If a company acquires a 40% interest in another company one of the fair value models...

If a company acquires a 40% interest in another company

one of the fair value models is usually applicable.

the equity method is usually applicable.

the investor does not have the ability to exert significant influence over the investee.

it would always have a controlling interest.

Expert Solution

Ans:

If a company acquires a 40% interest in another company:

a. one of the fair value models is usually applicable, the option is incorrect. Fair value model is to calculate the value of investment on fair value. Which is not usually applicable to all investment purposes.

b. the equity method is usually applicable. Yes this option is Correct. Equity method is ussually applicable where stock of an enterprise between 20%-50% is aquired. Which creates a significant influence over the company.

c. the investor does not have the ability to exert significant influence over the investee. the option is incorrect. Generally the investor has significant influence where the investment is over 20% in stock unless otherwise specified.

d. it would always have a controlling interest. the option is incorrect. Generally the investor has controlling interest where the investment is over 50% in stock unless otherwise specified.

So correct answer is option B.

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!

ekkarill92 answered 1 year ago

Investments are reported at fair value when a company has a significant influence over another company...

Investments are reported at fair value when a company has a significant influence over another company in which it invests. True False Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements. True False When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend revenue. True False When significant influence exists, the investment should be accounted for by the equity method. True...

If the company acquires another small company, assess how it would know if it has to...

If the company acquires another small company, assess how it would know if it has to consolidate its financial statements on an annual basis. Defend your response.

When one corporation acquires control of another entity, the investor corporation is referred to as the...

When one corporation acquires control of another entity, the investor corporation is referred to as the parent and the investee corporation as the: child. joint venture. subsidiary. associate.

Your division of purchasing is composed of two sections, one that acquires goods and another that...

Your division of purchasing is composed of two sections, one that acquires goods and another that acquires services. Over time, the two section heads have developed an intense rivalry that has increasingly turned ugly. The two are basically at war, with insults flying back and forth at every occasion. They are forcing you into the position of having to choose sides—which you don’t want to do. What would you do?

On January 1, 2013 an entity acquires a 5-year bond for its fair value of Ksh.1,000,000.The...

On January 1, 2013 an entity acquires a 5-year bond for its fair value of Ksh.1,000,000.The debt instrument has a principle amount of Ksh.1,250,000 and the instrument carries a fixed interest rate at 4.72% that is paid annually. It has been determined that the effective interest rate is 10%. How should the entity account for the debt instrument over the five year term? (show your schedule of workings)

How consolidations change when a company acquires at least 50%, but less then 100% of another...

How consolidations change when a company acquires at least 50%, but less then 100% of another company. What new account/s are present? How are these accounts classified/reported. What consolidation entries change?

On January 1, 2021, a company acquires $480,000 of another company’s 15% bonds at a price...

On January 1, 2021, a company acquires $480,000 of another company’s 15% bonds at a price of $630,000. For the investor company, interest is received on January 1 of each year, and the bonds mature on January 1, 2031. The investment will provide the investor a 10% yield (assumed, for ease of computation; do not attempt computation beyond the years necessary). The bonds are classified as held-to-maturity. Using the effective interest method, what is the amount the investor company will...

On January 1, 2021, a company acquires $540,000 of another company’s 7% bonds at a price...

On January 1, 2021, a company acquires $540,000 of another company’s 7% bonds at a price of $410,000. For the investor company, interest is received on January 1 of each year, and the bonds mature on January 1, 2031. The investment will provide the investor a 10% yield (assumed for ease of computation; do not attempt computation beyond the years necessary). The bonds are classified as held-to-maturity. Using the effective interest method, what is the amount the investor company will...

Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2017, for...

Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2017, for $60,000,000, and treats it as an equity method investment. There were no basis differences. Lexmark reports total net income of $20,000,000 for the period 2017 - 2020, and $5,000,000 for 2021. Lexmark paid no dividends during the period 2017 – 2020 but paid $1,000,000 in dividends in 2021. The accounting year for both companies ends December 31. Lexmark sells merchandise to Konica at a...

Morgan Company acquires 40% of the voting stock of Kirk Corporation on January 1, 2014, for...

Morgan Company acquires 40% of the voting stock of Kirk Corporation on January 1, 2014, for $60,000,000, and treats it as an equity method investment. At the date of Morgan’s investment, the fair values of Kirk’s net assets differed from book values as follows: Book value Fair value Merchandise (sold during 2014) $ 5,000,000 $ 8,000,000 Buildings and equipment (20-year life) 30,000,000 40,000,000 Intangible assets (4-year life) 0 10,000,000 Kirk reports total net income of $20,000,000 for the...

Question