Exam 14: Intercorporate Investments in Common Stock

To avoid double counting P's investment in S, P must eliminate

The summary of significant accounting principles, a required part of the financial statement notes, must include a statement about the parent's consolidation policy.If an investor does not consolidate a significant majority-owned subsidiary, the notes will disclose that fact.

U.S.GAAP view investments of between 20 and 50 percent of the voting stock of another company (unless evidence indicates that significant influence cannot be exercised) as

U.S.GAAP and IFRS require firms to account for minority, active investments, using the _____ method.

U.S.GAAP and IFRS view investments of less than 20% of the voting shares of another company as minority, passive investments in most cases.

Describe U.S.GAAP and IFRS requirements in accounting for the business combination.

Intercompany sales

On January 1, Year 1, Plano Co.purchased for $180,000, 90% of Santa Fe Co.at a time when Santa Fe had a book value of $200,000.There were no intercompany transactions during year 4. As of December 31 , Year 4 Assets Plano Santa Fe Accounts receivable \ 50,000 \ 40,000 Investment in Santa Fe (equity) 270,000 - Other assets 1,680,000 Total assets \ 2,000,000 \ 750,000 Liabilities and Equity Accounts payable \ 40,000 \ 50,000 Other liabilities 1,360,000 400,000 Common stock 200,000 200,000 Retained earnings \ 400,000 100,000 Total liabilities and equity \ 2.000,000 \ 750,000 CONDENSED INCOME STATEMENT for Current Year Plano Santa Fe Sales \ 800,000 \ 200,000 Equity in earnings of Santa Fe 18,000 - Total revenues \ 818,000 \ 200,000 Cost of goods sold Depreciation 100,000 30,000 Other expenses 78,000 20,000 Tax expense 40,000 10,000 Total expenses \7 18,000 \1 80,000 Net income \1 00,000 \2 0,000 Required: Prepare the appropriate elimination and reclassification entries necessary to prepare a consolidated balance sheet and income statement.

Marcoff Corporation acquires 30% of the outstanding voting common shares of the Invicta Corporation for $600,000.Marcoff Corporation acquires the investment in Invicta Corporation by buying previously issued shares of Invicta Corporation from other investors. If Invicta Corporation declares and pays a dividend of $30,000 to holders of its common stock, Marcoff Corporation records the following journal entry:

The rationale for the equity method is that it better measures an investor's income from investing activities when, because of its ownership interest, it

Which of the following is/are true regarding the acquisition method for a business combination?

Marley Company had the following portfolio of securities at the end of its first year of operations: Year-End Security Classification Cost Market Value A Trading \ 18,000 \ 23,000 B Trading \ 25,000 \ 27,000 (1) Provide the entry necessary to adjust the portfolio of securities to market value. (2) After adjusting the securities to market, Marley elects to reclassify Security B as an available-for-sale security. On the date of the transfer, Security B's market value is $26,500. Provide the journal entry to reclassify Security B.

For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account?

If the combined market value of trading securities at the end of the year is less than the market value of the same portfolio of trading securities at the beginning of the year, the difference should be accounted for by

Piu Co.owns 100% of Xu Co.Piu has owned Xu since Xu was incorporated.At December 31, $15,000 of Xu's accounts receivable represent amounts payable by Piu.$10,000 of Piu's accounts receivable represent amounts payable by Xu.During the current year, Xu sold $10,000 in merchandise to Piu (at cost its cost of $10,000).Piu has sold all the merchandise purchased from Xu. Required: Prepare the appropriate elimination entries necessary to prepare a consolidated balance sheet and income statement.

Which of the following is/are true regarding minority, active investments?

Power Corporation acquires 30% of the outstanding voting common shares of the Inroad Corporation for $600,000.Power Corporation acquires the investment in Inroad Corporation by buying previously issued shares of Inroad Corporation from other investors. Power Corporation records income earned by Inroad Corporation as a(n) _____, while the dividend _____, and _____ account.

Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000.Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors. Investee Corporation's other comprehensive income during the first period is as follows: Unrealized Holding Gains from Marketable Securities...$ 3,000 Unrealized Losses from Cash Flow Hedges .......... (2,000) Other Comprehensive Income.................... $ 1,000 Purchaser Corporation would make the following entry to recognize its share of the items of other comprehensive income of Investee Corporation:

Parent Computer Corporation acquired significant influence over Child Computer Company on January 2 by purchasing 20 percent of its outstanding stock for $100 million.Parent attributes the entire excess of cost over book value acquired to a patent, which it amortizes over 10 years.Child Computer had earnings of $100 million and declared dividends of $30 million during the year.The accounts receivable of Parent Computer Corporation at December 31 included $600,000 due from Child Computer.Parent Computer Corporation accounts for its investment in Child Computer using the equity method.Parent Computer Corporation considers reducing its ownership from 20 percent to 19.5 percent so that it no longer has to use the equity method.Comment on the ethical implications of this possibility.

Why do accountants sometimes refer to the equity method as a one-line consolidation?