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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 51

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On January 1, 2014, 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 2014, Daniel declared and paid a cash dividend of $1.25 per share. At December 31, 2014, end of the accounting period, Daniel's shares were selling at $48. The 2014 financial statements for Short Company should report the following amounts: $\begin{array}{lrcc}&\text { Long-Term }&\text { Unrealized Holding }&\text { Investment }\\&\text { Investment }&\text { Gains/(Losses) }&\text { Revenue }\\\hline\text { A. } & \$ 1,000,000 & \$(40,000) & \$ 25,000 \\\text { B. } & 960,000 & \text { Zero } & \text { Zero } \\\text { C. } & 1,000,000 & (15,000) & \text { Zero } \\\text { D. } & 960,000 & (40,000) & 25,000\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

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

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Question 52

Multiple Choice

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McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2016 for $102,000?

A) The 2016 realized loss reported on the income statement is $3,000.
B) The 2016 realized gain reported on the income statement is $2,000.
C) The 2016 unrealized gain reported on the income statement is $2,000.
D) The 2016 unrealized loss reported on the income statement is $3,000.

E) All of the above
F) A) and C)

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Question 53

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On January 1, 2014, Heitzman Company purchased the following shares of stock as a long-term investment in available-for-sale securities: $\begin{array}{llll}\text { Corporation } &\text { Shares }&\text { Percent Outstanding } &\text {Cost per Share }\\\hline\text { Maars } & 10,000 \text { common (no par) } & 5 \% & \$ 25 \\\text { Nassif } & 2,000 \text { preferred (par \$10) } & 2 \% & \$ 50\end{array}$ $\text { The fair value of the stocks subsequently were as follows: }$ $\begin{array}{lrr}&\text { Dec. 31. } 2014&\text { Dec. 31. } 2015\\\text { Maars Corporation common stock } & \$ 24.00 & \$ 27.50 \\\text { Nassif Corporation preferred stock } & 51.00 & 50.50\end{array}$ Required: Calculate the "Net unrealized gains/losses," at both December 31, 2014 and December 31, 2015.

A company owning an investment for which it uses the equity method of accounting would record a reduction in the investment account for the proportionate share of the affiliate's reported net loss.

When accounting for investments in trading securities, any decline in fair value below the cost of the investments is reported in which of the following ways?

Which of the following is the best description of investments in trading securities?

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.

Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 2014. On December 31, 2014, the current fair value of the securities was $481,000. How should the investment be reported within the 2014 financial statements?

Fun with Florals Corporation acquired all the voting common stock shares of Crafts-to-Go Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which of the following statements about the financial statements is true?

On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment. During 2014, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2014, the shares had a fair value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 2014 balance sheet?

During 2014, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars. Required: For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on the statement of cash flows. The operating activities section is prepared using the indirect method. (Enter "+" if added or "-" if subtracted. You do not need to enter dollar amounts). $\begin{array}{ll}\text { Equity income of affiliates } & 48 \\\text { Proceeds from the sale of investments } & 14 \\\text { Purchases of investments } & 67 \\\text { Dividends received from equity investments } & 36\end{array}$

McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. 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 2016 for $102,000?

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

On April 1, 2015, Paxton Corporation acquired all of the outstanding voting common stock of Stanley Company and Stanley will remain a separate corporation. Stanley's year-end is December 31. How should the assets and liabilities of Stanley be reported on the consolidated financial statements when Stanley is combined with Paxton on April 1, 2015?

On July 1, 2014, Carter Company purchased trading securities as follows: Dark Corporation common stock (par $1) 10,000 shares at $25 per share. Janin 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 Janin Corporation stock, $104 per share Each of the investments represented 5% of the total shares outstanding. The carrying value amount of the investments at December 31, 2014 should be

Subsequent to a merger, the assets and liabilities of the acquired company will continue to be accounted for within the acquired company's books.

A realized gain or loss is reported on the income statement when an investment account is adjusted to reflect changes in fair value.

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

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 the original cost of the investment.

How is goodwill accounted for subsequent to acquisition?