Question #14
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 6
Status: Correct
Correct Answer: A
Question
Under U.S. GAAP rules, where an investor owns 41% of the voting shares of an investee and is able to control the investee, which of the following methods of accounting is most appropriate to use?
Answer Choices:
A. Acquisition method
B. Equity method
C. Proportionate consolidation method
Explanation
It is possible to control with less than a 50% ownership interest. In this case, the
investment is still considered controlling and the acquisition method would be most
appropriate.
(Module 8.1, LOS 8.b)
On January 9, 20X6, Company X, reporting under IFRS, purchased $1,000,000 of government
bonds at par and 100,000 shares of stock in Company S for $2,000,000. The stock
investment was held at fair value through OCI while the bonds were held at amortized cost.
As of December 31, the bonds were valued at $900,000, and the stocks were valued at
$2,200,000. The bonds paid $50,000 of interest and the stocks paid $20,000 of dividends. In
2006, Company S had earnings per share of $0.90.