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Exam 2: Stock Investments Investor Accounting and Reporting

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Question 1

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For 2010 and 2011, Sabil Corporation earned net income of $480,000 and $640,000 and paid dividends of $18,000 and $20,000, respectively.At January 1, 2010, Sabil had $200,000 of $10 par value common stock outstanding and $1,500,000 of retained earnings. On January 1 of each of these years, Phyit Corporation bought 10% of the outstanding common stock of Sabil paying $200,000 per 10% block on January 1, 2010 and 2011.All payments made by Phyit in excess of book value were attributable to equipment, which is depreciated over ten years on a straight-line basis. Required: 1.If Phyit uses the cost method of accounting for its investment in Sabil, how much dividend income will Phyit recognize in 2010 and 2011, and what will be the balance in the investment account at the end of each year? 2.If Phyit has significant influence and can justify using the equity method of accounting, how much net investee income will Phyit recognize for 2010 and 2011?

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Question 2

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Which one of the following statements is correct for an investor company?

A) The balance in the Investment in Osprey Co. account can be reduced to represent a decline in the fair market value of the investment, but will not be adjusted if the fair market value increases.
B) Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss.
C) Once the balance in the Investment in Osprey Co. is reduced to zero, it will not be reduced any further.
D) Under the equity method, the balance in the Investment in Osprey Co. account will increase when cash dividends are received.

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Question 3

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Shoreline Corporation had $3,000,000 of $10 par value common stock outstanding on January 1, 2009, and retained earnings of $1,000,000 on the same date.During 2009, 2010, and 2011, Shoreline earned net incomes of $400,000, $700,000, and $300,000, respectively, and paid dividends of $300,000, $550,000, and $100,000, respectively. On January 1, 2009, Pebble purchased 21% of Shoreline's outstanding common stock for $1,240,000.On January 1, 2010, Pebble purchased 9% of Shoreline's outstanding stock for $510,000, and on January 1, 2011, Pebble purchased another 5% of Shoreline's outstanding stock for $320,000.All payments made by Pebble that are in excess of the appropriate book values were attributed to equipment, with each block depreciable over 20 years under the straight-line method. Required: 1.What is the adjustment to Investment Income for depreciation expense for Pebble's investment in Shoreline in 2009, 2010, and 2011? 2.What will be the December 31, 2011 balance in the Investment in Shoreline account after all adjustments have been made?

Bart Company purchased a 30% interest in Simpson Corporation on January 1, 2008, and Bart accounted for its investment in Simpson under the equity method for the next 3 years.On January 1, 2011, Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson.Bart should

For 2010, 2011, and 2012, Squid Corporation earned net incomes of $40,000, $70,000, and $100,000, respectively, and paid dividends of $24,000, $32,000, and $44,000, respectively.On January 1, 2010, Squid had $500,000 of $10 par value common stock outstanding and $100,000 of retained earnings. On January 1 of each of these years, Albatross Corporation bought 5% of the outstanding common stock of Squid paying $37,000 per 5% block on January 1, 2010, 2011, and 2012.All payments made by Albatross in excess of book value were attributable to equipment, which is depreciated over five years on a straight-line basis. Required: 1.Assuming that Albatross uses the cost method of accounting for its investment in Squid, how much dividend income will Albatross recognize for each of the three years and what will be the balance in the investment account at the end of each year? 2.Assuming that Albatross has significant influence and uses the equity method of accounting (even though its ownership percentage is less than 20%), how much net investee income will Albatross recognize for each of the three years?

Pinkerton Inc.owns 10% of Sable Company.In the most recent year, Sable had net earnings of $40,000 and paid dividends of $6,000.Pinkerton's accountant mistakenly assumed Pinkerton had considerable influence over Sable and used the equity method instead of the cost method.What is the impact on the investment account and net earnings, respectively?

In reference to the determination of goodwill impairment, which of the following statements is correct?

Paster Corporation was seeking to expand its customer base, and wanted to acquire a company in a market area it had not yet served.Paster determined that the Semma Company was already in the market they were pursuing, and on January 1, 2011, purchased a 25% interest in Semma to assure access to Semma's customer base.Paster paid $800,000, at a time when the book value of Semma's net equity was $3,000,000.Semma's book values equaled their fair values except for the following items: Required: Prepare a schedule to allocate any excess purchase cost to identifiable assets and goodwill.

The income from an equity method investee is reported on one line of the investor company's income statement except when

On January 1, 2010, Platt Corporation purchased a 30% interest in Sandig Company for $450,000.On this date, the fair values of Sandig's assets and liabilities are assumed to be the same as their book values.Platt will account for Sandig using the equity method.Sandig's adjusted trial balance at the date of acquisition and year end were as follows: Required: 1.What is Platt's investment income from Sandig for the year ending December 31, 2010? 2.Calculate Platt's investment in Sandig at year end December 31, 2010.

Pyming Corporation accounts for its 40% investment in Sillabog Company using the equity method.On the date of the original investment, fair values were equal to the book values except for a patent, which cost Pyming an additional $40,000.The patent had an estimated life of 10 years.Sillabog has a steady net income of $20,000 per year and consistently pays out 40% of its net income as dividends to its shareholders.Which one of the following statements is correct?

On January 2, 2010, Slurg Corporation paid $600,000 to acquire 20% interest in Padwaddy Inc.At that time, the book value of Padwaddy's stockholders' equity included $700,000 of common stock and $1,800,000 of retained earnings.All the excess purchase cost over the book value acquired was attributable to a patent with an estimated life of 10 years.Padwaddy paid $6,250 of dividends each quarter for the next two years, and reported net income of $180,000 for 2010 and $220,000 for 2011.Slurg recorded all activities related to their investment using the equity method. Required: 1.Calculate Slurg's income from Padwaddy for 2010. 2.Calculate Slurg's income from Padwaddy for 2011. 3.Determine the balance of Slurg's Investment in Padwaddy account on December 31, 2011.

In reference to intercompany transactions between an investor and an investee, when the investor can significantly influence the investee, which of the following statements is correct, assuming that the investor is using the equity method?

On January 1, 2010, Palgan, Co.purchased 75% of the outstanding voting common stock of Somil, Inc., for $1,500,000.The book value of Somil's net equity on that date was $2,000,000.Book values were equal to fair values except as follows: Required: Prepare a schedule to allocate any excess purchase cost to specific assets and liabilities.

An investor uses the cost method of accounting for its investment in common stock.During the current year, the investor received $25,000 in dividends, an amount that exceeded the investor's share of the investee company's undistributed income since the investment was acquired.The investor should report dividend income of what amount?

Panda Corporation purchased 100,000 previously unissued shares of Skunk Company's $10 par value common stock directly from Skunk for $2,200,000.Skunk's stockholders' equity immediately before the investment by Panda consisted of $3,000,000 of common stock and $4,800,000 in retained earnings.What is Panda's book value of equity in the net assets of Skunk?

On January 1, 2011, Pendal Corporation purchased 25% of the outstanding common stock of Sedda Corporation for $100,000 cash.Book value and fair value of Sedda's assets and liabilities at the time of acquisition are shown below. Required: Prepare an allocation schedule for Pendal's investment in Sedda.

Griffon Incorporated holds a 30% ownership in Duck Corporation.Griffon should use the equity method under which of the following circumstances?

Keynse Company owns 70% of Subdia Incorporated.The Investment in Subdia qualifies as a business reporting unit under FASB 142, and Keynse has reported goodwill in the amount of $200,000 with respect to its acquisition of Subdia.Subdia's $10 par common stock is currently trading for $92 per share, Subdia's account book balances and related fair values at December 31, 2011 are shown below. Required: Determine if Goodwill has been impaired, and if so, the amount of adjustment that would be required.

Which one of the following items, originally recorded in the Investment in Falcon Co.account under the equity method, would not be systematically used to reduce investment income on a periodic basis?