WALL STREET PREP ADVANCED
ACCOUNTING ACTUAL EXAM
COMPLETE QUESTIONS 100 PERCENT
CORRECT
◉ When an equity method investee sells inventory to its investor at
a gross profit and a portion of the inventory remains unsold to
outside parties at year end, the investor's Equity in Investee Income
account Answer: is decreased for the investor's ownership
percentage of the gross profit on intra-entity inventories that have
not been resold to outside entities.
◉ When an investor sells a portion of an equity-method investment,
Answer: -the investor continues to apply the equity method if the
investor continues to have the ability to exercise significant
influence over the investee.
-the investment account should reflect a balance current as of the
date of sale.
-the investor recognizes a gain or loss on the sale.
◉ The term used to describe inventory sales between an investor
company and its equity-method investee is _____________-______________
inventory sales. Answer: intra entity
,◉ True or false: Because reported income can affect market
perceptions of the underlying value of publicly traded shares,
managers will often assess prospective effects of equity method
income prior to making an equity-method investment in another
firm's shares. Answer: True
Reason: Equity-method income directly affects the reported net
income of the investor firm.
◉ An investor sells inventory to its investee, at a profit. At year end,
the investee has not disposed of this inventory. How should the
investor account for the gross profit from this intra-entity inventory
sale? Answer: Defer the investor's proportionate ownership share of
the intra-entity gross profit.
◉ Zell Company sells inventory at a $10,000 gross profit to its equity
method investee, Aaron Company. Before the end of the year, Aaron
resells all of this inventory to an outside, unrelated entity. As a result
of these activities, Zell Company should Answer: recognize the entire
$10,000 gross profit on its income statement.
Reason: Only the intra-entity gross profits on good remaining in
Aaron's ending inventory are deferred.
◉ What are some general criticisms of the equity method for
investments in the ownership shares of another firm? Answer: -
Significant influence and control may not be properly defined by
existing quantitative guidelines.
,-By not including the investee's assets and liabilities in the investor's
financial statement amounts, performance metric may be biased.
◉ When an investor sells inventory to its equity-method investee,
how is the reported sales balance on the investor's income
statement affected? Answer: The sales account remains unaffected.
◉ What are some common economic consequences of financial
reporting on the reporting firm? Answer: -Certain financial
statement performance metrics may affect the ability of a firm to
raise capital in debt or equity markets.
-Failure to maintain certain financial statement ratios may cause a
firm to violate debt covenants.
-Managerial compensation may depend on reported net income.
◉ Which of the following are included in net income for an
investment in equity shares accounted for under the fair-value
method? Answer: Dividends from the investee.
◉ Under the equity method, the amount of gross profit deferred
from an intra-entity sale is limited to the investor's _________________
share of the investee. Answer: percentage, proportional, ownership,
or proportionate
, ◉ A criticism of the 20%-50% ownership guideline for applying the
equity method is that Answer: -a firm may argue that less than 50%
ownership indicates a lack of control and thus avoid consolidation of
an investee.
-contractual agreements may be more indicative of significant
influence or control than ownership percentage.
◉ The fair-value option for reporting investments that would
otherwise be accounted for under the equity method requires
Answer: -an irrevocable election to elect fair value as the
measurement attribute for an equity investment
-the inclusion in net income of changes in the fair value of an equity
investment.
-the valuation of the equity method investment at fair value as of the
investor's balance sheet date.
◉ How can a company actively manage reported amounts by
keeping voting share ownership of another firm below 50%?
Answer: In applying the equity method, the liabilities of the investee
company are not combined with those on the investor's balance
sheet.
◉ When may majority stock ownership fail to provide control over a
business entity? Answer: -When the acquiring company has only an
indirect ability to determine the direction of management and
policies through its majority voting privileges.
ACCOUNTING ACTUAL EXAM
COMPLETE QUESTIONS 100 PERCENT
CORRECT
◉ When an equity method investee sells inventory to its investor at
a gross profit and a portion of the inventory remains unsold to
outside parties at year end, the investor's Equity in Investee Income
account Answer: is decreased for the investor's ownership
percentage of the gross profit on intra-entity inventories that have
not been resold to outside entities.
◉ When an investor sells a portion of an equity-method investment,
Answer: -the investor continues to apply the equity method if the
investor continues to have the ability to exercise significant
influence over the investee.
-the investment account should reflect a balance current as of the
date of sale.
-the investor recognizes a gain or loss on the sale.
◉ The term used to describe inventory sales between an investor
company and its equity-method investee is _____________-______________
inventory sales. Answer: intra entity
,◉ True or false: Because reported income can affect market
perceptions of the underlying value of publicly traded shares,
managers will often assess prospective effects of equity method
income prior to making an equity-method investment in another
firm's shares. Answer: True
Reason: Equity-method income directly affects the reported net
income of the investor firm.
◉ An investor sells inventory to its investee, at a profit. At year end,
the investee has not disposed of this inventory. How should the
investor account for the gross profit from this intra-entity inventory
sale? Answer: Defer the investor's proportionate ownership share of
the intra-entity gross profit.
◉ Zell Company sells inventory at a $10,000 gross profit to its equity
method investee, Aaron Company. Before the end of the year, Aaron
resells all of this inventory to an outside, unrelated entity. As a result
of these activities, Zell Company should Answer: recognize the entire
$10,000 gross profit on its income statement.
Reason: Only the intra-entity gross profits on good remaining in
Aaron's ending inventory are deferred.
◉ What are some general criticisms of the equity method for
investments in the ownership shares of another firm? Answer: -
Significant influence and control may not be properly defined by
existing quantitative guidelines.
,-By not including the investee's assets and liabilities in the investor's
financial statement amounts, performance metric may be biased.
◉ When an investor sells inventory to its equity-method investee,
how is the reported sales balance on the investor's income
statement affected? Answer: The sales account remains unaffected.
◉ What are some common economic consequences of financial
reporting on the reporting firm? Answer: -Certain financial
statement performance metrics may affect the ability of a firm to
raise capital in debt or equity markets.
-Failure to maintain certain financial statement ratios may cause a
firm to violate debt covenants.
-Managerial compensation may depend on reported net income.
◉ Which of the following are included in net income for an
investment in equity shares accounted for under the fair-value
method? Answer: Dividends from the investee.
◉ Under the equity method, the amount of gross profit deferred
from an intra-entity sale is limited to the investor's _________________
share of the investee. Answer: percentage, proportional, ownership,
or proportionate
, ◉ A criticism of the 20%-50% ownership guideline for applying the
equity method is that Answer: -a firm may argue that less than 50%
ownership indicates a lack of control and thus avoid consolidation of
an investee.
-contractual agreements may be more indicative of significant
influence or control than ownership percentage.
◉ The fair-value option for reporting investments that would
otherwise be accounted for under the equity method requires
Answer: -an irrevocable election to elect fair value as the
measurement attribute for an equity investment
-the inclusion in net income of changes in the fair value of an equity
investment.
-the valuation of the equity method investment at fair value as of the
investor's balance sheet date.
◉ How can a company actively manage reported amounts by
keeping voting share ownership of another firm below 50%?
Answer: In applying the equity method, the liabilities of the investee
company are not combined with those on the investor's balance
sheet.
◉ When may majority stock ownership fail to provide control over a
business entity? Answer: -When the acquiring company has only an
indirect ability to determine the direction of management and
policies through its majority voting privileges.
