Exam 14: Reporting and Interpreting Investments in Other Corporations

On January 1, 2014, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2014, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 2014 from the Rocker investment?

Copper Company purchased 40% of the common stock of York Corporation on January 1, 2014, for $2,000,000 as a long-term investment. The records of York Corporation showed the following on December 31, 2014: 2014 net income \ 290,000 Dividends declared and paid during December, 2014 \ 20,000 How much investment income should Copper report from the York investment during 2014?

On January 1, 2014, Calas Company acquired 40% of the outstanding voting common stock of Nick Company as a long-term investment. During 2014, Nick reported net income of $10,000 and declared and paid dividends of $4,000. During 2014, Calas Company should report equity in affiliate earnings of

Which of the following does not properly describe reasons for a retailer of pianos having 30 stores to acquire control of another retailer of pianos having 12 stores?

The equity method is required to be used when an investor has the ability to exert significant influence over the affiliate.

Investments other than held-to-maturity bond investments are reported on the balance sheet at fair value.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2014, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2014: net income \ 575,000 Dividends declared and paid during December, 2014 Market price per share \ 30,000 How much should Gilman Company report as investment income from the Burke investment during 2014?

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

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: Mini Company Balance Sheet January 1, 2014 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 115,000 Total Liabilities and Stockholders' Equity \ 390,000 On January 1, 2014, in a merger transaction, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The fair value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the fair value and book value are the same for Mini's remaining assets and liabilities, what was the amount of goodwill acquired by Maxi Company?

Passive investments other than held-to-maturity investments are reported on the balance sheet at fair value.

Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2, 2014, 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 2014, Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend. The December 31, 2014, fair value of Apprentice's stock was $84. Required: Prepare the journal entries required for Donald Corporation on January 2, 2014 and December 31, 2014.

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock, which constitutes 10% of Martin's voting stock on June 30, 2014 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2014, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 2014 net income was $52 million. What effect will the dividend have on Phillips' 2014 financial statements?

On January 1, 2014, Presto Corporation purchased, as a long-term investment, 5,000 shares of the outstanding voting common stock of Shazam Corporation at $30 per share. During 2014, the following events occurred at Shazam Corporation: Net Income reported for 2014 \2 0,000 Dividends declared and paid (per share) .50 Market price per share of common stock at December 31,2014 28.00 Required: A. Prepare the journal entry for Presto Corporation to record the investment (use an account titled "Long-term investment"). B. Assume two independent situations, Case A for 5,000 shares as 10% ownership and Case B for 5,000 shares as 40% ownership. For each situation, prepare the following entries: 1. To recognize net income for 2014. 2. To record cash dividend declared and received. 3. To record any adjustment to market price of stock at year-end.

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 correct if McGinn classifies the investment as a trading security?

Which of the following is the best description of investments in available-for-sale securities?

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

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

On July 1, 2014, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 of the 18,000 outstanding shares of the nonvoting preferred stock of Nature Company for $30 per share. The records of Nature Company reflect the following: 2014 net income \ 60,000 Dividends declared and paid during December, 2014 \ 6,500 December 31,2014 market price per share \ 27 The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2014 would be which of the following?

For all periods in which a security is held in the available-for-sale portfolio, the only income reported on the income statement is dividend revenue.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2014, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2014: 2014 net income \ 575,000 Dividends declared and paid during December, 2014 Market price per share \ 30,000 At what amount should Gilman Company report the Burke investment on the December 31, 2014 balance sheet?