase (decrease) in the fair market value of an asset (in this case, an investment security) that is still owned. Q6-3. Unrealized holding gains and losses related to trading securities are reported in the current year income statement (and also retained earnings). Unrealized holding gains and losses related to available-for-sale securities are reported as a separate component of stockholders' equity called Other Comprehensive Income (OCI). Q6-4. Significant influence gives the owner of the stock the ability to influence significantly the operating and financing activities of the company whose stock is owned. Normally, this is accomplished with a 20% through 50% ownership of the company's voting stock. The equity method is used to account for investments with significant influence. Such an investment is initially recorded at cost; the investment is increased by the proportionate share of the investee company's net income, and equity income is reported in the income statement; the investment account is decreased by dividends received on the investment; and the investment account is reported in the balance sheet at its book value. Unrealized appreciation in the market value of the investment is not recognized. Q6-5. Yetman Company's investment in Livnat Company is an investment with significant influence, and should, therefore, be accounted for using the equity method. At year-end, the investment should be reported in the balance sheet at $258,000 [$250,000 + (40% $80,000) - (40% x $60,000)]. Q6-6. A stock investment representing more than 50% of the investee company's voting stock is generally viewed as conferring control over the investee company. The investor and investee companies must be consolidated for financial reporting purposes. Cambridge Business Publishers, 2006 Solutions Manual, Module 6 6-1 Q6-7. Consolidated financial statements attempt to portray the financial position, operating results, and cash flows of affiliated companies as a single economic unit so that the scope of the entire (whole) entity is more realistically conveyed. Q6-8. The $750,000 investment in Murray Company appearing in Finn Company's balance sheet and the $300,000 common stock and $450,000 retained earnings appearing on Murray Company's balance sheet are eliminated. The two balance sheets (less the accounts eliminated) are then summed to yield the consolidated balance sheet....
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