Exam 12: Reporting and Analyzing Financial Investments

On January 1, Snowbird acquired common stock of A-Basin Company. At the time of acquisition, the book value and the fair value of A-Basin's net assets were $200 million. During the current year, A-Basin earned $80 million and declared dividends of $10 million. Indicate the amount shown for Investment in A-Basin on Snowbird's balance sheet on December 31 and the amount of income Snowbird would report for the year related to its investment under the assumption that Snowbird did the following: A. Paid $60 million for a 20-percent interest in A-Basin and classifies the investment as held-to-maturity. The fair value of A-Basin on December 31 was $240 million. B. Paid $80 million for a 35-percent interest in A-Basin and uses the equity method.

Under the equity method, the investment account is adjusted to the fair value of the stock at the end of the period.

Newman Corporation purchases an investment in Paul, Inc. at a purchase price of $6 million cash, representing 25% of the book value of Paul, Inc. During the year, Paul, Inc. reports net income of $700,000 and pays $120,000 of cash dividends. At the end of the year, the fair value of Newman's investment is $6.4 million. A. What is the year-end balance of the equity investment account? B. What amount of equity earnings would be reported by Newman Corporation? C. How are dividends treated in equity method accounting? What amount in dividends is reported? D. What is the amount of the unrealized gain or loss to be reported for the year?

Shareholders' equity of the investee company will be same using either equity method accounting or the consolidation accounting method for an investment

Lion Company purchases an investment in Africa Preserve Company at the purchase price of $6 million cash. This represents 25% of the book value of Africa Preserve. During the year, Africa Preserve reports net income of $1,200,000 and pays cash dividends of $100,000. At the end of the year, the fair value of Lion's investment is $6.4 million. A. At what amount is the investment reported on Lion's balance sheet at year-end? B. What amount of income from investments does Lion report? Explain. C. Prepare journal entries to record the transactions for Lion Company.

If Eve Company buys 26% of Adam Company's stock, and pays $4,000 more than current fair value for these shares, what percentage of Adam Company's shareholder equity belongs to Eve Company?

Team Tennis owns 40% of Best Racquets, Inc. and accounts for the investment using the equity method. During the year, Best Racquets reports a net loss of $2,400,000 and pays total dividends of $50,000. Which of the following describes the change in Team Tennis' investment in Best Racquets during the year?

When equity method accounting is used for an investment, which component of ROE will always be understated?

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

Which of the following statements is not true for fair value method accounting?

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

On December 31, 2015, East Company acquired 45% of Yellow Company's common stock for $3.0 million. In 2016, the fair value of East's investment in Yellow Company increased to $3.7 million. On December 31, 2016, Yellow declared net income of $800,000. It also paid its stockholders a dividend of 20% of its 2016 income. 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 2016? C. What will be the ending balance of East's Investment account on December 31, 2016?

Goodwill is not amortized, but is tested at least annually and written down to current fair value if found to be impaired, and written up to fair value if the fair value increases.

Raymundo Corp. owns 100% of Indiana Group, Inc.'s stock. Raymundo Corp. prepares consolidated financial statements. Data from the annual reports of the two companies are: A. How much of the $3,000,000 consolidated sales reported by Raymundo Corp. is from operations of Indiana Group? B. How much of the $800,000 consolidated net income reported by Raymundo Corp. is from operations of Indiana Group?

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.

Available-for-sale securities are those that management intends to actively trade for profits as market prices fluctuate.