Exam 16: Intercorporate Equity Investments

Which of the following properly describes a difference between the accounting for a trading security relative to the accounting for an available-for-sale security for a particular investment?

Mercedes Company paid $20,000,000 to purchase 100% of the outstanding common stock of Benz Incorporated on January 1,2015.The book value of Benz's net assets on the date of acquisition was $17,000,000.Benz's buildings were undervalued by $1,500,000 as of January 1,2015;the buildings had a ten-year remaining life as of the date of acquisition.All other assets and liabilities of Benz are being reported at market value.Mercedes retained earnings as of January 1,2015 was $5,750,000,while Benz reported retained earnings of $3,175,000.Mercedes net income was $1,750,000 during 2015 and was $2,035,000 during 2016;the 2015 and 2016 net income amounts did not include any amounts pertaining to the Benz investment.Benz's retained earnings increased $1,050,000 from January 1,2015 to December 31,2016 even though Benz declared $225,000 of dividends during that two-year period. Required: Determine the December 31,2016 consolidated retained earnings balance.

If a company elects to use the fair value method for available-for-sale debt investments,the interest income pattern in the income statement is identical to the interest income pattern under the held-to-maturity classification.

When consolidating foreign subsidiaries,the foreign subsidiary's financial numbers must be translated into the parents' currency unit.Under U.S.GAAP if the foreign subsidiary is a self-contained unit the

Intra-entity receivables and payables for an 80%-owned subsidiary are eliminated to the extent of ownership (i.e.,80% of balance is eliminated).

On January 1, 2015, Como Company purchased 45% of the outstanding common shares of the Lite Company for $200,000. The net assets of Lite Company totaled $400,000. The inventory had a book value of $100,000 and a fair value of $120,000. Excess cost attributable to inventory is written off in 2015. During 2015, Lite Company earned $200,000 and declared a dividend of $40,000 for the year. -The excess amount paid for Lite Company attributable to inventory is

GAAP presumes that ownership of less than 20% of another company's voting shares constitutes a passive investment.

Unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income.

Consolidated financial statements must always be prepared when a corporation acquires more than 50% of the voting stock of another corporation.

Investments in held-to-maturity debt investments must be accounted for using amortized cost.

The unrealized holding gain or loss on trading securities is recorded on

Ralmond Industries owns an investment that experienced a decline during 2015 that has been judged to be "other than temporary." The investment is held in Ralmond's available-for-sale debt portfolio,and Ralmond does not expect to sell the security and it is unlikely that Ralmond will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.It was purchased in March 2014 at a cost of $460,000.At the end of 2014,the fair value of the investment was $520,000 and its amortized cost basis was $454,000.At the end of 2015,the fair value of the investment is $410,000 and its amortized cost is $448,000.At the end of 2015,the present value of expected cash flows associated with the security discounted at the effective interest rate implicit when it was originally acquired is $432,000.What amount of loss will Ralmond Industries report on its income statement for the year ending December 31,2015 related to this investment?

The Kruk Company regularly sells merchandise to German customers.On December 1,2015,Kruk sold merchandise to a German customer at a price of three million Euros;the customer is required to pay for the goods on February 1,2016.The spot rate was $.875 per euro on December 1,2015,it was $.8875 per euro on December 31,2015,and it was $.865 per euro on February 1,2016. Required: Prepare the journal entries that might be necessary on December 1,2015,December 31,2015,and on February 1,2016.

On January 1,2015,the Knight Corporation purchased 80% of the Red Company's voting stock for $1,500,000.Red's net assets had a book value of $1,350,000;the fair value of Red's land was $325,000 greater than its book value.The book value of Knight's assets immediately after the acquisition of Red totaled $6,850,000 while Red's assets had a book value of $1,350,000.Assuming that Knight used the acquisition method to prepare its consolidated balance sheet,how much goodwill was reported on the January 1,2015 consolidated balance sheet?

The difference between the amortized cost basis of a debt security and the present value of expected cash flows for that security discounted at the effective interest rate implicit in the debt instrument when it was originally acquired is called the

When using purchase accounting to account for a business combination,the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values at the date of purchase regardless of whether there is a noncontrolling interest.

The acquired goodwill is $30,000 when the investor pays $100,000 to acquire 40% of a company's outstanding voting shares at a time when the fair value of the company's net assets was $175,000.

On November 1,2014,a U.S.company sold merchandise to a foreign company for 375,000 francs.The payment in francs is due on January 31,2015.The spot rate was as follows: $.20 per franc on November 1,2014;$.21 per franc on December 31,2014;and $.19 per franc on January 31,2015 when the payment was received.Which of the following incorrectly describes the accounting for this foreign currency transaction?

The Shasta Corporation began operations in 2014.Shasta's investment portfolio reported the following on December 31,2014: Available-for sale Trading Cost \ 250,000 \ 200,000 Fair value \ 210,000 \ 185,000 Which of the following is correct with respect to the accounting for Shasta's investment portfolio?

On January 1, 2015, the Husky Corporation purchased 90% of the Spartan Company's voting stock for $2,700,000. Spartan's net assets had a book value of $2,450,000; the fair value of Spartan's building was $325,000 greater than its book value. The book value of Husky's net assets immediately after the acquisition of Spartan totaled $6,850,000. Husky used the acquisition method to prepare its consolidated balance sheet. -What is the amount of goodwill to be reported on the January 1,2015 consolidated balance sheet?