Exam 17: Understanding Corporate Annual Reports: Basic Financial Statements

Elizabeth Company purchased stock in Taylor Company for $500,000. In the current year, Taylor Company had a net income of $48,000 and paid a dividend of $32,000. At the end of the year, the market value of Taylor Company is $525,000. Required: 1. Assume that Elizabeth Company owns 10% of the shares of Taylor Company. Show the effects of these transactions on the accounts of Elizabeth Company using the balance sheet equation. 2. Assume that Elizabeth Company owns 25% of the shares of Taylor Company. Show the effect of these transactions on the accounts of Elizabeth Company using the balance sheet equation.

Investments that the investor company has no intention of selling in the near future

When a parent company owns less than 50% of a subsidiary company, the companies must prepare consolidated financial statements.

The historical cost/constant dollars method adjusts historical costs using:

Hamandeggs Company owns a 60% interest in Hormel Company. The consolidated balance sheet of Hamandeggs Company, prepared at the beginning of the year, showed a minority interest of $30. The net income of Hamandeggs Company and Hormel Company were $80 and $10, respectively. The ending balance in the Minority Interest account is:

The concept that income emerges only after setting aside an amount that allows physical operating capability to be maintained

Financial statements expressed in component percentages

Jeff Company purchased, as a long- term investment, common stock of Garcia Company. During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company. Garcia Company's dividend will affect Jeff Company by:

Common- size statements are particularly useful because:

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: Hall Company Balance Monty Company Balance Sheet Sheet January 1,20X6 J anuary 1, 20X6 Cash \ 100 Cash \ 400 Net fixed assets Net fixed assets 380 Total assets \5 00 Total assets \7 80 Accounts payable Long- \ 20 Accounts payable \ 120 termbonds Long-termbonds payable 220 payable 280 Stockholders' equity 260 Stockholders' equity 380 Total liabilities and Total liabilities and stockholders' equity \ 500 stockholders' equity \ 780 On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. Which of the following statements regarding the consolidated balance sheet immediately after the acquisition is not correct?

Nominal dollars are defined as:

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. What accounts would be affected on Rock Company's books at the time Hudson Company reported its earnings and by how much?

Which of the following statements regarding goodwill is false?

If the fair market value of the subsidiary's assets are greater than the book value of those assets on the date that the subsidiary is acquired, the assets of the subsidiary are written up to their fair market value.

Entries made to avoid double counting the interest in a subsidiary company and the underlying assets and liabilities of the subsidiary

Suppose Rock Company acquires 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. What accounts would be affected on Rock Company's books to reflect the year- end market value and by how much?

The cost to replace an asset

Net income / average stockholders' equity

A market in which market prices fully reflect all information available to the public

Below is the balance sheet for Triple H Company: Triple H Company Balance Sheet December 31, 20X6 20X5 Current as sets: Cash \ 380 \ 242 Accounts receivable 430 194 Inventory 238 388 Prep aid insurance Total current assets \ 1,080 \ 900 Long-term assets: Fixed as sets \ 406 \ 452 Less: Accumul ated depreciation Total long-term ass ets \ 134 \ 224 Total assets \ 1,214 \ 1,124 Current liabilities: Accounts payable \ 176 \ 152 W ages payable 38 32 Total current liabilities \ 214 \ 184 Long-term liabilities: Notes payable 420 420 Total liabilities \ 634 \ 604 Owners' equity: Common stock \ 190 \ 160 Retained inc ome Total owners' equity \ 580 \ 520 Total liabilities and owners' \ 1,214 \ 1,124 equity If a common- size balance sheet were prepared, would be attributable to the 20X6 cash of Triple H Company.