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Exam 13: Measuring and Evaluating Financial Performance

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Question 1

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Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis?

A) The companies are legally and in economic substance separate.
B) The companies are legally and in economic substance one entity.
C) The companies are legally one entity but they are separate in economic substance.
D) The companies are legally separate but they are one entity in economic substance.

E) C) and D)
F) B) and C)

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Question 2

Multiple Choice

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Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the purchase method. Which of the following statements about the consolidated statements is true?

A) The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at their market values on the date of acquisition.
B) Fun with Florals will use the equity method of accounting for this investment.
C) Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a consolidated statement of earnings.
D) Fun with Florals will use the market value method of accounting for this investment.

E) None of the above
F) B) and C)

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Question 3

True/False

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Held-to-maturity bond investments should be reported on the statement of financial position at fair value.

On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. -What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position?

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

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

During 20X4, Manning Corporation purchased 100% of the outstanding voting shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value of $6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0: $\begin{array} { | l | r | } \hline 20 X 0 \text { net income } & \$ 290,000 \\\hline \text { Dividends declared and paid during December 20X0 } & \$ 20,000 \\\hline\end{array}$ At what amount should JDR report the YRK investment on the December 31, 20X0 statement of financial position?

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

On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 20X4, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. How much income will Palmer report from the Arnold investment during 20X4?

If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures.

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?

When accounting for investments in trading securities, any decline in market value below cost of the investments is reported in which of the following ways?

On January 1, 20X4, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000. The current market value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill purchased by Sheldon Company?

McGinn Company purchased 10% of RJ Company's common stock during 20X3 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X3 and a $105,000 fair value at the end of 20X4. Which of the following statements is incorrect if McGinn classifies the investment as available-for-sale security?

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

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.

A decline in the fair value of the available-for-sale portfolio reduces assets and net income.

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

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.