Chapter One

Question 1

3 ways to report investments in other companies (GAAP):

Answer 1

1. Fair-Value Method
2. Consolidation
3. Equity Method

Question 2

Fair Value Method

Answer 2

1. Investor holds a small percentage

Question 3

Investments classified as Trading Securities:

Answer 3

1. Held for sale in the short term.

2. Unrealized holding gains and losses are included in earnings (net income).

Question 4

Investments classified as Available-for-Sale Securities:

Answer 4

1. Any Securities not classified as Trading.
2. Unrealized holding gains and losses are reported in shareholders’ equity as other comprehensive income (i. e., not included in net income).

Question 5

Consolidation of 
Financial Statements

Answer 5

1. Investor’s ownership exceeds 50% of investee
2. One set of financial statements prepared to consolidate all accounts of the parent company and all of its controlled subsidiaries AS A SINGLE ENTITY.

Question 6

Equity Method

Answer 6

1. Investor has the ability to exercise significant influence on the investee operations (whether influence is applied or not)
2. Generally used when ownership is between 20% and 50%.
3. Significant Influence might be present with much lower ownership percentages.