Question #42 - Reading 8 Intercorporate Investments

Reading: Reading 8 Intercorporate Investments

PDF File: Reading 8 Intercorporate Investments.pdf

Page: 18

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

of 84 Regarding accounting for joint ventures using the equity method or using proportionate consolidation, it would be most accurate to state that: 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 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

Question

What will be the post-acquisition current ratio, using both the acquisition method and the equity method, respectively, for TME? The choices below represent Acquisition and Equity, respectively.

Answer Choices:

A. 1.01, 0.92

B. 1.21, 1.02

C. 1.04, 1.11

Explanation

With the acquisition method: The current assets are ($80,000 + $38,000 - $25,000) = $93,000. The current liabilities are ($60,000 + $32,000) = $92,000. The current ratio is $93,000/$92,000 = 1.01. With the equity method: The current assets are ($80,000 - $25,000) = $55,000. The current liabilities are $60,000. The current ratio is $55,000/$60,000 = 0.92.

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