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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Matching Accounting Methods and Investments

Consider the following accounting methods for long-term investments:

a. Amortized cost method

b. Fair value method

c. Equity method

d. Consolidation of parent and sub

Required:

Match one or more of these methods with each of the investments described below:

1. Mueller Inc. owns 75% of Johnston Corporation’s outstanding common stock.

2. Anderson Inc. owns 25% of Peterson Corporation’s outstanding common stock.

3. Wixon Corporation owns 12% of the outstanding common stock of Gilman Inc., which is classified as available-for-sale,

4. Kohler Corporation holds a $40,000 long-term note receivable from Bennett Inc., a major customer. Kohler expects to sell the note within the next 2 or 3 years.

5. Janis Products Inc. holds $200,000 in Gibson Manufacturing bonds. Janis plans to hold these until they mature.

To determine

Introduction:

There are three methods i.e. amortized cost, equity and fair value method that is used to record investment for less than 50% ownership of the common stock outstanding whereas more than 50% ownership is regarded as consolidation of parent and subsidiary company.

To match:

The terms with their definition or most related example.

Explanation

a. Amortized Cost:

Investment in debt security (hold-until maturity) is recorded using Amortized Cost Method.

b. Fair Value Method:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

c...

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