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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 31

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Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock,which constitutes 10% of Creole's voting stock on June 30,2019 for $42 per share.Orleans' intent is to keep these shares beyond the current year.On December 20,2019,Creole paid a $4,000,000 cash dividend.On December 31,2019,Creole's stock was trading at $45 per share and their reported 2019 net income was $52 million. A.Record the transaction to record the acquisition of Creole Corporation on June 30,2019. B.Record the transaction for the dividend received by Orleans on December 20,2019. C.Record any year-end entries needed by Orleans Corporation.

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*1,000,000 × $5 = $...

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Question 32

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Which of the following statements regarding the accounting for a common stock investment using the equity method is incorrect?

A) The equity method is used for investments of ownership between 20% and 50% of the outstanding voting stock when the investor has the ability to exert significant influence.
B) The investment account is increased by the proportionate share of affiliate net income.
C) The investment account is decreased by the proportionate share of affiliate dividends.
D) Investment income equals the proportionate share of affiliate dividends.

E) A) and B)
F) B) and D)

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Question 33

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Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,and Heartfelt accounts for the investment using the equity method.During 2019,Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.The carrying value of the Candle investment was $500,000 on January 1,2019. - At what amount is the Candle investment reported on the December 31,2019 balance sheet of Heartfelt Company?

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

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%.Trent 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?

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

If a bond is purchased at a discount,the amortized book value of the bond investment will increase as the bond approaches maturity.

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

For an investment accounted for under the equity method,the Investment account along with an investment income account would be increased for an amount equal to the investor's proportionate share of the affiliate's reported net income.

On January 1,2019,Fall Corporation acquired 100% of the outstanding voting shares of Foliage Corporation for $600,000.The book and fair values of Foliage's assets and liabilities as of January 1,2019 are listed below: What amount of goodwill,if any,will be recorded by Fall Corporation as a result of this investment?

On January 1,2019,Short Company purchased 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 as a long-term investment.During November 2019,Daniel declared and paid a cash dividend of $1.25 per share.At December 31,2019,end of the accounting period,Daniel's shares were selling at $48.What is the net amount reported in the income statement for the year ended December 31,2019 for Short Company related to this investment?

On January 1,2019,Presto Corporation purchased,as a long-term investment,5,000 shares of the outstanding voting common stock of Shazam Corporation at $30 per share.During 2019,the following events occurred at Shazam Corporation: A.Prepare the journal entry for Presto Corporation to record the investment. B.Assume two independent situations,Case A for 5,000 shares as 10% ownership and Case B for 5,000 shares as 40% ownership.For each situation,prepare the following entries: 1.To recognize net income for 2019. 2.To record cash dividend declared and received. 3.To record any adjustment to market price of stock at year-end.

Under the equity method,dividends received are recognized by increasing the Investment Revenue account.

On January 1,2019,Heitzman Company purchased the following shares of stock as a long-term investment: The fair values of the stocks subsequently were as follows: Calculate the amount of unrealized gain or loss Heitzman would report on its income statement at both December 31,2019 and December 31,2020.

On January 1,2019,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 fair value of SCD's plant and equipment was $100,000 in excess of the equipment's book value.If the fair value and book value are the same for SCD's remaining assets and liabilities,what was the amount of goodwill acquired by Shelley Company?

An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale debt security exceeds its fair value reported in the prior period.

Lumber Company purchased 16% of Jack Company's common stock during 2019 for $160,000.The 16% investment in Jack had a $144,000 fair value at the end of 2019 and a $168,000 fair value at the end of 2020. 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 30,2019 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2019,Martin paid a $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and Martin reported 2019 net income of $52 million. - What investment value will be reflected on Phillips' balance sheet at December 31,2019?

Which of the following statements is false with regard to investments and the cash flow statement?

A.Discuss the criteria for applying the equity method of accounting for long-term investments. B.Discuss the rationale for the equity method procedures of accounting for long-term investments.