Question 1

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

Accepted Answer

Investment income using the equity method is not limited to the proportionate share of investee dividends. It also includes the proportionate share of investee net income.

Question 2

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2010, for $2,000,000 as a long-term investment. The records of YRK Corporation showe the following on December 31, 2010:  At what amount should JDR report the YRK investment on the December 31, 2010 statement of financial position?

Accepted Answer

The answer of JDR Company purchased 40% of the common...

Question 3

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?

Accepted Answer

Since the bonds were purchased at a discount (96% of face value), the book value of the bond investment will increase as the discount is amortized over the life of the bonds.

Question 4

Which of the following statements is correct?

Accepted Answer

Unrealized holding gains or losses on trading securities are reported on the income statement, while those on available-for-sale securities are reported in other comprehensive income.

Question 5

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 6

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?

Accepted Answer

For trading securities, unrealized gains and losses are included in net earnings. In 2012, the unrealized gain of $10,000 ($160,000 - $150,000) is included in Rye's net earnings.

Question 7

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.

Accepted Answer

This is the correct definition of the equity method of accounting for investments.

Question 8

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classifications should be used by Idaho Company in accounting for the investment?

Accepted Answer

Since the investment is being held as a long-term investment rather than for trading purposes, the trading securities classification (choice C) is inappropriate. The held-to-maturity classification (choice B) only applies to debt securities, not preferred stock. Consolidation (choice A) is used when the investor has control over the investee. Since the investment is only 30% of the outstanding preferred stock, Idaho Company does not have control. Therefore, the best classification to use in this situation is available-for-sale (choice D).

Question 9

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 $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 effect will the dividend have on Phillips' 2010 financial statements?

Accepted Answer

The dividend received by Phillips Corporation will increase their cash and be recorded as investment income, as they hold less than 20% of Martin Corporation's stock and thus do not have significant influence.

Question 10

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 $2 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:

Accepted Answer

The answer of On January 1, 2014, Short Company purchased...

Question 11

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. How much income should Heartfelt report during 2014 from the Candle investment?

Accepted Answer

Heartfelt owns 40%, therefore, their share of net earnings is $100,000 x 40% = $40,000. Since Candle declared and paid $10,000 in dividends, Heartfelt receives $10,000 x 40% = $4,000. The carrying value of the investment increases by $36,000 ($40,000 income - $4,000 dividend), bringing the carrying value to $500,000 + $36,000 = $536,000. Therefore, Heartfelt should report $40,000 of income from the Candle investment.

Question 12

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

Accepted Answer

The answer of When accounting for investments in trading securities,...

Question 13

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?

Accepted Answer

The amount reported on the balance sheet for available-for-sale securities is calculated as follows:

Cost of investment = 6,000 shares x $30 per share = $180,000

Unrealized holding gain (or loss) = Market value - Cost of investment

As there is no information given about the market value of the preferred stock, we assume it to be the same as the cost of investment.

Unrealized holding gain (or loss) = $180,000 - $180,000 = $0

Therefore, the amount reported on the balance sheet by Wildlife Supp Company for its investment at December 31, 2010 is:

Cost of investment + Unrealized holding gain (or loss) = $180,000 + $0 = $180,000

However, there is also a $18,000 discount on the preferred stock that needs to be amortized over its life, which is not reflected in the above calculation.

Discount amortization = $18,000 / (6,000 shares x 10 years) = $0.30 per share

Therefore, the amount reported on the balance sheet by Wildlife Supp Company for its investment at December 31, 2010 is:

Cost of investment + Unrealized holding gain (or loss) - Discount amortization = $180,000 + $0 - ($0.30 x 6,000 shares) = $162,000

Thus, the correct answer is option B.

Question 14

McGinn Company purchased 10% of RJ Company's common stock during 2012 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2012 and a
$105,000 fair value at the end of 2013. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2014 for $102,000?

Accepted Answer

The answer of McGinn Company purchased 10% of RJ Company's...

Question 15

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?

Accepted Answer

The correct answer is A. The investment in Click It should be reported at $23,600,000, which is the sum of the initial investment ($20 million) and the share of Click It's net earnings for the year ($3.6 million).

Question 16

Significant influence over the operating and financial policies of another company may be indicated by the following except:

Accepted Answer

Significant influence over the operating and financial policies of another company may be indicated by evidence of material transactions between the two companies, participation on its board of directors, and participation in its policy-making process. However, having significant influence only on income earned by the other company is not necessarily an indication of overall significant control over its policies.

Question 17

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?

Accepted Answer

Under the equity method, the initial investment is recorded at cost and adjusted for the investor's share of the investee's earnings/losses and dividends.

Initial investment:
30% of outstanding shares = 30% x MV = 30% x $500,000 = $150,000

2014 adjustments:
Turtle's share of Shell's net earnings = 30% x $40,000 = $12,000
Turtle's share of Shell's dividends = 30% x $5,000 = $1,500

Investment balance at December 31, 2014:
Cost + share of net earnings - share of dividends + share of unrealized gain (MV - Cost)
= $150,000 + $12,000 - $1,500 + (30% x ($160,000 - $150,000))
= $160,500

Therefore, the investment balance reported on Turtle's December 31, 2014 statement of financial position is $160,500 (Option B).

Question 18

On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 2014, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 2014, the shares had a market value of
$150,000. How much income will Palmer report from the Arnold investment during 2014?

Accepted Answer

Using the equity method, Palmer will record income based on its share of Arnold's net earnings. 
Palmer's share of Arnold's net earnings = 40% x $30,000 = $12,000. 
Palmer will also record its share of Arnold's cash dividends, which is 40% x $10,000 = $4,000. 
Therefore, Palmer's net income from the investment in Arnold during 2014 will be $12,000 - $4,000 = $8,000.

Question 19

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?

Accepted Answer

The answer of On January 1, 2014, Shelley Company paid...

Question 20

Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition?

Accepted Answer

When a company acquires another company and consolidates its financial statements, the assets and liabilities of the acquired company should be reported at their fair market values on the date of acquisition. This is in accordance with the purchase method of accounting, which is used for business combinations. This approach provides a more accurate reflection of the underlying value of the acquired company's assets and liabilities, and therefore its earnings potential. The previously reported book values may not reflect the fair market values, and nominal estimated values determined by the parent company would not be objective or reliable. Market values on the date of acquisition less accumulated depreciation would also not provide a complete picture of the assets' current values.

Quiz 14: Reporting and Interpreting Investments in Other Corporations

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

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?

Which of the following statements is correct?

Which of the following statements is correct?

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.

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classifications should be used by Idaho Company in accounting for the investment?

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

Significant influence over the operating and financial policies of another company may be indicated by the following except:

Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition?