Multiple-Choice Questions on Intercorporate Investments
Select the correct answer for each of the following questions.
1. An investment in a partnership potentially may be reported using
a. Cost method.
b. Equity method.
c. Full consolidation.
d. All of the above.
2. Prescott Company holds a 40 percent interest in G&K Partnership, which has operated profitably since its formation and has made no distributions of earnings to its owners. Prescott’s total assets at the end of the fourth year of ownership will be highest if it uses
a. Full consolidation.
b. Pro rata consolidation.
c. Equity-method reporting.
d. Cost-method reporting.
3. Using equity-method reporting for investments in partnerships as opposed to investments in corporations
a. May be more difficult because factors other than the percent of assets contributed to the partnership may determine whether the equity method is appropriate.
b. Is more difficult to apply because partnerships generally do not follow generally accepted accounting principles in recording everyday transactions.
c. Is easier because the dollar amounts typically are much smaller.
d. Is easier because corporations must pay income taxes and partnerships do not.
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