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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 1

Multiple Choice

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Idaho Company purchased,as a long-term investment,30% of the outstanding bonds of Potato Corporation.Which of the following classifications should be used by Idaho Company in accounting for the investment?

A) Trading securities.
B) Held-to-maturity.
C) Available-for-sale.
D) Consolidation.

E) None of the above
F) A) and B)

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C

Question 2

Multiple Choice

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Trent Corp.purchased $1,000,000 of bonds at 96 when the market yield was 8%.The bonds pay interest at the rate of 6%.Trent intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is correct?

A) Since the bonds were purchased at a discount,the cash interest will be more than interest revenue.
B) Since the bonds were purchased at a discount,the book value of the bond investment will increase toward its maturity value.
C) The bond investment will be classified as available-for-sale.
D) The company will recognize unrealized gains or losses on the bonds at each balance sheet date when the bonds are adjusted to fair value.

E) A) and B)
F) C) and D)

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Question 3

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

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1,2019,at $40 per share as a long-term investment.The records of Burke Corporation showed the following on December 31,2019: - How much should Gilman Company report as investment income from the Burke investment during 2019?

Which of the following statements is correct?

On January 31,2018,McBurger Corporation purchased the following shares of voting common stock as long-term investments.None of these holdings amounted to more than 5% of the respective company's outstanding voting shares.The accounting period ends December 31. All of the Bailey Corporation stock was sold for $13,500 on January 12,2020. Prepare the required journal entries at the following dates: January 31,2018,December 31,2018,December 31,2019 and January 12,2020.

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

Yoga Co.purchased 15% of Glow Company's outstanding bonds during 2019 for $255,000.The bonds had a $272,000 fair value at the end of 2019 and a $238,000 fair value at the end of 2020.If the bonds are accounted for as trading securities,which of the following statements is correct?

All investments other than held-to-maturity bond investments are reported on the balance sheet at their fair value as of the balance sheet date.

On March 31,2019,Kudos Corporation paid $20,000,000 for 2,000,000,$1 par value,shares of the voting stock of Nutribar Corporation.This investment represented 40% of Nutribar's outstanding shares.On December 12,2019,Nutribar declared and paid a $1,000,000 cash dividend and reported net income for the year ended 2019 of $10,000,000.On December 31,2019,Nutribar's stock was trading at $11.50 per share. A.Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31,2019. B.Record the cash dividend received by Kudos on December 12,2019. C.Record any end of year entries needed on Kudos' books.

Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2,2019,for $80 per share.At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock with a par value of $50 per share.During 2019,Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend.The December 31,2019,fair value of Apprentice's stock was $84. Prepare the journal entries required for Donald Corporation on January 2,2019 and December 31,2019.

Libby Company purchased debt securities for $100,000 and classified them as available-for-sale securities on September 15,2019.At December 31,2019,the current fair value of the debt securities was $105,000.How should the investment be reported in the 2019 financial statements?

Passive debt investments other than held-to-maturity investments are reported on the balance sheet at fair value.

During 2019,the following items were reported on ShoeCo's statement of cash flows in millions of dollars. For each item,identify the type of activity it is (operating,investing,financing)and the effect it would have on the statement of cash flows.The operating activities section is prepared using the indirect method.Enter "+" if the item is added or "-" if the item is subtracted.Do not enter dollar amounts.

For all periods in which a debt security is held in the available-for-sale securities portfolio,the only income reported on the income statement is interest revenue

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock,which constitutes 10% of Martin's voting stock on June 30,2019 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2019,Martin paid a $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and Martin reported 2019 net income of $52 million. - What effect will the dividend have on Phillips' 2019 financial statements?

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

Which of the following is true about a passive investment in common stock?

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

On January 1,2019,Alden Company acquired 15,000 shares (4%)of the nonvoting preferred stock of Maxim Corporation as a long-term investment for $225,000.Maxim reported a 2019 net income of $35,000.On January 2,2020,Maxim declared and paid a $10,000 cash dividend on the preferred stock.The fair value of the Maxim stock held by Alden on December 31,2019,was $224,000.Alden Company has recorded only the following journal entries: January 1,2019: December 31,2019 (end of the accounting period): No entry January 2,2020: Based on the above information,answer the following questions: