Exam 14: Intercorporate Investments in Common Stock

The equity method of accounting for an investment in the common stock of another company should be used when the investment

Pagoli Corporation acquires 30% of the outstanding voting common shares of the Inform Corporation for $600,000.Pagoli Corporation acquires the investment in Inform Corporation by buying previously issued shares of Inform Corporation from other investors. Between the time of the acquisition and the end of Pagoli Corporation's next accounting period, Inform Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock. Inform Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent accounting period. Pagoli Corporation's Investment in Stock of Inform Corporation account now has a balance of:

Which of the following is/are true?

acker Corporation acquires 30% of the outstanding voting common shares of the Insight Corporation for $600,000.Packer Corporation acquires the investment in Insight Corporation by buying previously issued shares of Insight Corporation from other investors. Between the time of the acquisition and the end of Packer Corporation's next accounting period, Insight Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock. Insight Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent accounting period. Assume now that Packer Corporation sells one-fourth of its investment in Insight Corporation for $165,000.The entry is as follows:

Often, the parent does not own 100% of the voting stock of a consolidated subsidiary.The parent refers to the owners of the remaining shares of voting stock as a

The consolidated income statement shows

Describe the U.S.GAAP requirement in accounting for joint venture investments.,

The accounting for investments in common stock depends on (1) the expected holding period, and (2) the purpose of the investment, as determined by both the percentage held and management intent.

The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee.An investment of 20% or more of the voting stock of an investee should lead to the presumption (absent evidence to the contrary) that an investor has the ability to exercise significant influence over an investor.The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee. Required: Identify events or circumstances that suggest that an investor has significant influence over an investee.

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.When Purchaser Corporation acquired 30% of Investee Corporation's common shares for $600,000, Investee Corporation's total shareholders' equity was $1.5 million.Purchaser Corporation's cost exceeds the carrying value of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)]. Purchaser Corporation attributes the $150,000 excess purchase price as follows: $100,000 to remeasure buildings and equipment to fair value and $50,000 to goodwill. Which of the following is/are true?

Describe the limitations of consolidated statements.

Securities that firms expect to hold for more than one year from the date of the balance sheet appear in investments in securities, classified as a current asset on the balance sheet.

Consolidated financial statements provide more helpful information than does the equity method, because

InvestCo purchases 30% of NewCo's stock on January 1, Year 1, for $100,000.In Year 1, NewCo paid total dividends of $30,000 and had a net income of $70,000.In Year 2, NewCo suffered a loss of $20,000 and paid no dividends.On January 1, Year 3, InvestCo sells its investment in NewCo for $105,000.How is the sale recorded?

Pense Co.purchased 40% of the stock of Stretch Co.in Year 1 for $100,000.Stretch had net income in Year 1 of $50,000 and net income in Year 2 of $30,000.Stretch also paid total dividends of $20,000 in Year 2.On January 1, Year 3, Pense Co.sold its investment in Stretch Co.to GE Capital Corporation (GE) for $130,000.What entry would Pense Co.make to record the sale of Stretch Co.?

Describe the accounting for minority, active investments.

The equity method records the initial purchase of an investment in voting common stock at _____. Each period, the investor treats as revenue its share of the _____ of the investee.The investor treats dividends declared by the investee as _____.

For various reasons, a single economic entity may exist in the form of a parent and several legally separate subsidiaries, often referred to as an affiliated group. Which of the following is/are true?

The accounting for investments in common stock depends on the

Penney Corporation acquires 30% of the outstanding voting common shares of the Instat Corporation for $600,000.Penney Corporation acquires the investment in Instat Corporation by buying previously issued shares of Instat Corporation from other investors. Between the time of the acquisition and the end of Penney Corporation's next accounting period, Instat Corporation reports earnings of $80,000.Penney Corporation records the following journal entry: