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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 31

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Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2014, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2014: $\begin{array}{lr}2014 \text { net income } & \$ 575,000 \\\text { Dividends declared and paid during December, 2014 } \\\text { Market price per share } & \$ 30,000\end{array}$ At what amount should Gilman Company report the Burke investment on the December 31, 2014 balance sheet?

A) $4,218,000.
B) $4,000,000.
C) $4,124,000.
D) $3,800,000.

E) A) and D)
F) A) and C)

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Question 32

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On July 1, 2014, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 of the 18,000 outstanding shares of the nonvoting preferred stock of Nature Company for $30 per share. The records of Nature Company reflect the following: $\begin{array}{lr}2014 \text { net income } & \$ 60,000 \\\text { Dividends declared and paid during December, } 2014 & \$ 6,500 \\\text { December } 31,2014 \text { market price per share } & \$ 27\end{array}$ The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2014 would be which of the following?

A) $179,800.
B) $162,000.
C) $182,000.
D) $197,800.

E) C) and D)
F) B) and D)

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Question 33

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An increase in the fair value of the trading securities portfolio increases both assets and net income.

On January 1, 2014, Calas Company acquired 40% of the outstanding voting common stock of Nick Company as a long-term investment. During 2014, Nick reported net income of $10,000 and declared and paid dividends of $4,000. During 2014, Calas Company should report equity in affiliate earnings of

A decline in the fair value of the available-for-sale portfolio reduces assets and net income.

Which of the following does not properly describe reasons for a retailer of pianos having 30 stores to acquire control of another retailer of pianos having 12 stores?

For all periods in which a security is held in the available-for-sale portfolio, the only income reported on the income statement is dividend revenue.

Copper Company purchased 40% of the common stock of York Corporation on January 1, 2014, for $2,000,000 as a long-term investment. The records of York Corporation showed the following on December 31, 2014: $\begin{array}{lr}2014 \text { net income } & \$ 290,000 \\\text { Dividends declared and paid during December, 2014 } & \$ 20,000\end{array}$ How much investment income should Copper report from the York investment during 2014?

Which of the following is the best description of investments in available-for-sale securities?

Investments other than held-to-maturity bond investments are reported on the balance sheet at fair value.

The equity method is required to be used when an investor has the ability to exert significant influence over the affiliate.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2014, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2014: $\begin{array}{lr} \text { net income } & \$ 575,000 \\\text { Dividends declared and paid during December, 2014 } \\\text { Market price per share } & \$ 30,000\end{array}$ How much should Gilman Company report as investment income from the Burke investment during 2014?

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock, which constitutes 10% of Martin's voting stock on June 30, 2014 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2014, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 2014 net income was $52 million. What effect will the dividend have on Phillips' 2014 financial statements?

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: Mini Company Balance Sheet January 1, 2014 $\begin{array}{lr}\text { Cash } & \$ 90,000 \\\text { Accounts receivable (net) } & 50,000 \\\text { Inventory } & 150,000 \\\text { Plant and equipment (net) } & 100,000 \\\text { Total Assets } & \$ 390,000\\\\\text { Accounts payable } & \$ 40,000 \\\text { Notes payable } & 80,000 \\\text { Common stock } & 155,000 \\\text { Retained earnings } & 115,000 \\\text { Total Liabilities and Stockholders' Equity } & \$ 390,000 \\\end{array}$ On January 1, 2014, in a merger transaction, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The fair value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the fair value and book value are the same for Mini's remaining assets and liabilities, what was the amount of goodwill acquired by Maxi Company?

Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2, 2014, for $80 per share. At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock with a par value of $50 per share. During 2014, Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend. The December 31, 2014, fair value of Apprentice's stock was $84. Required: Prepare the journal entries required for Donald Corporation on January 2, 2014 and December 31, 2014.

On January 1, 2014, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2014, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 2014 from the Rocker investment?

Passive investments other than held-to-maturity investments are reported on the balance sheet at fair value.

McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. Which of the following statements is correct if McGinn classifies the investment as a trading security?

When is the equity method used to account for long-term investments in common stock?

On January 1, 2014, Presto Corporation purchased, as a long-term investment, 5,000 shares of the outstanding voting common stock of Shazam Corporation at $30 per share. During 2014, the following events occurred at Shazam Corporation: $\begin{array}{l}\text { Net Income reported for } 2014&\$20,000\\\text { Dividends declared and paid (per share) } &.50\\\text { Market price per share of common stock at December } 31,2014&28.00\end{array}$ Required: A. Prepare the journal entry for Presto Corporation to record the investment (use an account titled "Long-term investment"). B. Assume two independent situations, Case A for 5,000 shares as 10% ownership and Case B for 5,000 shares as 40% ownership. For each situation, prepare the following entries: 1. To recognize net income for 2014. 2. To record cash dividend declared and received. 3. To record any adjustment to market price of stock at year-end.