Question #41
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 17
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Regarding accounting for joint ventures using the equity method or using proportionate consolidation, it would be most accurate to state that:
Answer Choices:
A. the equity method results in a single line item on the income statement, and a single line item on the balance sheet
B. both IFRS and US GAAP require the proportionate consolidation method be used to account for joint ventures
C. total net assets of the investor will differ between proportionate consolidation and the equity method. Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash. Pre-acquisition Balance Sheets December 31, 2001
Explanation
On the income statement, the equity method results in a single line item (equity in income
of the joint venture). On the balance sheet, the equity method also results in a single line
item (investment in joint venture). Both IFRS and U.S. GAAP require the equity method of
accounting for joint ventures; only under rare circumstances will proportionate
consolidation be allowed for reporting of joint ventures under IFRS and U.S. GAAP. Total
net assets of the investor is identical under the two methods.
(Module 8.8, LOS 8.a)
Assume that on the balance sheet date shown below TME Corporation acquires 70% of
Abcor, Inc. common stock for $25,000 in cash.
Pre-acquisition Balance Sheets
December 31, 2001
TME Corp.
Abcor, Inc.
Current assets
$80,000
$38,000
Other assets
28,000
15,000
Total assets
$108,000
$53,000
Current liabilities
$60,000
$32,000
Common stock
15,000
14,000
Retained earnings
33,000
7,000
Total liabilities and equity
$108,000
$53,000