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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 21

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Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 2010. On December 31, 2010, the current market value of the securities was $481,000. How should the investment be reported within the 2010 financial statements?

A) A realized holding loss on the trading securities would be reported on the income statement.
B) The investment in trading securities would be reported in the balance sheet at its $500,000 cost.
C) The investment in trading securities would be reported in the balance sheet at its $481,000 market value and a realized holding loss on the trading securities would be reported on the income statement.
D) The investment in trading securities would be reported in the balance sheet at its $481,000 market value.

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Question 22

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The sale of a stock from the available-for-sale portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

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Question 23

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Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2014. On December 31, 2014, Click It paid a $1 million cash dividend declared earlier in 2014 and reported net earnings for the year ended 2014 of $10 million. On December 31, 2014, Click Its stock was trading at $11.50 per share. At what amount will the Click It investment be reported on Photo Finish's December 31, 2014 statement of financial position?

How is goodwill accounted for subsequent to acquisition?

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 previously declared $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 investment value will be reflected on Phillips' balance sheet at December 31, 2014?

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 valu 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 a the date of acquisition?

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

On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. How much investment income will Turtle report from the Shell investment during 2014?

If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures.

On January 1, 2014, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000. The current market value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill purchased by Sheldon Company?

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is correct if Rye classifies the investment as a trading security?

On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 statement of financial position?

Any unrealized gains or losses on trading securities would have to be added back to or deducted from net earnings on the statement of cash flows under the indirect method of determining cash flows from operating activities.

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million.

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

Investments in bonds intended to be sold before they reach maturity should be reported under the market value method.

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

Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is

On January 31, 2010, McBurger Corporation purchased the following shares of voting common stoc as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31. All of the Bailey Corporation stock was sold for $13,500 on January 12, 2012. Prepare the required journal entries at the following dates: January 31, 2010, December 31, 2010, December 31, 2011 and January 12, 2012.