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Exam 14: PPA: Reporting and Interpreting Investments in Other Corporations

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Question 1

Multiple Choice

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On January 1, 2016, Calas Company acquired 40% of the outstanding voting common stock of Nick Company as a long-term investment. During 2016, Nick reported net income of $10,000 and declared and paid dividends of $4,000. During 2016, Calas Company should report equity in affiliate earnings of:

A) $5,600.
B) $4,000.
C) $2,400.
D) $10,000.

E) A) and D)
F) All of the above

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B

Question 2

Multiple Choice

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McGinn Company purchased 10% of RJ Company's common stock during 2016 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2016 and a $105,000 fair value at the end of 2017. Which of the following statements is incorrect if McGinn classifies the investment as an available-for-sale security?

A) The 2016 unrealized loss is $10,000, but is not included in McGinn's 2016 net income.
B) The 2017 unrealized gain is $15,000, but is not included in McGinn's 2017 net income.
C) The 2017 unrealized gain is $10,000 and is included in McGinn's 2017 net income.
D) The 2016 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity.

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

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Question 3

Multiple Choice

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McGinn Company purchased 10% of RJ Company's common stock during 2016 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2016 and a $105,000 fair value at the end of 2017. 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 2018 for $102,000?

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

During 2016, the following items were reported on ShoeCo's statement of cash flows in millions of dollars. Required: 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.

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

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?

On January 1, 2016, Heitzman Company purchased the following shares of stock as a long-term investment in available-for-sale securities: The fair value of the stocks subsequently were as follows: Required: Calculate the "Net unrealized gains/losses," at both December 31, 2016 and December 31, 2017.

When accounting for investments in trading securities, any decline in fair value below the cost of the investments is reported in which of the following ways?

On January 1, 2016, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's book value of assets minus liabilities on the date of acquisition was $550,000. The current fair value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill acquired by Sheldon Company?

Ocean Corporation owns 30% of Woods Corp. for which it paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid stockholders a $100,000 dividend. Therefore, the Investment in Woods Corp. account will decrease by Ocean's $30,000 proportionate share of the Woods. Corp. dividend.

Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or acquisition.

Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million.

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2016. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?

How is goodwill accounted for subsequent to acquisition?

Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2017. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2017, Click-It paid a $1 million cash dividend declared earlier in 2017, and reported net income for the year ended 2017 of $10 million. On December 31, 2017, Click-It's stock was trading at $11.50 per share. At what amount will the Click-It investment be reported on Photo Finish's December 31, 2017 balance sheet?

Investments in bonds intended to be sold before they reach maturity should be reported under the fair value method.

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

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

Which of the following does not properly describe reasons for a retailer of pianos having 30 stores to acquire control of another retailer of pianos having 12 stores?