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Exam 13: Measuring and Evaluating Financial Performance

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Question 51

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Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. -Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?

A) The 20X2 unrealized gain is $10,000, but is not included in Rye's 20X2 net earnings.
B) The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings.
C) The 20X3 unrealized loss is $10,000 and is included in Rye's 20X3 net earnings.
D) The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity.

E) None of the above
F) C) and D)

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Question 52

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If a bond is bought at a discount, then interest revenue will be less than the cash payment.

A) True
B) False

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Question 53

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Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 20X0: $\begin{array} { | l | r | } \hline \text { Net income } & \$ 575,000 \\\hline \text { Dividends declared and paid during December 20X0 } & \$ 30,000 \\\hline \text { Market price per share } & \$ 42.00 \\\hline\end{array}$ -At what amount should Gilman Company report the Burke investment on the December 31, 20X0 statement of financial position?

On January 1, 20X4, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment and classified the shares as available-for-sale securities. During 20X4, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 20X4 from the Rocker investment?

Chapman Inc., owns 35% of Dawson Corporation. During the calendar year 20X1, Dawson had net earnings of $300,000 and paid dividends of $30,000. Chapman mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings? $\begin{array} { | l | l | l | l | } \hline & \text { Investment Account } & \text { Net Income } & \text { Retained Earnings } \\\hline \text { A } & \text { Understate } & \text { Overstate } & \text { Overstate } \\\hline \text { B } & \text { Overstate } & \text { Understate } & \text { Understate } \\\hline \text { C } & \text { Overstate } & \text { Overstate } & \text { Overstate } \\\hline \text { D } & \text { Understate } & \text { Understate } & \text { Understate } \\\hline\end{array}$

Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated statement of earnings.

On January 1, 20X4, 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 20X4 net earnings of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 20X4 was $10 per share. Calculate the carrying value of John's investment at the end of 20X4.

Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classifications should be used by Idaho Company in accounting for the investment?

On January 1, 20X0, Heitzman Company purchased the following shares as a long-term investment in available-for-sale securities: $\begin{array} { | l | l | r | r | } \hline \text { Corporation } & \text { Shares } & \text { Percent Outstanding } & \text { Cost per Share } \\\hline \text { Maars } & 10,000 \text { common (no par) } & 5 \% & \$ 25 \\\hline \text { Nassif } & 2,000 \text { preferred (par \$10) } & 2 \% & \$ 50 \\\hline\end{array}$ The market value of the stocks subsequently were as follows: $\begin{array} { | l | r | r | } \hline & \text { Dec. 31, 20X0 } & \text { Dec. 31, 20X1 } \\\hline \text { Maars Corporation common stock } & \$ 24.00 & \$ 27.50 \\\hline \text { Nassif Corporation preferred stock } & 51.00 & 50.50 \\\hline\end{array}$ Calculate the "Net unrealized gains/loss," on both December 31, 20X0 and December 31, 20X1.

On January 2, 20X0, Parent Company purchased 100% of Sub Company's stock for $900,000 cash. At this date, the book value of Sub Company's net assets (i.e., assets less liabilities) was $800,000 which included property, plant and equipment that have a book value of $400,000 and a market value of $440,000. Required: A. Prepare the journal entry that would appear on the books of each company at the acquisition date. B. How much goodwill should P arent Company recognize on the consolidated financial statements at the date of acquisition?

During 20X4, the following items were reported on Shoe Co's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows statement (added or deducted). (in millions $) $\begin{array} { | l | r | } \hline \text { Acquisitions and investments in unconsolidated affiliates } & \$ 64 \\\hline \text { Sales of property, plant, and equipment } & 38 \\\hline \text { Investee equity income, and gains on sale of equipment } & 207 \\\hline \text { Short-term investments, purchases } & 44 \\\hline \text { Short-term investments, sales } & 38 \\\hline\end{array}$

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 20X4. - At what amount is the Candle investment reported on the December 31, 20X4 statement of financial position?

At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Manowar does not have significant influence over Cortez. Manowar reports the investment using the FVTPL method. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?

Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. 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 20X4 for $148,000?

The premium or discount on bonds accounted for under the amortized cost method is

How is goodwill accounted for subsequent to acquisition?

On January 31, 20X0, 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. $\begin{array} { | l | r | r | r | } \hline \text { Stock } & \text { Cost } & \text { Market at Dec. 31, 20X0 } & \text { Market at Dec. 31, 20X1 } \\\hline \text { Orange Corporation } & \$ 15,000 & \$ 12,000 & \$ 14,000 \\\hline \text { Bailey Inc. } & \$ 13,000 & \$ 12,000 & \$ 13,000 \\\hline\end{array}$ All the Bailey stock was sold for $13,500 on January 12, 20X2. Prepare the required journal entries at the following dates: January 31, 20X0, December 31, 20X0, December 31, 20X1 and January 12, 20X2.

Comprehensive income is included as part of