Question 1

On January 1, 20X4, as a long-term investment in available-for-sale securities, John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne reported 20X4 net earnings of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 20X4 was $10 per share. Calculate the carrying value of John's investment at the end of 20X4.

Accepted Answer

The answer of On January 1, 20X4, as a long-term...

Question 2

The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process.

Accepted Answer

This statement is true. When a subsidiary is consolidated with its parent company, the assets of the subsidiary are treated as if they are owned by the parent company and are therefore subject to depreciation and amortization over their useful lives.

Question 3

During 20X4, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows (added or deducted). (in millions $) $$\begin{array} { | l | r | } 
\hline \text { Equity in the income of investees } & \$ 372 \
\hline \text { Proceeds from the sale of investments } & 14 \
\hline \text { Purchases of investments } & 67 \
\hline
\end{array}$$

Accepted Answer

The answer of During 20X4, the following items were reported...

Question 4

Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classiﬁcation is used relative to use of the available-for-sale classiﬁcation.

Accepted Answer

The answer of Describe the difference in the calculation of...

Question 5

On 1 August 20X4, Baker Sindall LLC, a public company, purchased $50,000 face amount of Shandlie Company 6% coupon bonds for $43,200. The market interest rate was 8% on this date. The bond pays interest semi-annually on 31 July and 31 January. At the fiscal year-end for Baker Sindall, the Shandlie bonds have a market value of $45,000. Required: Prepare the journal entries to record the investment, the investment income and any other needed adjustments at 31 December. The investment is classified as held to maturity and accounted for using amortized cost.

Accepted Answer

The answer of On 1 August 20X4, Baker Sindall LLC,...

Question 6

Hampton Developments had the following transactions pertaining to its short-term equity investments. Hampton does not use an allowance account to record unrealized gains and losses, but $$\begin{array} { | l | l | } 
\hline \text { Jan. 1 } & \begin{array} { l } 
\text { Purchased 1,000 shares of Chapman Foods Ltd. for } \$ 50,000 \text { cash, plus brokerage } \
\text { fees of } \$ 550 . \text { The shares were classified as trading securities. }
\end{array} \
\hline \text { June 1 } & \text { Received cash dividends of } \$ 3 \text { per share on the Chapman shares. } \
\hline \text { Sept. 15 } & \text { Sold } 500 \text { Chapman shares for } \$ 24,900 , \text { less brokerage fees of } \$ 100 . \
\hline \text { Dec. } 31 & \text { The fair value of the Chapman shares was } \$ 25,400 . \
\hline
\end{array}$$ Required: 1. Prepare all the journal entries required for these transactions. 2. How will these transactions be reported on the statement of earnings ending on December 31?

Accepted Answer

The answer of Hampton Developments had the following transactions pertaining...

Question 7

On January 1, 20X0, Heitzman Company purchased the following shares as a long-term investment in available-for-sale securities: $$\begin{array} { | l | l | r | r | } 
\hline \text { Corporation } & \text { Shares } & \text { Percent Outstanding } & \text { Cost per Share } \
\hline \text { Maars } & 10,000 \text { common (no par) } & 5 \% & \$ 25 \
\hline \text { Nassif } & 2,000 \text { preferred (par \$10) } & 2 \% & \$ 50 \
\hline
\end{array}$$ The market value of the stocks subsequently were as follows: $$\begin{array} { | l | r | r | } 
\hline & \text { Dec. 31, 20X0 } & \text { Dec. 31, 20X1 } \
\hline \text { Maars Corporation common stock } & \$ 24.00 & \$ 27.50 \
\hline \text { Nassif Corporation preferred stock } & 51.00 & 50.50 \
\hline
\end{array}$$ Calculate the "Net unrealized gains/loss," on both December 31, 20X0 and December 31, 20X1.

Accepted Answer

The answer of On January 1, 20X0, Heitzman Company purchased...

Question 8

Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 12, 20X4, Nutribar declared and paid a $1 million cash dividend and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Nutribar's stock was trading at $11.50 per share. Requirements:
A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 20X0.
B. Record the cash dividend received by Kudos on December 12, 20X4.
C. Record any end of year entries needed on Kudos' books.

Accepted Answer

The answer of Kudos Corporation bought a 40% interest in...

Question 9

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

Accepted Answer

Goodwill is only reported on a consolidated statement of financial position if it was acquired in a merger or acquisition. If there is no goodwill acquired in a merger or acquisition, it will not be reported on the consolidated financial statement.

Question 10

On January 2, 20X0, Parent Company purchased 100% of Sub Company's stock for $900,000 cash. At this date, the book value of Sub Company's net assets (i.e., assets less liabilities) was $800,000 which included property, plant and equipment that have a book value of $400,000 and a market value of $440,000. Required:
A. Prepare the journal entry that would appear on the books of each company at the acquisition date.
B. How much goodwill should P arent Company recognize on the consolidated financial statements at the date of acquisition?

Accepted Answer

The answer of On January 2, 20X0, Parent Company purchased...

Question 11

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

Accepted Answer

The answer of Complete the following matrix by writing a...

Question 12

On January 31, 20X0, McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31. $$\begin{array} { | l | r | r | r | } 
\hline \text { Stock } & \text { Cost } & \text { Market at Dec. 31, 20X0 } & \text { Market at Dec. 31, 20X1 } \
\hline \text { Orange Corporation } & \$ 15,000 & \$ 12,000 & \$ 14,000 \
\hline \text { Bailey Inc. } & \$ 13,000 & \$ 12,000 & \$ 13,000 \
\hline
\end{array}$$ All the Bailey stock was sold for $13,500 on January 12, 20X2. Prepare the required journal entries at the following dates: January 31, 20X0, December 31, 20X0, December 31, 20X1 and January 12, 20X2.

Accepted Answer

The answer of On January 31, 20X0, McBurger Corporation purchased...

Question 13

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

Accepted Answer

The answer of Discuss how the equity method prevents managers...

Question 14

On January 1, 20X0, Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000. The book and market values of Foliage's assets and liabilities as of January 1, 20X0 are listed below: $$\begin{array} { | l | r | r | } 
\hline \text { Item } & \text { Book Value } & \text { Market Value } \
\hline \text { Equipment } & \$ 60,000 & \$ 80,000 \
\hline \text { Trucks } & \$ 40,000 & \$ 55,000 \
\hline \text { Factory } & \$ 300,000 & \$ 320,000 \
\hline \text { Remaining assets } & \$ 130,000 & \$ 130,000 \
\hline \text { Liabilities } & \$ 100,000 & \$ 100,000 \
\hline
\end{array}$$ Calculate the amount of goodwill that should be recognized.

Accepted Answer

The answer of On January 1, 20X0, Fall Corporation purchased...

Question 15

Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million.

Accepted Answer

The purchase price of $10.0 million minus the fair value of Allison's net assets of $9.1 million ($12.5 million - $3.4 million) equals goodwill of $0.9 million. Hence, Madison will report goodwill of $0.9 million.

Question 16

On January 1, 20X1, Castleton Co. purchased $100,000 of eight percent bonds for $108,530. The bonds were purchased to yield six percent. Interest is paid on July 1 and January 1 and the bonds mature on January 1, 20X6. Castleton Co. uses the effective interest method to amortize the premium and applies the amortized cost method. Required: 1. Prepare the journal entry on January 1, 20X1. 2. Prepare the journal entries for the receipt of interest and amortization of the premium for the remainder of 20X1. 3. What is the carrying value of the investment at the end of 20X1?

Accepted Answer

The answer of On January 1, 20X1, Castleton Co. purchased...

Question 17

During 20X4, the following items were reported on Shoe Co's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows statement (added or deducted). (in millions $) $$\begin{array} { | l | r | } 
\hline \text { Acquisitions and investments in unconsolidated affiliates } & \$ 64 \
\hline \text { Sales of property, plant, and equipment } & 38 \
\hline \text { Investee equity income, and gains on sale of equipment } & 207 \
\hline \text { Short-term investments, purchases } & 44 \
\hline \text { Short-term investments, sales } & 38 \
\hline
\end{array}$$

Accepted Answer

The answer of During 20X4, the following items were reported...

Question 18

When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

Accepted Answer

When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities are consolidated with those of the acquiring company at their fair market values, not their book values.

Question 19

The extent of inﬂuence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company.

Accepted Answer

The extent of influence and control over another company is a crucial factor in determining whether to use the equity method or the fair value method when accounting for a long-term investment in the common stock of another company.

Question 20

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.

Accepted Answer

After a merger, the subsidiary's revenues and expenses are combined with those of the parent company on the consolidated statement of earnings to reflect the financial performance of the merged entity as a whole.

Quiz 13: Measuring and Evaluating Financial Performance