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

Question 1

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.

Answer 1

False

Question 2

Under the equity method, if the fair market 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 the increase in value.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

When investments are classified as available-for-sale, market value changes are recognized in the income statement as unrealized gains or losses.

Question 7

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

Question 8

Available-for-sale securities are those that management intends to sell in the near future.

Question 9

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

Question 10

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

A) Influential securities
B) Held-to-maturity securities
C) Trading securities
D) Available-for-sale securities
E) Controlling securities

Question 11

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.

A) $7,000
B) $ 875
C) $1,500
D) $1,375

Question 12

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

A) Greater than 20% of the voting stock of the investee
B) Greater than 50% of the voting stock of the investee
C) Between 20% and 50% of the voting stock of the investee
D) Greater than 20% of the voting stock or of the market value of the investee

Question 13

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?

A) The investment increases by $7,500
B) The investment decreases by $1,225,000
C) The investment decreases by $367,500
D) The investment decreases by $385,500

Question 14

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?

A) Written off as an impairment
B) Recorded as a liability on the company's balance sheet
C) Recorded as an expense on the company's income statement
D) Using a valuation account to the investment account
E) Added to stockholders' equity of the investor

Question 15

Angle Norde holds an 18% equity investment in Tan Zone. Barnard Company holds 33% of Tan Zone's stock. On November 1, Tan Zone declares and pays dividends to its stockholders.
How will the dividend affect each company's investment account?

A)

B)

C)

D)

Question 16

In which investment classification do market value changes affect the income statement?

A) Trading
B) Available-for-sale
C) Influential
D) Both A and B

Question 17

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

A) As goodwill
B) As a separate component of stockholders' equity
C) As part of net income
D) Not recognized

Question 18

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

A) The losses of the investee
B) Dividends paid by the investee
C) Declines in the fair value of the investment
D) All of the choices would decrease the investment account

Question 19

On October 1, Gordon Company purchased $100,000 face value of 10% Strong Company bonds at 98. The brokerage commission was $50. The bonds pay interest each March 31 and September 30.
What amount should be recorded as an increase to the bond investment account on October 1?

A) $58,800
B) $60,300
C) $60,350
D) $98,050
E) None of the above

Question 20

A bond investment purchased at a discount:

A) Costs less than its face value
B) Costs more than its face value
C) Will earn less interest than if the bond had been purchased at par
D) Is a bond investment purchased between interest dates
E) None of the above

Question 21

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?

Question 22

The following is from the financial statement footnotes from Chelsea Retailers:
As of December 31, 2019, 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 December 1, 2019, the Company had recorded an unrealized gain of approximately $2.3 million in comprehensive loss on its investment in a certain private company. In fiscal 2020 the Company sold this investment in its entirety and realized a gain on the sale of $2.9 million.
Required
a. How did Chelsea classify these marketable securities? How do you know?
b. How did the unrealized gain of $2.3 million affect Chelsea's 2019 net income?

Question 23

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.

Question 24

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?

Question 25

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.

Question 26

Jake Corporation purchases an investment in Dempsey, Inc. at a purchase price of $3.5 million cash, representing 25% of the book value of Dempsey, Inc. During the year, Dempsey, Inc. reports net income of $250,000 and pays $50,000 of cash dividends. At the end of the year, the market value of Jake's investment is $3.2 million.
Required
a. What is the year-end balance of the equity investment account?
b. What amount of investment income would be reported by Jake Corporation?
c. How are dividends treated in equity method accounting?
d. What is the amount of the unrealized gain or loss to be reported for the year?

Question 27

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?

Question 28

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?

Question 29

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?