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Exam 2: Stock Investments Investor Accounting and Reporting

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Question 1

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Shebing Corporation had $80,000 of $10 par value common stock outstanding on January 1,2013,and retained earnings of $120,000 on the same date.During 2013 and 2014,Shebing earned net incomes of $30,000 and $45,000,respectively,and paid dividends of $8,000 and $10,000,respectively. On January 1,2013,Pentz Company purchased 25% of Shebing's outstanding common stock for $60,000.On January 1,2014,Pentz purchased an additional 10% of Shebing's outstanding stock for $30,200.The payments made by Pentz in excess of the book value of net assets acquired were attributed to equipment,with each excess value amount depreciable over 8 years under the straight-line method. Required: 1.What is the adjustment to Investment Income for depreciation expense relating to Pentz's Investment in Shebing in 2013 and 2014? 2.What will be the December 31,2014 balance in the Investment in Shebing account after all adjustments have been made?

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Question 2

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Pelican Corporation acquired a 25% interest in Seafare Incorporated at book value several years ago.Seafare declared $100,000 dividends in 2013 and reported its income for the year as follows: Pelican's Investment in Seafare account for 2013 should increase by

A) $ 100,000.
B) $ 125,000.
C) $ 150,000.
D) $ 180,000.

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

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Question 3

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For 2013 and 2014,Sabil Corporation earned net income of $480,000 and $640,000 and paid dividends of $18,000 and $20,000,respectively.At January 1,2013,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 1,2013 and 2014.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 2013 and 2014,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 2013 and 2014?

On January 2,2013,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 2013 and $220,000 for 2014.Slurg recorded all activities related to their investment using the equity method. Required: 1.Calculate Slurg's income from Padwaddy for 2013. 2.Calculate Slurg's income from Padwaddy for 2014. 3.Determine the balance of Slurg's Investment in Padwaddy account on December 31,2014.

Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1,2013 for $300,000.This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31,2015 was $440,000.The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year.In 2016,Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May.If Jabiru sold one-half of its investment in Fish on August 1,2016 for $500,000,how much gain was recognized on this transaction?

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?

Wader's Corporation paid $120,000 for a 25% interest in Shell Company on July 1,2014.No information is available on the fair value of Shell's assets and liabilities.Assume the equity method.Shell's trial balances at July 1,2014 and December 31,2014 were as follows: Required: 1.What is Wader's investment income from Shell for the year ending December 31,2014? 2.Calculate Wader's investment in Shell at year end December 31,2014.

Sandpiper Inc.acquired a 30% interest in Shore Corporation for $27,000 cash on January 1,2013,when Shore's stockholders' equity consisted of $30,000 of capital stock and $20,000 of retained earnings.Shore Corporation reported net income of $18,000 for 2013.The allocation of the $12,000 excess of cost over book value acquired on January 1 is shown below,along with information relating to the useful lives of the items: Required: Determine Sandpiper's investment income from Shore for 2013.

Use the following information to answer the question(s) below. On January 1,2013,Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings.Book values of Sunflower's net assets equaled their fair values on this date.Sunflower's net income and dividends for 2013 through 2015 were as follows: -Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was

Use the following information to answer the question(s) below. On January 1,2013,Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings.Book values of Sunflower's net assets equaled their fair values on this date.Sunflower's net income and dividends for 2013 through 2015 were as follows: -Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was

For 2012,2013,and 2014,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 1,2012,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 1,2012,2013,and 2014.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?

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

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 1,2013,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.

On January 1,2013,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 31,2013? 2.Calculate Platt's investment in Sandig at year end December 31,2013.

On January 1,2013,Pailor Inc.purchased 40% of the outstanding stock of Saska Company for $300,000.At that time,Saska's stockholders' equity consisted of $270,000 common stock and $330,000 of retained earnings.Saska Corporation reported net income of $360,000 for 2013.The allocation of the $60,000 excess of cost over book value acquired is shown below,along with information relating to the useful lives of the items: Required: Determine Pailor's investment income from Saska for 2013.

Pike Corporation paid $100,000 for a 10% interest in Salmon Corp.on January 1,2013,when Salmon's stockholders' equity consisted of $800,000 of $10 par value common stock and $200,000 retained earnings.On December 31,2014,after receipt of the year's dividends from Salmon,Pike paid $192,000 for an additional 20% interest in Salmon Corp.Both of Pike's investments were made when Salmon's book values equaled their fair values.Salmon's net income and dividends for 2013 and 2014 were as follows: Required: 1.Prepare journal entries for Pike Corporation to account for its investment in Salmon Corporation for 2013 and 2014. 2.Calculate the balance of Pike's investment in Salmon at December 31,2014

What method of accounting will generally be used when one company purchases between 20% to 50% of the outstanding stock of another company?

On January 1,2013,Petrel,Inc.purchased 70% of the outstanding voting common stock of Ocean,Inc. ,for $2,600,000.The book value of Ocean's net equity on that date was $3,100,000.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?

On January 1,2013,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.