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Exam 13: Measuring and Evaluating Financial Performance

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Question 41

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

A) participation on its board of directors.
B) participation in its policy-making process.
C) evidence of material transactions between the two companies.
D) have significant influence only on income earned by the other company. 13.

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

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Question 42

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Cannalli Landscape Architecture has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Cannalli's financial statements?

A) 3,000 shares of the 10,000 outstanding preferred shares of Fallow Co
B) 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co
C) 5,000 shares of the 60,000 outstanding common shares of Denman's Greenhouses Corp
D) 20,000 shares of the 25,000 outstanding common shares of Just Pure Water Co

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

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Question 43

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A realized gain or loss is reported on the income statement when a fair value adjustment is made.

Allen Corporation accounts for its investment in the common shares of Burns Company under the equity method. Allen Corporation should ordinarily record a cash dividend received from Young as

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.

Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash. -The carrying amount of this investment in Tansent's December 31, 20X1 statement of financial position should be

Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is

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

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 $) $\begin{array} { | l | r | } \hline \text { Equity in the income of investees } & \$ 372 \\\hline \text { Proceeds from the sale of investments } & 14 \\\hline \text { Purchases of investments } & 67 \\\hline\end{array}$

Under the amortized cost model, holding gains are

Use of the equity method is required for investments between 20 and 50% of a company's common stock regardless of the investor's ability to influence the investee.

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X4 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X4, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net income was $52 million. What effect will the dividend have on Phillips' 20X0 financial statements?

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, 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, 20X4. -How much income should Heartfelt report during 20X4 from the Candle investment?

Which of the following statements is correct?

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, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, 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, 20X4 statement of financial position?

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

An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its cost.

On its December 31, 20X1, statement of financial position, Lumilite Co. reported its temporary investment in equity securities, under the fair value through net income method at $330,000. At December 31, 20X2, the fair value of the securities was $350,000. What should Lumilite report on its 20X2 statement of earnings because of the increase in fair value of the investments in 20X2?

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

On January 1, 20X4, 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. $\begin{array} { | l | r | r | } \hline & \text { Book Value per Patriot's } & \text { Appraised Market Value } \\& \text { Books }\\\hline \text { Inventory } & \$ 300,000 &\$280,000\\\hline \text { Furniture and fixtures } & 60,000 & \$73,000 \\\hline \text { Other assets } & 10,000 & 32,000 \\\hline\end{array}$ What amount of Goodwill will be recorded in the transaction?