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Exam 12: Investments

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Question 31

Multiple Choice

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Consolidated financial statements are prepared when one company has:

A) Accounted for the investment using the equity method.
B) Accounted for the investment as securities available for sale.
C) Control over another company.
D) None of these is correct.

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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Which of the following is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method?

A) no journal entry need be made to recognize the investor's portion of the investee's net income.
B) unrealized gains and losses on that investment are recognized in net income.
C) no journal entry need be made to recognize the investor's portion of dividends paid by the investee.
D) All of these are true.

E) All of the above
F) None of the above

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Question 33

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Many corporations own more than 50% of the voting stock in other corporations. Sometimes these affiliated companies operate within the same industry, and many times the companies are in unrelated industries. Required: What is the significance of owning more than 50% of the voting common stock of another company?

Companies need to consider SFAS No. 157, "Fair Value Measurements", when determining the fair value of an investment. That standard distinguishes between various levels of inputs to fair value determination. Required: Describe the various levels of inputs, explaining key aspects that distinguish them, and indicate which level is most preferred and which is least preferred.

Required: Assume Arctic Cat did not purchase any trading securities during 2005. Write a journal entry to record any unrealized holding gains or losses on trading securities during 2005.

On January 1, 2009, Everglade Company purchased the following securities and properly accounted for them as securities available for sale: All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2009 income statement?

Sloan Company has owned an investment during 2009 that has increased in fair value. After all closing entries for 2009 are completed, the effect of the increase in fair value on total shareholders' equity would be:

Sometimes companies change the extent to which they can significantly influence an investee, such that they have to change to the equity method or from the equity method of accounting for the investment. Required: Describe the adjustments necessary when a company (1) changes to the equity method from another method, and (2) when a company changes from the equity method to another method.

On January 1, 2009, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2009. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2009?

Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates.

Net unrealized holding gains (losses) are reported in the income statement for trading securities.

On July 1, 2009, Silverwood Company purchased for cash 35% of the voting common stock of Yellowstone Corporation. Both companies have a December 31 fiscal year-end. Yellowstone Corporation, which is publicly traded on an organized stock exchange, reported its net income for the year to Silverwood and paid a dividend to Silverwood during the year. Required: How should Silverwood report the above information in its year-end income statement and balance sheet? Discuss the rationale for your answer.

If an investment is accounted for under the equity method, the investor reduces investment income and the investment account for amortization of goodwill acquired in the investment.

The fair value of debt securities not regularly traded can be most reasonably approximated by:

When an investor owns 20% to 50% of the voting stock of an investee company, the investor is presumed to exercise significant influence over the investee unless there is evidence to the contrary. Required: What factors could be evidence of significant influence? What factors could be evidence of lack of significant influence?

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:

Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2009. Jack can significantly influence Jill. On December 10, 2009, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2009 relative to its investment in Jill?

Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on Jan 1, 2009. On November 1, 2009, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2009 relative to its investment in Hack?

Newjohn Company owns stock in several affiliated companies. Investments in some of these affiliates are accounted for as securities available for sale while some are accounted for using the equity method. Required: What factors determine which method should be used? What events are recorded when the equity method is used? What events are recorded when the securities are accounted for as available for sale?

Hope Company bought 30% of Faith Corporation in 2009. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2009, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of the using the equity method. What effect would this error have on the investment account and net income, respectively, for 2009?