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SolutionsModule7 - Module 6 Reporting and Analyzing...

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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
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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. Q6-9. The $75,000 accounts payable on Dee's balance sheet and the $75,000 accounts receivable on Bradshaw's balance sheet are eliminated. In a consolidation, all intercompany items are eliminated so that the consolidated statements show only the interests of outsiders.
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