Exam 14: Intercorporate Investments in Common Stock

Potion Corporation acquires 30% of the outstanding voting common shares of the Formula Corporation for $600,000.Potion Corporation acquires the investment in Formula Corporation by buying previously issued shares of Formula Corporation from other investors. Between the time of the acquisition and the end of Potion Corporation's next accounting period, Formula Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock. Formula Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent accounting period. During the next accounting period, Potion Corporation sells one-fourth of its investment in Formula Corporation for $165,000. After the sale, the balance in the Investment in Stock of Formula Corporation account is:

The Canada Corporation has been using the equity method for its 100-percent owned subsidiary, Trenton Company, which has both assets and liabilities on its balance sheet and both revenues and expenses on its income statement.Trenton has positive cash flow from operations.Canada now consolidates the accounts of the Trenton Company, which it has owned 100 percent since organizing it.Trenton has no investments of its own and regularly declares dividends greater than zero, but less than net income. Required: Answer the following questions with one of these: larger, smaller, unchanged, or insufficient (information given to answer question). a. What would be the effect on net income of Canada Corporation? b. What would be the effect on revenues, including investment income, of Canada Corporation? c. What would be the effect on investments of Canada Corporation? d. What would be the effect on assets of Canada Corporation? e. What would be the effect on liabilities of Canada Corporation? f. What would be the effect on the debt/equity ratio (= Liabilities/Total Equities)?

U.S.GAAP and IFRS require firms to account for minority, active investments, generally those where the investor owns between _____ using the equity method.Under the equity method, the investor recognizes as revenue (expense) each period its share of the net income (loss) of the investee.The investor recognizes dividends received from the investee as a return (reduction) of investment, not as income.

Assume that P uses the equity method of accounting for its investment in S.Solve for the unknown in each of the following independent cases: CASE A CASE B CASE C P's ownership of S 40\% 25\% 40\% Investment in S--beginning of year \ 100 \ 100 \ 130 Investment in S--end of year \ 120 \ 150 \ 120 S's income (loss) 300 S's dividends paid 80 0

When an investor owns less than a majority of the voting stock of another corporation, the accountant must judge when the investor can exert significant influence.For the sake of uniformity, U.S.GAAP and IFRS presume that significant influence exists at ownership of _____ or more of the voting stock of the investee. (Assume that management does not have a contractual or other basis to demonstrate that influence.)

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

Management and shareholders may desire to have legally separate corporations because

An intercompany transaction is a transaction between

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

On July 1, 2013, Mecca Group purchased for cash 35 percent of the outstanding capital stock of Wembley Studios.Both Mecca Group and Wembley Studios have a December 31 year-end.Wembley Studios, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Mecca Group and also paid cash dividends on November 15, 2013, to Mecca Group and its other stockholders. How should Mecca Group report the above facts in its December 31, 2013, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.

In Year 2, ABC Corp.acquired a 15% interest in XYZ, Inc., for $50,000.During the year, XYZ paid dividends of $10,000 and had net income of $30,000.ABC sold the shares of XYZ for $65,000 cash.What entry will ABC make to record the sale?

Paula Company recognizes unrealized changes in the fair value of available-for-sale securities in

Park Inc.owns 35 percent of Exeter Corporation.During the calendar year 2013, Exeter had net earnings of $300,000 and paid dividends of $36,000.Park mistakenly accounted for the investment in Exeter using the cost method rather than the equity method of accounting.What effect would this have on the investment account and net income, respectively?

Business firms have several reasons for preferring to operate as a group of legally separate corporations, rather than as a single entity.From the standpoint of the parent company, the more important reasons for maintaining legally separate subsidiary companies include which of the following?

U.S.GAAP view investments of over 50 percent of the voting stock of another company (for the purpose of controlling the other company at the broad policy-making level and at the day-to-day operational level) as

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as

Given the following separate company balance sheets and income statements, answer the following questions. Additional information: Plea acquired its investment in the stock of Settle on the date of Settle’s incorporation. Consolidated accounts receivable is $80,000. Consolidated sales total $900,000. No purchases from Settle remain in Plea’s ending inventory. Required: a. What percentage of Settle does Plea appear to own? b. What is beginning retained earnings of Plea? c. How much was Plea’s initial investment in Settle? d. What is the amount of intercompany accounts receivable? e. What is consolidated cost of goods sold?

Accountants sometimes refer to the equity method as a one-line consolidation because

Discuss the accounting for majority, active investments.

Securities that firms expect to sell within the next year appear as investment securities in current assets on the balance sheet.