Exam 12: Reporting and Analyzing Financial Investments

Explain the standards which determine if an investor company will report its investment in an investee company using the equity method vs. consolidation. Why might the investor company prefer the equity method?

Under IFRS, trading and available-for-sale securities are accounted for similar to GAAP.

The 2016 annual report of Major Bank Corp includes the following footnote related to its available-for-sale securities: A. What amount will Major Bank report for available-for-sale equity securities on the balance sheet? Explain. B. How do unrealized gains arise on these available-for-sale equity securities? C. How do these unrealized gains affect Major Bank's 2016 income statement? D. How do these unrealized gains affect Major Bank's' 2016 balance sheet?

Under the equity method, if the fair value of the investee company increases, and the increases are deemed other-than-temporary, the book value of the investment on the investor's balance sheet is adjusted upward to reflect in the increase in value.

Why do corporations undertake intercorporate investments? How might our understanding of these reasons influence our analysis of such investments?

At what amount is a derivative contract reported?

Thomas C. Company holds a 15% equity investment in Kayak Zone. Fred W. Company holds a 30% of Kayak Zone's stock. On November 1, 2016, Kayak Zone declares and pays dividends to its stockholders. How will the dividend affect each company's investment account?

Brick Company had the following transactions and adjustment related to a stock investment. Prepare the journal entries to record these transactions.

Companies are only required to disclose quantitative information about derivatives in financial statement notes.

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

Under equity method accounting, dividends received from the investee are treated as a return on the investment rather than a return of the investment.

Which of the following would not be capitalized as an identifiable intangible asset by an investor company when an entire company is acquired?

Investor P has $160,000 in assets (including the investment account at $22,000) and $36,000 in equity. Investor P purchased (at book value) 100% of Investee G, which has $30,000 in assets and $8,000 in liabilities. What will the assets, liabilities, and equity be on the consolidated balance sheet?

One reason a company makes investments with significant influence is to gain a seat on the board of directors from which it can learn much about the investee company.

What is meant by significant influence? Describe situations in which you believe a company has significant influence over the operations of another company. How is significant influence in investments accounted for?

In addition to the ownership of a sufficient percentage of outstanding common stock, significant influence can result by virtue of legal agreements and technology licensing.

The following is from the financial statement footnotes from Perfect Container Retailers: As of December 31, 2016, the Company's marketable securities approximated the fair market values of the securities and the unrealized gains and losses on these securities were not significant. As of September 30, 2016, the Company had recorded an unrealized gain of approximately $4.6 million in other comprehensive income on its investment in a certain private company. In 2017, the Company sold this investment in its entirety and realized a gain on the sale of $5.8 million. A. How did Perfect Container classify these marketable securities? How do you know? B. How did the unrealized gain of $4.6 million affect Perfect Container's 2016 net income?

IFRS uses the term 'associate' to describe an investment involving significant influence.

See the Future Corporation reported the following in its 2016 annual report regarding acquisition of Mountain Microchips: Acquisition of Mountain Microchips, Inc. On January31, 2016 we completed our acquisition of Mountain Microchips, Inc., a provider of hardware systems, software and services, by means of a merger of one of our wholly owned subsidiaries with and into Mountain such that Mountain became a wholly owned subsidiary of See the Future. We acquired Mountain to, among other things, expand our product offerings by adding Mountain's existing hardware systems business and broadening our software and services offerings. We have included the financial results of Mountain in our consolidated financial statements from the date of acquisition. A. Of the total assets acquired, what portion is allocated to tangible assets and what portion to intangible assets? B. Are Mountain's assets (both tangible and intangible) reported on the consolidated balance sheet at the book value or at the fair market value on the date of the acquisition? Explain. C. Explain how the intangible assets are valued at the time of the acquisition. D. How are the tangible and intangible assets accounted for subsequent to the acquisition?

If Pamela & Lee, Inc. paid $8,000 at book value for its 25% stake in Parkersburg Company, and in the next year total shareholders' equity for Parkersburg Company increases by 75%. What will Pamela & Lee's interest of Parkersburg's equity be?