Exam 14: PPA: Reporting and Interpreting Investments in Other Corporations

Discuss how the equity method of accounting for investments prevents managers of the investor corporation from manipulating income related to dividends from the investee.

Under the equity method, dividends received are recognized by increasing the Investment Revenue account.

Use of the equity method is required for investments between 20 and 50% of a company's voting common stock regardless of the investor's ability to influence the affiliate.

If a bond is bought at a discount, then interest revenue using the effective interest method will be less than the cash interest received.

From an economic standpoint of investment returns, the capital gain or loss includes unrealized gains and losses as well as realized gains and losses.

All investments other than held-to-maturity bond investments are reported on the balance sheet at their fair value as of the balance sheet date.

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: On January 1, 2016, in a merger transaction, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The fair value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the fair value and book value are the same for Mini's remaining assets and liabilities, what was the amount of goodwill acquired by Maxi Company?

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock, which constitutes 10% of Martin's voting stock on June 30, 2016 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2016, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and Martin reported 2016 net income of $52 million. What investment value will be reflected on Phillips' balance sheet at December 31, 2016?

On the date that one company acquires 100% of the voting stock of another company, the book value of the acquired assets and liabilities will be combined with book values of the assets and liabilities of the acquiring company.

On January 2, 2016, Eagle Company acquired 100% of Solly Company's common stock for $900,000 cash in a merger transaction. At this date, the book value of all of Solly Company's assets, except a building, was $700,000. The fair value of these assets without the building was $800,000. In addition to these assets is a building that has a book value of $400,000 and a fair value of $440,000. The book value and fair value of Solly Company's liabilities is $520,000. Required: A.Prepare a schedule to calculate the goodwill arising from the transaction. B.Prepare the journal entry to record the merger on the books of Eagle Company at the acquisition date.

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock, which constitutes 10% of Martin's voting stock on June 30, 2016 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2016, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and Martin reported 2016 net income of $52 million. What method of accounting will Phillips use to account for this investment?

On January 1, 2016, as a long-term investment in available-for-sale securities, John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne reported 2016 net income of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 2016 was $10 per share. Calculate the carrying value of John's investment at the end of 2016.

On January 31, 2016, McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31. All of the Bailey Corporation stock was sold for $13,500 on January 12, 2018. Required: Prepare the required journal entries at the following dates: January 31, 2016, December 31, 2016, December 31, 2017 and January 12, 2018.

The use of consolidation accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is:

Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classification is used relative to use of the available-for-sale classification.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2016, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2016: How much should Gilman Company report as investment income from the Burke investment during 2016?

Sandor Company owns an investment portfolio of available-for-sale securities. During 2016, Sandor received $3,000 of dividends and $1,000 of interest from the securities in the portfolio. The fair value of the portfolio on January 1, 2016 was $86,000 and the fair value of the portfolio at December 31, 2016 was $98,000. The economic return from investing ratio is closest to:

On January 1, 2016, Fall Corporation acquired 100% of the outstanding voting shares of Foliage Corporation for $600,000. The book and fair values of Foliage's assets and liabilities as of January 1, 2016 are listed below:

Which of the following statements is correct with regard to investments and the statement of cash flows?

During 2016, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars. Required: For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on the statement of cash flows. The operating activities section is prepared using the indirect method. Enter "+" if the item is added or "-" if the item is subtracted. Do not enter dollar amounts.