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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 41

True/False

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Any unrealized gains or losses on trading securities would have to be added back to or subtracted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

A) True
B) False

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Question 42

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

A) The investment would be accounted for using the equity method.
B) The investment would be accounted for by consolidation.
C) The investment would be accounted for under the fair value method.
D) The investment would be accounted for under the amortized cost methoD.An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation method.

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

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Question 43

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

On January 1, 2014, 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, 2014 are listed below: $\begin{array} { l r r } \text { Item } & \text { Book Value } & \text { Fair value } \\\text { Equipment } & \$ 60,000 & \$ 80,000 \\\text { Trucks } & \$ 40,000 & \$ 55,000 \\\text { Factory } & \$ 300,000 & \$ 320,000 \\\text { Other assets } & \$ 130,000 & \$ 100,000 \\\text { Liabilities } & \$ 100,000 & \$ 105,000\end{array}$ Required: Calculate the amount of goodwill resulting from the acquisition.

On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment is used. During 2014, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2014, the shares had a fair value of $150,000. What is the amount of Equity in Affiliate Earnings for 2014?

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.

Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classification is used relative to use of the available-for-sale classification.

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.

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 correct?

If a bond is bought at a discount, then interest revenue will be less than the cash payment.

During 2014, Manning Corporation purchased 100% of the outstanding voting common stock shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair value of $6.5 million. The book value as well as fair value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

Which of the following is true about a passive investment in common stock?

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

Which of the following statements is correct with regard to investments and the statement of cash flows?

Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2015. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2015, Click-It paid a $1 million cash dividend declared earlier in 2015, and reported net income for the year ended 2015 of $10 million. On December 31, 2015, Click-It's stock was trading at $11.50 per share. What effect will the dividend have on the Photo Finish financial statements?

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, 2014, 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 2014, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2014, the shares had a fair value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 balance sheet?

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 incorrect if Rye classifies the investment as an available-for-sale security?

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current fair value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?

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