Exam 2: Stock Investments - Investor Accounting and Reporting

On January 2,2013,Slurg Corporation paid $600,000 to acquire 20% interest in Padwaddy Inc.At that time,the book value of Padwaddy's stockholders' equity included $700,000 of common stock and $1,800,000 of retained earnings.All the excess purchase cost over the book value acquired was attributable to a patent with an estimated life of 10 years.Padwaddy paid $6,250 of dividends each quarter for the next two years,and reported net income of $180,000 for 2013 and $220,000 for 2014.Slurg recorded all activities related to their investment using the equity method. Required: 1.Calculate Slurg's income from Padwaddy for 2013. 2.Calculate Slurg's income from Padwaddy for 2014. 3.Determine the balance of Slurg's Investment in Padwaddy account on December 31,2014.

Pancake Corporation saw the potential for vertical integration and purchases a 15% interest in Syrup Corp.on January 1,2013,for $150,000.At that date,Syrup's stockholders' equity included $200,000 of $10 par value common stock,$300,000 of additional paid in capital,and $500,000 retained earnings.The companies began to work together and realized improved sales by both parties.On December 31,2014,Pancake paid $250,000 for an additional 20% interest in Syrup Corp.Both of Pancake's investments were made when Syrup's book values equaled their fair values.Syrup's net income and dividends for 2013 and 2014 were as follows: Required: 1.Prepare journal entries for Pancake Corporation to account for its investment in Syrup Corporation for 2013 and 2014. 2.Calculate the balance of Pancake's investment in Syrup at December 31,2014.

Plum Corporation paid $700,000 for a 40% interest in Satin Company on January 1,2013 when Plum's stockholders' equity was as follows: On this date,the book values of Plum's assets and liabilities equaled their fair values and there were no dividends in arrears. Required: Calculate the amount recorded in the Investment in Satin Company and the amount of implied Goodwill in this transaction.

Stilt Corporation purchased a 40% interest in the common stock of Shallow Company for $2,660,000 on January 1,2013,when the book value of Shallow's net equity was $6,000,000.Shallow's book values equaled their fair values except for the following items: Required: Prepare a schedule to allocate any excess purchase cost to identifiable assets and goodwill.

Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1,2013 for $300,000.This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31,2015 was $440,000.The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year.In 2016,Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May.If Jabiru sold one-half of its investment in Fish on August 1,2016 for $500,000,how much gain was recognized on this transaction?

Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1,2013,but was not able to exercise significant influence over Lilypad.During 2014,Jacana reported income of $120,000,excluding its income from Lilypad,and paid dividends of $50,000.Lilypad reported net income of $40,000 during 2014 and paid dividends of $20,000.Jacana should report net income for 2014 in the amount of

Wader's Corporation paid $120,000 for a 25% interest in Shell Company on July 1,2014.No information is available on the fair value of Shell's assets and liabilities.Assume the equity method.Shell's trial balances at July 1,2014 and December 31,2014 were as follows: Credits Required: 1.What is Wader's investment income from Shell for the year ending December 31,2014? 2.Calculate Wader's investment in Shell at year end December 31,2014.

The income from an equity method investee is reported on one line of the investor company's income statement except when

Pyming Corporation accounts for its 40% investment in Sillabog Company using the equity method.On the date of the original investment,fair values were equal to the book values except for a patent,which cost Pyming an additional $40,000.The patent had an estimated life of 10 years.Sillabog has a steady net income of $20,000 per year and consistently pays out 40% of its net income as dividends to its shareholders.Which one of the following statements is correct?

For 2013 and 2014,Sabil Corporation earned net income of $480,000 and $640,000 and paid dividends of $18,000 and $20,000,respectively.At January 1,2013,Sabil had $200,000 of $10 par value common stock outstanding and $1,500,000 of retained earnings. On January 1 of each of these years,Phyit Corporation bought 10% of the outstanding common stock of Sabil paying $200,000 per 10% block on January 1,2013 and 2014.All payments made by Phyit in excess of book value were attributable to equipment,which is depreciated over ten years on a straight-line basis. Required: 1.If Phyit uses the cost method of accounting for its investment in Sabil,how much dividend income will Phyit recognize in 2013 and 2014,and what will be the balance in the investment account at the end of each year? 2.If Phyit has significant influence and can justify using the equity method of accounting,how much net investee income will Phyit recognize for 2013 and 2014?

On January 1,2013,Platt Corporation purchased a 30% interest in Sandig Company for $450,000.On this date,the fair values of Sandig's assets and liabilities are assumed to be the same as their book values.Platt will account for Sandig using the equity method.Sandig's adjusted trial balance at the date of acquisition and year end were as follows: Required: 1.What is Platt's investment income from Sandig for the year ending December 31,2013? 2.Calculate Platt's investment in Sandig at year end December 31,2013.

The equity method is often called the dual-line consolidation.

Dotterel Corporation paid $200,000 cash for 40% of the voting common stock of Swamp Land Inc.on January 1,2013.Book value and fair value information for Swamp on this date is as follows: Required: Prepare an allocation schedule for Dotterel's investment in Swamp Land.

If an investor sells a portion of an equity investment and it reduces its interest below 20 percent the equity method of accounting is no longer appropriate.

Griffon Incorporated holds a 30% ownership in Duck Corporation.Griffon should use the equity method under which of the following circumstances?

Pike Corporation paid $100,000 for a 10% interest in Salmon Corp.on January 1,2013,when Salmon's stockholders' equity consisted of $800,000 of $10 par value common stock and $200,000 retained earnings.On December 31,2014,after receipt of the year's dividends from Salmon,Pike paid $192,000 for an additional 20% interest in Salmon Corp.Both of Pike's investments were made when Salmon's book values equaled their fair values.Salmon's net income and dividends for 2013 and 2014 were as follows: Required: 1.Prepare journal entries for Pike Corporation to account for its investment in Salmon Corporation for 2013 and 2014. 2.Calculate the balance of Pike's investment in Salmon at December 31,2014.

Shoreline Corporation had $3,000,000 of $10 par value common stock outstanding on January 1,2012,and retained earnings of $1,000,000 on the same date.During 2012,2013,and 2014,Shoreline earned net incomes of $400,000,$700,000,and $300,000,respectively,and paid dividends of $300,000,$550,000,and $100,000,respectively. On January 1,2012,Pebble purchased 21% of Shoreline's outstanding common stock for $1,240,000.On January 1,2013,Pebble purchased 9% of Shoreline's outstanding stock for $510,000,and on January 1,2014,Pebble purchased another 5% of Shoreline's outstanding stock for $320,000.All payments made by Pebble that are in excess of the appropriate book values were attributed to equipment,with each block depreciable over 20 years under the straight-line method. Required: 1.What is the adjustment to Investment Income for depreciation expense for Pebble's investment in Shoreline in 2012,2013,and 2014? 2.What will be the December 31,2014 balance in the Investment in Shoreline account after all adjustments have been made?

The GAAP requires that all majority-owned subsidiaries be consolidated,except when control lies with the majority interest.

Panda Corporation purchased 100,000 previously unissued shares of Skunk Company's $10 par value common stock directly from Skunk for $2,200,000.Skunk's stockholders' equity immediately before the investment by Panda consisted of $3,000,000 of common stock and $4,800,000 in retained earnings.What is Panda's book value of equity in the net assets of Skunk?

On January 1,2013,Pendal Corporation purchased 25% of the outstanding common stock of Sedda Corporation for $100,000 cash.Book value and fair value of Sedda's assets and liabilities at the time of acquisition are shown below. Required: Prepare an allocation schedule for Pendal's investment in Sedda.