Exam 14: Reporting and Interpreting Investments in Other Corporations

When is the equity method not used to account for a long-term investment in common stock?

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2014. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?

Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million, in exchange for 2 million shares at a $10 market price, on March 31, 2014. On December 12, 2014, Nutribar declared and paid a $1 million cash dividend and reported net income for the year ended 2014 of $10 million. On December 31, 2014, Nutribar's stock was trading at $11.50 per share. Required: A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 2014. B. Record the cash dividend received by Kudos on December 12, 2014. C. Record any end of year entries needed on Kudos' books.

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

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

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 2014, 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, 2014. At what amount is the Candle investment reported on the December 31, 2014 balance sheet?

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.

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 correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 2016 for $148,000?

Held-to-maturity bond investments must be reported on the balance sheet at fair value.

On the date that one company acquires 100% of the voting stock of another company, the book value of the acquired assets and liabilities will be consolidated with book values of the assets and liabilities of the acquiring company.

McGinn Company purchased 10% of RJ Company's common stock during 2014 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2014 and a $105,000 fair value at the end of 2015. Which of the following statements is incorrect if McGinn classifies the investment as an available-for-sale security?

On January 1, 2014, 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?

The equity method requires the recognition of investment revenue for dividends received.

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 correct if Rye classifies the investment as a trading security?

Ocean Corporation owns 30% of Woods Corp. for which it paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid stockholders a $100,000 dividend, and the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

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. At what amount will the Click-It investment be reported on Photo Finish's December 31, 2015 balance sheet?

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

On January 31, 2014, McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31. All of the Bailey Corporation stock was sold for $13,500 on January 12, 2016. Required: Prepare the required journal entries at the following dates: January 31, 2014, December 31, 2014, December 31, 2015 and January 12, 2016.

On January 1, 2014, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's book value of assets minus liabilities on the date of acquisition was $550,000. The current fair value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill acquired by Sheldon Company?

During 2014, the following items were reported on ShoeCo's statement of cash flows in millions of dollars. Required: For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on the statement of cash flows. The operating activities section is prepared using the indirect method. (Enter "+" if added or "-" if subtracted. You do not need to enter dollar amounts). Investments in unconsolidated affiliates, purchases \ 64 Dividends received from equity affiliates 10 Equity in affiliate earnings 38 Available-for-sale securities, sales proceeds 27 Loss on sale of available-for-sale securities (6) Unrealized gain on trading securities 15