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

Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 2016. On December 31, 2016, the current fair value of the securities was $481,000. How should the investment be reported within the 2016 financial statements?

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2016. At December 31, 2016, the current fair value of the securities was $105,000. How should the investment be reported in the 2016 financial statements?

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 effect will the dividend have on Phillips' 2016 financial statements?

Rye Company purchased 15% of Lena Company's common stock during 2016 for $150,000. The Investment in Lena had a $160,000 fair value at the end of 2016 and a $140,000 fair value at the end of 2017. Which of the following statements is correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 2018 for $148,000?

Passive investments other than held-to-maturity investments are reported on the balance sheet at fair value.

During 2016, Manning Corporation purchased 100% of the outstanding voting common stock shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair value of $6.5 million. The book value as well as fair value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

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 is the net increase in Maxi's assets only, after paying the cash for Mini?

On April 1, 2017, Paxton Corporation acquired all of the outstanding voting common stock of Stanley Company and Stanley will remain a separate corporation. Stanley's year-end is December 31. How should the assets and liabilities of Stanley be reported on the consolidated financial statements when Stanley is combined with Paxton on April 1, 2017?

On January 1, 2016, Presto Corporation purchased, as a long-term investment, 5,000 shares of the outstanding voting common stock of Shazam Corporation at $30 per share. During 2016, the following events occurred at Shazam Corporation: Required: A. Prepare the journal entry for Presto Corporation to record the investment (use an account titled "Long-term investment"). B. Assume two independent situations, Case A for 5,000 shares as 10% ownership and Case B for 5,000 shares as 40% ownership. For each situation, prepare the following entries: 1. To recognize net income for 2016. 2. To record cash dividend declared and received. 3. To record any adjustment to market price of stock at year-end. A.Prepare the journal entry for Presto Corporation to record the investment (use an account titled "Long-term investment"). B.Assume two independent situations, Case A for 5,000 shares as 10% ownership and Case B for 5,000 shares as 40% ownership.For each situation, prepare the following entries: 1.To recognize net income for 2016.2.To record cash dividend declared and received.3.To record any adjustment to market price of stock at year-end.

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2016, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 2016: At what amount should JDR report the YRK investment on the December 31, 2016 balance sheet?

On January 1, 2016, Short Company purchased as an available-for-sale investment, 20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost of $50 per share. During November 2016, Daniel declared and paid a cash dividend of $1.25 per share. At December 31, 2016, end of the accounting period, Daniel's shares were selling at $48. The 2016 financial statements for Short Company should report the following amounts:

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

Any unrealized gains or losses on trading securities would have to be added back to or subtracted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

On July 1, 2016, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 of the 18,000 outstanding shares of the nonvoting preferred stock of Nature Company for $30 per share. The records of Nature Company reflect the following: The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2016 would be which of the following?

If a bond is bought at a discount, the amortized book value of the bond investment will increase as the bond approaches maturity.

On January 1, 2016, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment. During 2016, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2016, the shares had a fair value of $150,000. At the end of 2016, the shares had a fair value of $150,000. What is the amount of Equity in Affiliate Earnings for 2016?

Allyn Company owns 10% of the Cordon Company common stock. The economic return from investing ratio that Allyn calculates contains which of the following components?

On March 1, 2017, Young Company paid cash to purchase the following stocks as long-term investments in available-for-sale securities: Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares) ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares) XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares) The market prices per share at December 31, end of the accounting period, were as follows: Required: Prepare the required journal entries at the following dates: March 1, 2017, December 31, 2017 and December 31, 2018.

Which of the following is the best description of investments in available-for-sale securities?

On January 1, 2016, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company. SCD's stockholders equity on the date of acquisition was $500,000. The current fair value of SCD's plant and equipment was $100,000 in excess of the equipment's book value. If the fair value and book value are the same for SCD's remaining assets and liabilities, what was the amount of goodwill acquired by Shelley Company?