Exam 12: Reporting and Interpreting Investments in Other Corporations

On July 1,2010,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 31,2010 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 balance sheet at December 31,2010 would be which of the following?

On January 31,2010,McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities.None of these holdings amounted to more than 5% of the respective company's outstanding voting shares.The accounting period ends December 31. Orange Corporation \ 15,000 \ 12,000 \ 14,000 Bailey Corporation \ 13,000 \ 12,000 \ 13,000 All of the Bailey Corporation stock was sold for $13,500 on January 12,2012.Prepare the required journal entries at the following dates: January 31,2010,December 31,2010,December 31,2011 and January 12,2012.

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

On January 1,2010,Red Company purchased Patriot Shop for $400,000 cash.Red Company received the assets listed below and assumed accounts payable (owed by Patriot)amounting to $30,000. Book Value per Appraised Patriot's Books Market Value Inventory \ 300,000 \ 280,000 Furniture and fixtures 60,000 73,000 Other assets 10,000 32,000 What amount of Goodwill will be recorded in the transaction?

Any unrealized gains or losses on trading securities would have to be added back to or deducted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

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.

McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000.The 10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of 2011.Which of the following statements is correct if McGinn classifies the investment as a trading security?

A decline in the fair value of the available-for-sale portfolio reduces assets and net income.

McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000.The 10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of 2011.Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2012 for $102,000?

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,accounted for using the equity method.During 2010,Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.The carrying value of the Candle investment was $500,000 on January 1,2010.How much income should Heartfelt report during 2010 from the Candle investment?

Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000.The 15% investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of 2011.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 2012 for $148,000?

On January 1,2010,Presto Corporation purchased,as a long-term investment,5,000 shares of the outstanding common stock of Shazam Corporation at $30 per share.During 2010,the following events occurred at Shazam Corporation: Net Income reported for 2010 \2 0,000 Dividends declared and paid (per share) .50 Market price per share of common stock at December 31, 2010 28.00 Requirements: A.Prepare the journal entry for Presto Corporation to record the investment. B.Assume two independent situations,Case A - 10% ownership and Case B - 40% ownership.For each situation,prepare the following entries: 1.To recognize net income for 2010. 2.To record cash dividend declared and received. 3.To record market price of stock at year-end.

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

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

When is the equity method used to account for long-term investments in stocks?

Which of the following is the best description of investments in available-for-sale securities?

When is the equity method not used to account for long-term investments in stocks?

On July 1,2010,Carter Company purchased trading securities as follows: Dark Corporation common stock (par $1)10,000 shares at $25 per share. Janvrin Corporation preferred stock (par $100)2,000 shares at $105 per share. The quoted market prices per share on December 31,2010 were as follows: Dark Corporation stock,$27 per share Janvrin Corporation stock,$104 per share Each of the investments represented 5% of the total shares outstanding.The carrying value amount of the investments at December 31,2010 should be

Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15,2010.On December 31,2010,the current market value of the securities was $481,000.How should the investment be reported within the 2010 financial statements?