Short Essay Questions
1.Why should users be cautious when examining financial statements in which the company has accounted for investments using the equity method?
2.How is the purchase method used in accounting for business acquisitions?
3.How does the concept of "consolidated financial statements" relate to a business acquisition?
4.On November 1, 2009, Nova Company purchased short-term marketable equity securities in Sandi Corporation and Exeter Corporation. The following valuation of Nationals' portfolio in short-term investments on December 31, 2009 is:
|
Cost
|
Market
|
Sandi Corporation
|
$70,000
|
$75,000
|
Exeter Corporation
|
$45,000
|
$60,000
|
Answer the following questions if you assume that only one of these short-term investments is to be classified as trading, while the other will be classified as available-for-sale.
A.If Nova Company wants to maximize its 2009 earnings per share, which investment should be classified as trading? Justify your choice.
B.If Nova Company desires to minimize its December 31, 2009, debt/equity ratio, which investment should be classified as trading? Justify your choice.
5.What are several features about the equity method that should cause financial report users to view it carefully?