Question

D Question 18 2 pts When a company accounts for an investment under the purchase method of accounting the book value of the subsidiary's assets is added to the parent company's assets. the book value of the subsidiary's liabilities is added to the parent company's liabilities. the company owns more than 50% of the stock of the investee. O a year-end adjustment is made to increase or decrease the carrying value of the investment to fair market value Question 19 Passive investments in equity Securities are reported on the balance sheet at original cost. may have unrealized price increases or decreases which affect shareholders equity but not the income statement are reported in the shareholders' equity section of the balance sheet at fair value. may have unrealized gains or losses on the income statement associated with price increases or decreases

Answer 1

Question 18

Under the purchase method, the assets and liabilities of the acquired company are combined onto the

financial statements of the acquiring company at fair market values on the transaction date.

Purchase method accounting is applied when there is parent subsidiary relation.

Hence, correct answer is "The company owns more than 50% of the stock of the investee."

Question 19

Generally, an investment is considered a passive investment when a company owns less than 20%of the voting common stock of the investee

At acquisition, a company classifies each passive investment in debt and equity securities into one of three categories based on the company’s intent to hold or sell the securities. i) Held‐to‐Maturity Securities:Investments in debt securities for which thecompany management has thepositive intent and ability to hold until maturity ii) Trading Securities: Investments in debt and equity securities that arepurchased and held principally to sell in the near term iii) Available‐for‐Sale Securities: Investments in debt and equity securitiesthat are not classified as held‐to‐maturity or trading

Hence, correct answer is 4th " may have unrealized gains or losses on the income statement associated with price increases or decreases.

1st option is incorrect because under all the 3 methods, investment is not reported at cost.

2nd otion is incorrect because unrealized gain affects income statement.

3rd option is incorrect because investments are reported on the assets section of the balance sheet not on equity section.