Exam 13: Measuring and Evaluating Financial Performance

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

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: Mini Company Statement of Financial P osition January 1, 20X0 Cash \ 90,000 Accounts receivable (net) 50,000 Inventory 150,000 Plant and equipment (net) 100,000 Total assets \ 390,000 Accounts payable \ 40,000 Notes payable 80,000 Common stock 155,000 Retained earnings Total Liabilities and Stockholders' Equity \ 390,000 On January 1, 20X0, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Mini's remaining assets, what was the amount of goodwill purchased by Maxi Company?

An investment accounted for under the equity method would record a reduction in the investment account for the proportionate share of the investee's reported net loss.

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 20X4. At December 31, 20X4, the current market value of the securities was $105,000. How should the investment be reported in the 20X4 financial statements?

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

Which of the following statements is false?

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

At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Through this investment and by having two seats on their Board of Directors, Manowar has signi?cant in?uence over Cortez. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?

Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share. -What effect will the dividend have on Photo Finish's financial statements?

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

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

Which of the following is true about passive investments?

Discuss how the equity method prevents managers of the investor corporation from manipulating income related to dividends from the investee.

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 income and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 20X4 statement of financial position?

Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. -Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 20X4 for $148,000?

Investments in bonds intended to be sold before they reach maturity should be reported under the market value method.

Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 20X0. On December 31, 20X0, the current market value of the securities was $481,000. How should the investment be reported within the 20X0 financial statements?

On January 1, 20X4, Short Company purchased as an available-for-sale investment, 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. During November 20X4, Daniel declared and paid a cash dividend of $2 per share. At December 31, 20X4, end of the accounting period, Daniel's shares were selling at $48. The 20X4 financial statements for Short Company should report the following amounts: Long-Term Investment Unrealized Holding Gains/Losses Investment Revenue A 1,000,000 40,000 40,000 B 960,000 Zero Zero C 1,000,000 80,000 Zero D 960,000 40,000 40,000

What method should RBB use to account for their investment in Torritos Tacos Emporium?