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Exam 14: Reporting and Interpreting Investments in Other Corporations

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Question 41

Multiple Choice

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Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

A) Investment income equals the proportionate share of investee dividends.
B) It is used for investments between 20 - 50% of the outstanding voting stock when the investor has the ability to exert significant influence.
C) The investment account is increased by the proportionate share of investee net income.
D) The investment account is decreased by the proportionate share of investee dividends.

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

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Question 42

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A realized gain or loss is reported on the income statement when a fair value adjustment is made.

A) True
B) False

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Question 43

Multiple Choice

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

The extent of influence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company.

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

The equity method requires the recognition of investment revenue for dividends received.

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 2014 for $148,000?

An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its cost.

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost.

McGinn Company purchased 10% of RJ Company's common stock during 2012 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2012 and a $105,000 fair value at the end of 2013. Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 2014 for $102,000?

Held-to-maturity bond investments have to be reported on the balance sheet at fair value.

Which of the following is the best description of investments in trading securities?

On July 1, 2014, Surf Company purchased long-term investments in available-for-sale securities as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share. The quoted market prices per share on December 31, 2014 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the statement of financial position at December 31, 2014 would be which of the following?

During 2014, Manning Corporation purchased 100% of the outstanding voting shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value of $6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

On January 1, 2010, Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000. The book and market values of Foliage's assets and liabilities as of Januar 1, 2010 are listed below: Calculate the amount of goodwill that should be recognized.

Which of the following statements is correct?

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments.

McGinn Company purchased 10% of RJ Company's common stock during 2012 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2012 and a $105,000 fair value at the end of 2013. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2014 for $102,000?

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

When an investment accounted for under the equity method is sold, the gain or loss reported on the statement of earnings is the difference between the selling price and its original cost.