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Exam 14: PPA: Reporting and Interpreting Investments in Other Corporations

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Question 51

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Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2, 2016, for $80 per share. At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock with a par value of $50 per share. During 2016, Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend. The December 31, 2016, fair value of Apprentice's stock was $84. Required: Prepare the journal entries required for Donald Corporation on January 2, 2016 and December 31, 2016.

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Question 52

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An increase in the fair value of the trading securities portfolio increases both assets and net income.

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Question 53

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The sale of a stock from the available-for-sale securities portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

When is the equity method used to account for long-term investments in common stock?

On December 31, 2016, Jean World Corporation recorded the following journal entry relating to its investment in 9,000 shares of common stock of Soda Corporation. At the end of 2016, Soda Corporation reported net income of $120,000. Earlier in the year, Soda declared and paid dividends of $18,000. Required: A.What method is being used to account for this investment? B.What is the total number of shares outstanding of Soda's common stock?

McGinn Company purchased 10% of RJ Company's common stock during 2016 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2016 and a $105,000 fair value at the end of 2017. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2018 for $102,000?

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?

For an investment accounted for under the equity method, the Investment in Affiliates 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.

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

On July 1, 2016, Carter Company purchased trading securities as follows: Dark Corporation common stock (par $1) 10,000 shares at $25 per share. Janin Corporation preferred stock (par $100) 2,000 shares at $105 per share. The quoted market prices per share on December 31, 2016 were as follows: Dark Corporation stock, $27 per share Janin Corporation stock, $104 per share Each of the investments represented 5% of the total shares outstanding. The carrying value amount of the investments at December 31, 2016 should be

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?

Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2017. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2017, Click-It paid a $1 million cash dividend declared earlier in 2017, and reported net income for the year ended 2017 of $10 million. On December 31, 2017, Click-It's stock was trading at $11.50 per share. What effect will the dividend have on the Photo Finish financial statements?

On January 1, 2016, Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment. Maxim reported a 2016 net income of $35,000. On January 2, 2017, Maxim declared and paid a $10,000 cash dividend. The fair value of the Maxim stock held by Alden on December 31, 2016, was $224,000. Alden Company has recorded only the following journal entries: January 1, 2016: December 31, 2016 (end of the accounting period): No entry January 2, 2017: 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, 2016? 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, 2017.

Which of the following best describes the numerator of the economic return from investing ratio?

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

Copper Company purchased 40% of the common stock of York Corporation on January 1, 2016, for $2,000,000 as a long-term investment. The records of York Corporation showed the following on December 31, 2016: How much investment income should Copper report from the York investment during 2016?

Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock, which constitutes 10% of Creole's voting stock on June 30, 2016 for $42 per share. Orleans' intent is to keep these shares beyond the current year. On December 20, 2016, Creole paid a $4,000,000 cash dividend. On December 31, 2016, Creole's stock was trading at $45 per share and their reported 2016 net income was $52 million. Required: A.Record the transaction to record the acquisition of Creole Corporation on June 30, 2016. B.Record the transaction for the dividend received by Orleans on December 20, 2016. C.Record any year-end entries needed by Orleans Corporation.

When an investment accounted for under the equity method is sold, the gain or loss reported on the income statement is the difference between the selling price and the original cost of the investment.

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments.

On January 1, 2016, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2016, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2016, the shares had a fair value of $160,000. At the end of 2016, the shares of Shell Corporation had a fair value of $160,000. What investment balance will be reported on Turtle's December 31, 2016 balance sheet?