Exam 12: Reporting and Interpreting Investments in Other Corporations

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.

On July 1,2010,as a long-term investment in available-for-sale securities,Wildlife Supply Company purchased 6,000 shares of the preferred stock (nonvoting)of Nature Company for $30 per share (18,000 shares outstanding).The records of Nature Company reflect the following: 2010 net income \ 600,000 Dividends declared and paid during December, 2010 \ 6,500 December 31,2010 market price per share \ 27 The amount reported on the balance sheet by Wildlife Company for its investment at December 31,2010 would be which of the following?

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 1,2010.At the end of 2010,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 2010 was $23 per share.Calculate the net balance in Martha's investment account at the end of 2010.

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.

Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock which constitutes 10% of Creole's voting stock on June 30,2010 for $42 per share.Orleans' intent is to keep these shares beyond the current year.On December 20,2010,Creole paid a $4,000,000 cash dividend.On December 31,2010,Creole's stock was trading at $45 per share and their reported 2010 net income was $52 million. A.Record the transaction to record the acquisition of Creole Corporation on June 30, 2010. B.Record the transaction for the dividend received by Orleans on December 20, 2010. C.Record any year-end entries needed by Orleans Corporation.

JDR Company purchased 40% of the common stock of YRK Corporation on January 1,2010,for $2,000,000 as a long-term investment.The records of YRK Corporation showed the following on December 31,2010: 2010 net income \ 290,000 Dividends declared and paid during December, 2010 \ 20,000 How much investment income should JDR report from the YRK investment during 2010?

Which of the following statements is correct?

Miller Corp.purchased $1,000,000 of bonds at 105.The bonds pay interest at the rate of 10%.Miller intends to hold these bonds to maturity.Which of the following statements is false?

Paxton Corporation acquired all of the outstanding voting stock of Stanley Company.How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition?

Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2,2010,for $80 per share.At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock (par $50).During 2010,Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend.The December 31,2010,market value of Apprentice's stock was $84.Prepare the journal entries required for Donald Corporation on January 2,2010 and December 31,2010.

On January 1,2010,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 2010,Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends.At the end of 2010,the shares had a market value of $150,000.At what amount should the Arnold investment be reported at on the December 31,2010 balance sheet?

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

JDR Company purchased 40% of the common stock of YRK Corporation on January 1,2010,for $2,000,000 as a long-term investment.The records of YRK Corporation showed the following on December 31,2010: 2010 net income \ 290,000 Dividends declared and paid during December, 2010 \ 20,000 At what amount should JDR report the YRK investment on the December 31,2010 balance sheet?

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

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

If a bond is bought at a premium,the amortized book value of the bond investment will decrease as the bond matures.

Subsequent to a merger,any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated income statement.

Use of the equity method is required for investments between 20 and 50% of a company's common stock regardless of the investor's ability to influence the investee.

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.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1,2010,at $40 per share as a long-term investment.The records of Burke Corporation showed the following on December 31,2010: 2010 net income \ 575,000 Dividends declared and paid during December, 2010 \ 30,000 Market price per share \ 42 How much should Gilman Company report as investment income from the Burke investment during 2010?