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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 51

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On July 1, 2014, Carter Company purchased trading securities as follows: Dark Corporation common stock (par $1) 10,000 shares at $25 per share. Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share. The quoted market prices per share on December 31, 2014 were as follows: Dark Corporation stock, $27 per share Janvrin Corporation stock, $104 per share Each of the investments represented 5% of the total shares outstanding. The carrying valu amount of the investments at December 31, 2014 should be

A) $478,000
B) $480,000
C) $458,000
D) $460,000

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

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Question 52

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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 incorrect if Rye classifies the investment as an available-for-sale security?

A) The 2013 unrealized loss is $10,000 and is included in Rye's 2013 net earnings.
B) The 2012 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity.
C) The 2012 unrealized gain is $10,000, but is not included in Rye's 2012 net earnings.
D) The 2013 unrealized loss is $20,000, but is not included in Rye's 2013 net earnings.

E) A) and B)
F) A) and C)

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Question 53

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

If a bond is bought at a discount, then interest revenue will be less than the cash payment.

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. What effect will the dividend have on Photo Finish's financial statements?

Discuss how the equity method prevents managers of the investor corporation from manipulating income related to dividends from the investee.

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated statement of earnings.

Goodwill is reported on a consolidated statement of financial position only if it was acquired in the merger or acquisition.

On January 1, 2014, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The current market value of SCD's plant and equipment was $100,000 in excess of the equipment's book value. If the market value and book value are the same for SCD's remaining assets, what was the amount of goodwill purchased by Shelley Company?

On July 1, 2010, as a long-term investment in available-for-sale securities, Wildlife Supp Company purchased 6,000 shares of the preferred stock (nonvoting) of Nature Company for $30 per share (18,000 shares outstanding) . The records of Nature Company reflect the following: The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2010 would be which of the following?

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2014, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2014. At what amount is the Candle investment reported on the December 31, 2014 statement of financial position?

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

An investment accounted for under the equity method would record an increase in the investment account and create net earnings for an amount equal to the proportionate share of the investee's reported net earnings.

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current market value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?

Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

An investment accounted for under the equity method is always reported on the statement of financial position fair value.

Investments classified other than as held-to-maturity bond investments have to be reported on the balance sheet at fair value.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2010: At what amount should Gilman Company report the Burke investment on the December 31, 2010 statement of financial position?

On January 1, 2014, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the assets listed below and assumed trade payables (owed by Patriot) amounting to $30,000. What amount of Goodwill will be recorded in the transaction?