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Exam 12: Reporting and Interpreting Investments in Other Corporations

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Question 51

Multiple Choice

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Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

A) Patents
B) Goodwill
C) Acquisition expense
D) Acquisition revenue

E) A) and D)
F) A) and B)

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Question 52

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Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment.Which of the following classifications should be used by Idaho Company in accounting for the investment?

A) Trading securities.
B) Held-to-maturity.
C) Available-for-sale.
D) Consolidation.

E) None of the above
F) A) and B)

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Question 53

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On January 2,2010,Parent Company purchased 100% of Sub Company's stock for $900,000 cash.At this date,the book value of Sub Company's net assets (i.e.,assets less liabilities)was $800,000 which included property,plant and equipment that have a book value of $400,000 and a market value of $440,000. Requirements: A.Prepare the journal entry that would appear on the books of each company at the acquisition date. B.How much goodwill should Parent Company recognize on the consolidated financial statements at the date of acquisition?

Which of the following statements is false?

McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000.The 10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of 2011.Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 2012 for $102,000?

When an investment accounted for under the equity method is sold,the gain or loss reported on the income statement is the difference between the selling price and its original cost.

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments. $\begin{array} { l l l l } & & \underline { \text { Outstanding } } & \underline { \text { Level of Ownership: } } \\ &\underline {\text { Measurement and} } & \underline {\text { Common Stock} } & \underline { \text { Degrees of Influence } } \\& \underline { \text { Reporting Method Stock } } & \underline { \text { Owned } ( \% ) } & \underline { \text { or Contro } } \\\text { A. } \text { Market value }\ \\\text { B. Equet value } & \underline { } & \underline { \text { l } } \\\text { C. Consolidated statements } & &\end{array}$

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

A realized gain or loss is reported on the income statement when a trading security is sold.

On January 1,2010,Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000.The book and market values of Foliage's assets and liabilities as of January 1,2010 are listed below: $\begin{array} { l r r } \text { Item } & \text { Book Value } & \text { Market Value } \\\text { Equipment } & \$ 60,000 & \$ 80,000 \\\text { Trucks } & \$ 40,000 & \$ 55,000 \\\text { Factory } & \$ 300,000 & \$ 320,000 \\\text { Remaining assets } & \$ 130,000 & \$ 130,000 \\\text { Liabilities } & \$ 100,000 & \$ 100,000\end{array}$ Calculate the amount of goodwill that should be recognized.

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis?

Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000.The 15% investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of 2011.Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30,2010 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2010,Martin paid a previously declared $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and their reported 2010 net income was $52 million.What investment value will be reflected on Phillips' balance sheet at December 31,2010?

A.Discuss the similarities of accounting for available-for-sale and trading securities portfolios. B.Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

Which of the following is true about passive investments?

On January 1,2010,Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment.Maxim reported a 2010 net income of $35,000.On January 2,2011,Maxim declared and paid a $10,000 cash dividend.The market value of the Maxim stock held by Alden on December 31,2010,was $224,000.Alden Company has recorded only the following journal entries: $\begin{array}{lccc}\text { January 1, 2010:} \\ \text { Long-term investment, Maxim stock (15,000 shares) } & 225,000 & \\\text {Cash}&&225,000\\\\ \text { December 31,2010 (end of the accounting period): } && \\\text {No entry}&&\\\\\text { January 2, 2010:} \\\text {Cash}&400&\\ \text { Investment income } && 400\\\end{array}$ Based on the above information,answer the following questions: A.What method did Alden use to account for the investment? B.Did Alden fail to make an adjusting entry on December 31,2010? C.What condition,if changed,would require that the equity method be used? D.Assuming the market value method is used; calculate the valuation of the net investment on January 3,2011.

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

On January 1,2010,Short Company purchased as an available-for-sale investment,20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost of $50 per share.During November 2010,Daniel declared and paid a cash dividend of $2 per share.At December 31,2010,end of the accounting period,Daniel's shares were selling at $48.The 2010 financial statements for Short Company should report the following amounts: $\begin{array} { l c c c } & \underline { \text { Long-Term } } & \underline { \text { Unrealized Holding } } & \underline { \text { Investment } } \\& \underline { \text { Investment } } & \underline { \text { Gains/Losses } } & \underline { \text { Revenue } } \\\text { A. } & 1,000,000 & 40,000 & 40,000 \\\text { B. } & 960,000 & \text { Zero } & \text { Zero } \\\text { C. } & 1,000,000 & 80,000 & \text { Zero } \\\text { D. }& 960,000 & 40,000 & 40,000\end{array}$

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?