Exam 14: Appendix B: Accounting for Investments and Consolidated Financial Statements

A recent annual report of Fargo Company includes the following footnote related to its trading securities: Required a. What amount will Fargo report for trading equity securities on the balance sheet? Explain. b. What do the unrealized gains and losses represent on these trading securities? c. How do these unrealized gains and losses affect Fargo's income statement?

If company A accounts for its investment in company B using the equity method, then all of company B's earnings are reported on company A's income statement.

Under equity method accounting, dividends paid by the investee company are reported as investment income by the investor company.

A bond investment purchased at a discount:

Crane Company purchases an investment in Windall Company at the purchase price of $3.3 million cash. This represents 25% of the book value of Windall. During the year, Windall reports net income of $300,000 and pays cash dividends of $50,000. At the end of the year, the market value of Crane's investment is $3.2 million. Required a. At what amount is the investment reported on Crane's balance sheet at year-end? b. What amount of income from investments does Crane report? Explain. c. How are dividends treated in equity method accounting?

Golden Company purchases equity securities in Leash Products, Inc. at a purchase price of $500,000, representing 15% of the book value of Leash Products. During the year, Leash Products reports a net income of $150,000 and pays cash dividends of $40,000. The market value of Golden's investment at the end of the year is $600,000. Required a. At what amount is the investment account reported at the end of the year if the securities are classified as trading securities? b. How would market value changes be treated if the marketable securities are classified as available-for-sale investments? c. How would market value changes be treated if the marketable securities are classified as trading investments? d. How are dividends and gains/losses on security sales treated for trading securities and for available-for-sale securities?

In which of the following investment classifications are unrealized gains in marketable securities reflected in the income statement of the investor company?

Following is a portion of the investments footnote from Urban Company's 2019 annual report. Required a. At what amount does Urban report its available-for-sale securities on its balance sheets for 2019 and 2018? b. How does Urban's account for its trading securities? How does the accounting differ from their accounting method for available-for-sale? c. What are the net unrealized gains (losses) for 2019 and 2018? How did these unrealized gains (losses) affect the company's reported income in 2019 and 2018? d. What is the difference between realized and unrealized gains and losses? Are realized gains and losses treated differently in the income statement than unrealized gains and losses for the available-for-sale securities?

A corporation that controls another corporation through ownership of a company's voting stock is knows as a holding company.

If Jensen, Inc. paid $4,000 at book value for its 25% stake in Storm Company, and in the next year total shareholders' equity for Storm Company increases by 75%, what will Jensen's interest of Storm's equity be? Jensen uses the equity method to account for its investment in Storm Company.

Under the equity method, how are unrealized gains (losses) reported?

Jarden Tech owns 30% of Stark Inc. and accounts for the investment using the equity method. During the year, Stark reports a net loss of $1,250,000 and pays total dividends of $35,000. Which of the following describes the change in Jarden's investment in Stark during the year?

If investee shares are classified as "available-for-sale" by the investor company, then no significant influence is assumed.

When the market value of a company's portfolio of available-for-sale equity securities is lower than its book value, how should the difference be handled?

At what level of investment ownership is significant influence often presumed?

Under the equity method, which of the following does not cause a decrease in the investment account?

Unrealized gains and losses on investments classified as trading securities are reported as a component of a company's net income.

On January 1, Barn Corporation acquired common stock of Yard Corporation. At the time of acquisition, the book value and the fair market value of Yard Corporation's net assets were $675 million. During the year, Yard Corporation earned $160 million and declared dividends of $40 million. The market value of shares increased by 10 percent during the year. How much income would Barn Corporation report on the income statement for the year related to its investment under the assumption that it: a. Paid $75 million for 15 percent of the common stock and the securities are classified as available-for-sale securities. b. Paid $150 million for 30 percent of the common stock and the securities are classified as influential securities.

On January 1, 2019, East Company acquired 45% of Yellow Company's common stock for $3 million. During 2019, the market value of East's investment in Yellow Company increased to $3.25 million. On December 31, 2019, Yellow declared net income of $300,000. It also paid its stockholders a dividend of 20% of its 2019 income. Required a. How would you classify East Company's investment in Yellow Company? Explain. b. What will East report on its income statement for the investment in Yellow for 2019? c. What will be the ending balance of East's Investment account on December 31, 2019?

On January 1, Jackson acquired common stock of Williams Company. At the time of acquisition, the book value and the market value of Williams' net assets were $100 million. During the current year, Williams earned $30 million and declared dividends of $3 million. Indicate the amount shown for Investment in Williams on Jackson's balance sheet on December 31 and the amount of income Jackson would report for the year related to its investment under the assumption that Jackson did the following: a. Paid $10 million for a 10-percent interest in Williams and classifies the investment as a trading security. The market value of Williams on December 31 was $120 million b. Paid $40 million for a 35-percent interest in Williams and classifies the investment as an influential equity security.