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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 21

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On March 1, 2015, Young Company paid cash to purchase the following stocks as long-term investments in available-for-sale securities: Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares) ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares) XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares) The market prices per share at December 31, end of the accounting period, were as follows: $\begin{array}{lll}\text { Stock }&\text { Dec. } 31,2015&\text { Dec. } 31,2016\\\hline\text { Old common } & \$ 6 & \$ 7 \\\text { ABC common } & \$ 24 & \$ 25 \\\text { XYZ common } & \$ 21 & \$ 17\end{array}$ Required: Prepare the required journal entries at the following dates: March 1, 2015, December 31, 2015 and December 31, 2016.

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Question 22

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Rye Company purchased 15% of Lena Company's common stock during 2014 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2014 and a $140,000 fair value at the end of 2015. Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 2016 for $148,000?

A) The 2016 realized loss is $2,000 and is included in Rye's 2016 income statement.
B) The 2016 realized gain is $8,000 and is included in Rye's 2016 income statement.
C) The 2016 unrealized gain is $8,000 and is included in Rye's 2016 income statement.
D) The 2016 unrealized loss is $2,000 and is included in Rye's 2016 income statement.

E) All of the above
F) None of the above

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Question 23

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Required: A. Discuss the similarities of accounting for available-for-sale and trading securities portfolios. B. Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

On January 2, 2014, Eagle Company acquired 100% of Solly Company's common stock for $900,000 cash in a merger transaction. At this date, the book value of all of Solly Company's assets, except a building, was $700,000. The fair value of these assets without the building was $800,000. In addition to these assets is a building that has a book value of $400,000 and a fair value of $440,000. The book value and fair value of Solly's liabilities is $520,000. Required: A. Prepare a schedule to calculate the goodwill arising from the transaction. B. Prepare the journal entry to record the merger on the books of Eagle Company at the acquisition date.

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its fair value reported in the prior period.

A realized gain or loss is reported on the income statement when a trading security is sold.

Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock, which constitutes 10% of Creole's voting stock on June 30, 2014 for $42 per share. Orleans' intent is to keep these shares beyond the current year. On December 20, 2014, Creole paid a $4,000,000 cash dividend. On December 31, 2014, Creole's stock was trading at $45 per share and their reported 2014 net income was $52 million. Required: A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2014. B. Record the transaction for the dividend received by Orleans on December 20, 2014. C. Record any year-end entries needed by Orleans Corporation.

On January 1, 2014, Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment. Maxim reported a 2014 net income of $35,000. On January 2, 2015, Maxim declared and paid a $10,000 cash dividend. The fair value of the Maxim stock held by Alden on December 31, 2014, was $224,000. Alden Company has recorded only the following journal entries: Required: Based on the above information, answer the following questions: A. What method did Alden use to account for the investment? B. Did Alden fail to make an adjusting entry on December 31, 2014? C. What condition, if changed, would require that the equity method be used? D. Assuming the fair value method is used; calculate the valuation of the net investment on January 3, 2015.

On January 1, 2014, Red Company purchased Patriot Shop for $400,000 cash in a merger transaction. Red Company received the assets listed below and assumed accounts payable owed by Patriot to its suppliers in the amount of $30,000. $\begin{array}{lrr}&\text { Book Value per }&\text { Fair }\\&\text { Patriot's Books }&\text { value }\\\text { Inventory } & \$ 300,000 & \$ 280,000 \\\text { Furniture and fixtures } & 60,000 & 73,000 \\\text { Other assets } & 10,000 & 32,000\end{array}$ What amount of goodwill will be recorded in the transaction?

The use of consolidation accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is

Miller Corp. purchased $1,000,000 of bonds at 105 when the market yield was 8%. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is false?

Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds pay interest at the rate of 6%. Miller intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is not correct?

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

On July 1, 2014, Surf Company purchased long-term investments in available-for-sale securities as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share. The quoted market prices per share on December 31, 2014 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the balance sheet at December 31, 2014 would be which of the following?

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 previously declared $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 investment value will be reflected on Phillips' balance sheet at December 31, 2014?

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

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2014, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 2014: $\begin{array}{lr}2014 \text { net income } & \$ 290,000 \\\text { Dividends declared and paid during December, 2014 } & \$ 20,000\end{array}$ At what amount should JDR report the YRK investment on the December 31, 2014 balance sheet?

Which of the following statements is correct?

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 method of accounting will Phillips use to account for this investment?