Exam 14: Reporting and Interpreting Investments in Other Corporations

On January 1, 2014, as a long-term investment in available-for-sale securities, John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne reported 2014 net income of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 2014 was $10 per share. Calculate the carrying value of John's investment at the end of 2014.

An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its fair value reported in the prior period.

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. How much investment income should Heartfelt report during 2014 from the Candle investment?

Which of the following statements is false with regard to investments and the cash flow statement?

Significant influence over the operating and financial policies of another company would not be indicated by:

As a long-term investment, Martha Company purchased 5,000 of the 12,500 outstanding voting shares of Stewart Corporation at $20 per share on January 1, 2014. At the end of 2014, Stewart reported net income of $100,000 and declared and paid dividends of $10,000. The market price of the Stewart stock at the end of 2014 was $23 per share. Calculate the net balance in Martha's investment account at the end of 2014.

Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or acquisition.

Required: A. Discuss the criteria for applying the equity method of accounting for long-term investments. B. Discuss the rationale for the equity method procedures of accounting for long-term investments.

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: 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 is the net increase in Maxi's assets only, after paying the cash for Mini?

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

On December 31, 2014, Jean World Corporation recorded the following journal entry relating to its investment in 9,000 shares of common stock of Soda Corporation. 12/31/2014: $\quad$ Long-term investment in common stock $\quad 54,000$ $\quad$$\quad$$\quad$$\quad$$\quad$ Equity in affiliate earnings $\quad 54,000$ At the end of 2014, Soda Corporation reported net income of $120,000. Earlier in the year, Soda declared and paid dividends of $18,000. Required: A. What method is being used to account for this investment? B. What is the total number of shares outstanding of Soda's common stock?

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