Question

9a. Consolidated financial statements are prepared when one company has:
a) Accounted for the investment as securities available for sale.
b) Accounted for the investment using the equity method. (This answer is wrong)
c) Control over another company.
d) None of these answer choices are correct.

9b. When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be:

a) Carried over at the fair value that exists on date of transfer.
b) Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years. (This answer is wrong)
c) Carried over as is with no adjustment necessary.
d) Adjusted to reflect amortized cost.

Answer 1

Solution 9a:

Consolidated financial statements are prepared when one company has "Control over another company"

Hence option c is correct.

Solution 9b:

When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be "Carried over at the fair value that exists on date of transfer."

Hence option a is correct.