Question #65

Reading: Reading 8 Intercorporate Investments

PDF File: Reading 8 Intercorporate Investments.pdf

Page: 28

Status: Unattempted

Part of Context Group: Q64-65
Shared Context
- If Zeisler were to account for the Market Square Corporation shares as FVPL, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be: A) $2.50 million. B) $2.75 million. C) $3.50 million.
Question
If Zeisler were to account for the Market Square Corporation shares using the equity method, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be:
Answer Choices:
A. $2.75 million
B. $2.60 million
C. $3.50 million
Explanation
Under the equity method the market value of the stock is ignored but the proportionate share of the earnings are added to the original investment and the proportionate share of the dividends are subtracted from the earnings. Hence, we have the original investment + (earnings − dividends) = total value of the investment. [(100,000 shares)($25)] + [(100,000 shares)($2.50 earnings − 1.50 dividend)] = $2,600,000.
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