Multiple Choice Questions
Before a business combination the target’s retained earnings was $50K. Right after the business combination and initial elimination entries, the consolidated retained earnings on the parent’s balance sheet will be $50K higher.
a. True
b. False
2. Company A has an investment in Company B. Company B has $10K of net income during the year. How does the $10K earned by Company B impact Company A?
Company B’s net income will result in Company A’s investment account under the equity method:
a. no change
b. increase
c. decrease
.
Company B’s net income will result in Company A’s investment account under the fair value (no significance influence) method
a. no change
b. increase
c. decrease
Part A. Pre ASU 2016-01, a company reported its equity investments with no significant influence at cost – impairment of $350 million. The company currently has $100 million of unrealized losses from these investments (difference in fair value from cost). After
the implementation of ASU 2016-01 in Year 1, the company’s:
Before when it used the cost method, net income would now be
a. higher
b. lower
c. the same as.
Before when it used the cost method, retained carings would now be
a. higher
b. lower
c. the same as.
Before when it used the cost method, accumulated other comprehensive income would be
a. higher
b. lower
c. the same as.
before when it used the cost method, total asset would be
a. higher
b. lower
c. the same as.
(You are assuming there are no changes to any other
accounts besides just the change from ASU 2016-01)
It is now Year 2. From Year 1 to Year 2 the investments have increased in value by $20 million from the end of Year 1 ($250 million fair value at end of Year 1 now fair value is $270 million). The company updated its investments to follow 2016-01 last year in Question 1. How are the following impacted from the $20 million increase in Year 2?
From this $20 million increase in fair value, net income would
a. increase
b. decrease
c. the same
From this $20 million increase in fair value, retained earnings would
a. increase
b. decrease
c. the same
From this $20 million increase in fair value, accumulated other comprehensive income would
a. increase
b. decrease
c. the same
From this $20 million increase in fair value, total assets would
a. increase
b. decrease
c. the same
Choose the following impacts that are correct for debt investments:
Unrealized gains and losses are reported on the income statement for
a. held to maturity securities only
b. AFS securities only
c. trading securities only
d. trading, AFS, and held to maturity securities
e. AFS and held to maturity securities
f. trading and AFS securities
The following investment(s) is(are) reported at fair value on the balance sheet:
a. trading, AFS, and held to maturity securities
b. AFS and held to maturity securities
c. AFS securities only
d. trading and AFS securities
e. trading securities only
f. held to maturity securities only.
5. Comparing the fair value method under ASU 2016-01 to the cost – impairment method…
Is the information in the financial reports more or less verifiable under ASU 2016-01 vs cost
method? Explain your answer for marketable and non-marketable equity securities.
Is the information in the financial reports more or less relevant under ASU 2016-01 vs. cost method? Explain your answer for marketable and non-marketable equity securities.
Explain why banks do not want increased volatility in their regulatory capital and note what type of debt investment would be most desirable for specifically large banks.