CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the accounting treatment of intercorporate investments? Assume U.S. GAAP.

I. Minority interest would arise if less than 100% of a subsidiary is owned and the parent company uses the equity method of accounting.
II. If the parent owns less than 50% of a subsidiary, then the investment would be recorded in the parent's book using the lower of cost or market method.
III. The acquisition method is used if the parent owns more than 50% of the subsidiary.
IV. Regardless of the method of accounting method used, the parent's before tax cash flows should remain the same.
A. I, II and IV
B. I, II and III
C. III and IV
Explanation: I is incorrect because minority interest would arise if less than 100% of a subsidiary is owned and the parent company uses the "consolidation" method of accounting.

II is incorrect because if the parent owns less than 50% of a subsidiary, then the investment would be recorded in the parent's book using the equity method.

IV is true because the only cash flow that will come from the subsidiary is dividends. This amount will be independent of the accounting method that is chosen.

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