Managerial Accounting Persuasive Essay

TEST BANK CHAPTER 1 Intercorporate Investments: An Overview MULTIPLE CHOICE Use the following information on a company’s investments in equity securities to answer questions 1- 4 below. The company’s accounting year ends December 31. |Date of acquisition|Cost |Fair value |Date sold |Selling price | |Investment | | |12/31/10 | | | |Ajax Company stock |6/20/10 |$40,000 |$36,000 |2/10/11 |$34,000 | |Bril Corporation stock |5/1/10 | 20,000 |N/A |11/15/10 | 23,000 | |Coy Company stock |8/2/10 | 16,000 | 19,500 |1/17/11 | 21,000 | 1. Topic: Accounting for trading securities LO 2 If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2010 income statement? a. 3,000 gain b. $2,500 gain c. $4,000 loss d. No gain or loss ANS:b 2. Topic: Accounting for trading securities LO 2 If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2011 income statement? a. $1,000 loss b. $2,000 gain c. $3,000 gain d. $500 loss ANS:d 3. Topic: Accounting for AFS securities LO 2 If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities, on the 2010 income statement? a. $3,000 gain b. $2,500 gain c. $4,000 loss d. No gain or loss ANS:a 4. Topic: Accounting for AFS securities LO 2
If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities, on the 2011 income statement? a. $1,000 loss b. $2,000 gain c. $3,000 gain d. $500 loss ANS:a Use the following information to answer questions 5-7 below: A company holds a $100,000 face value corporate bond, bought January 1, 2011, paying 4% annually on December 31, and maturing December 31, 2014. The company paid $93,070 for the bond, to yield 6%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. 5. Topic: Accounting for HTM securities LO 2 What amount will the company report as interest revenue on the bond for 2012? a. $4,000 b. $5,584 c. $5,679 d. $6,000 ANS:c 6.
Topic: Accounting for HTM securities LO 2 What is the entry to record receipt of interest and principal on December 31, 2014, assuming no impairment on the bond throughout its life? a. Cash104,000 Interest revenue 5,887 Investment in bond98,113 b. Cash104,000 Interest revenue 4,000 Investment in bond100,000 c. Cash106,000 Interest revenue 6,000 Investment in bond100,000 d. Cash104,000 Interest revenue 5,584 Investment in bond 98,416 ANS:a 7. Topic: Accounting for HTM securities LO 2 Assume the market value of the bond on December 31, 2011 is $80,000, and no previous impairment has been reported. The decline in value is considered to be other than temporary.What impairment loss is reported on the company’s 2011 income statement? a. $20,000 b. $13,070 c. $14,654 d. $24,000 ANS:c Use the following information to answer questions 8-11 below: Eagle Company acquires 25% of the voting stock of Frank Corporation for $4,000,000 on January 1, 2010. At the time, the book value of the company was $16,000,000. During 2010 Frank reported net income of $1,500,000 and paid dividends of $200,000. Both companies have December 31 year-ends. 8. Topic: Equity method investments LO 3 What is the investment balance on Eagle’s balance sheet on December 31, 2010? a. $4,000,000 b. $4,375,000 c. $4,325,000 d. $4,300,000 ANS:c 9. Topic: Equity method investments LO 3
Now assume Frank’s book value at the date of acquisition was $10,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of 10 years. Straight-line amortization is appropriate. What amount will Eagle report as equity in net income of Frank for 2010? a. $225,000 b. $375,000 c. $175,000 d. $325,000 ANS:a 10. Topic: Equity method investments LO 3 Assume the same information as in question 9. What is the investment balance on December 31, 2010, reported on Eagle’s balance sheet? a. $4,375,000 b. $4,225,000 c. $4,175,000 d. $4,000,000 ANS:c 11. Topic: Equity method investments LO 3 Now assume Eagle’s 2010 ending inventory contains $90,000 in merchandise purchased from Frank, at a markup of 20% on cost. What is the impact on 2010 equity in net income? a. None b. $15,000 lower c. 3,750 lower d. $18,000 lower ANS:c Use the following information to answer questions 12 and 13 below: Eagle Company acquires all of the voting stock of Frank Corporation for $20,000,000 on January 1, 2010, in a statutory merger. Frank’s January 1, 2010 balance sheet is as follows: Current assets$15,000,000 Plant & equipment 60,000,000 Current liabilities 12,000,000 Long-term debt 47,000,000 12. Topic: Statutory merger LO 4 How much goodwill does Eagle report? a. $4,000,000 b. $0 c. $16,000,000 d. $20,000,000 ANS:a 13. Topic: Statutory merger LO 4 Now assume Frank’s plant and equipment is overvalued by $5,000,000. How much goodwill does Eagle report? . $(5,000,000) b. $0 c. $4,000,000 d. $9,000,000 ANS:d Use the following information to answer questions 14 and 15 below: At the beginning of the current year, Jalu S. A. enters a joint venture with another company to develop new technology. Each company invests €1,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €200,000 and pays dividends of €60,000. At the end of the year the joint venture’s balance sheet reports €5,000,000 in assets and €2,860,000 in liabilities. Jalu reports €22,000,000 in assets and €10,000,000 in liabilities from its own operations. 14. Topic: Joint ventures LO 3, 5
If Jalu uses the equity method to report its investment in the joint venture, what are its total liabilities at the end of the year? a. €10,000,000 b. €12,860,000 c. €11,430,000 d. € 2,860,000 ANS:a 15. Topic: Joint ventures LO 5 If Jalu uses proportionate consolidation to report its investment in the joint venture, what are its total liabilities at the end of the year? a. €10,000,000 b. €12,860,000 c. €11,430,000 d. € 2,860,000 ANS:c 16. Topic: Equity method investment LO 3 Monroe Company owns 40% of the voting stock of Nartal Industries, acquired at book value. Nartal reports income of $600,000 for 2010. Nartal regularly sells merchandise to Monroe at a markup of 30% on cost. Monroe’s 2010 beginning inventory includes $156,000 purchased from Nartal.
Its 2010 ending inventory includes $260,000 purchased from Nartal. Monroe uses the equity method to report its investment in Nartal. Equity in net income of Nartal for 2010 is: a. $249,600 b. $230,400 c. $216,000 d. $264,000 ANS:b Use the following information to answer questions 17 – 20 below: On January 1, 2011, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond yielding 4%, interest paid annually on December 31, and classifies it as held-to-maturity. Ola’s reporting year ends December 31. 17. Topic: HTM investment LO 2 On its 2011 income statement, Ola reports interest revenue on the corporate bond of: a. $12,000 b. $11,667 c. $15,556 d. $16,000 ANS:c 18.
Topic: HTM investment LO 2 On its 2011 balance sheet, Ola reports the investment at: a. $389,678 b. $392,965 c. $400,000 d. $392,456 ANS:d 19. Topic: HTM investment LO 2 On its 2012 balance sheet, Ola reports the investment at: a. $395,981 b. $397,296 c. $396,154 d. $398,231 ANS:c 20. Topic: HTM investment LO 2 What is the life of this bond? a. 2 years b. 5 years c. 6 years d. 4 years ANS:d 21. Topic: Trading investment LO 2 On December 20, 2011, a company pays $40,000 for a stock, classified as a trading security. On December 31, 2011, the company’s year-end, the stock has a market value of $43,000. The company sells the stock in 2012 for $41,000.
On its income statement, the company reports: a. a gain of $3,000 in 2011, and a loss of $2,000 in 2012. b. no gain or loss in 2011, and a gain of $1,000 in 2012. c. a gain of $3,000 in 2011, and no gain or loss in 2012. d. no gain or loss in 2011, and a gain of $3,000 in 2012. ANS:a 22. Topic: AFS investment LO 2 On December 20, 2011, a company pays $40,000 for a stock, classified as an available-for-sale security. On December 31, 2011, the company’s year-end, the stock has a market value of $43,000. The company sells the stock in 2012 for $41,000. On its income statement, the company reports: a. a gain of $3,000 in 2011, and a loss of $2,000 in 2012. b. o gain or loss in 2011, and a gain of $1,000 in 2012. c. a gain of $3,000 in 2011, and no gain or loss in 2012. d. no gain or loss in 2011, and a gain of $3,000 in 2012. ANS:b 23. Topic: Statutory merger LO 4 Porter Corporation acquires all of Quinn Company’s assets and liabilities on January 1, 2012, for $10,000,000 in cash. At the date of acquisition, Quinn’s balance sheet reported assets of $50,000,000 and liabilities of $46,000,000. Investigation reveals that Quinn’s reported plant assets are undervalued by $2,500,000. Porter reports how much goodwill on this acquisition? a. $6,000,000 b. $2,500,000 c. $3,500,000 d. $2,000,000 ANS:c 24. Topic: Statutory merger LO 4
Rand Corporation acquires all of Southern Company’s assets and liabilities on January 1, 2012, for $15,000,000 in cash. At the date of acquisition, Southern’s balance sheet reported assets of $75,000,000 and liabilities of $65,000,000. Investigation reveals that Southern’s reported plant assets are overvalued by $1,400,000. Rand reports how much goodwill on this acquisition? a. $5,000,000 b. $6,400,000 c. $3,600,000 d. $2,000,000 ANS:b 25. Topic: Joint ventures LO 3, 5 At the beginning of the current year, Trux, Inc. enters a joint venture with another company. Each company invests €25,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €1,500,000 and pays no dividends.
At the end of the year the joint venture’s balance sheet reports €65,000,000 in assets and €13,500,000 in liabilities. If Trux uses proportionate consolidation to report its investment in the joint venture, its liabilities will be: a. the same as if it used the equity method to report the investment. b. €13,500,000 higher than if it used the equity method to report the investment. c. €25,000,000 lower than if it used the equity method to report the investment. d. €6,750,000 higher than if it used the equity method to report the investment. ANS:d 26. Topic: Controlling investment LO 4 A company acquires all of the assets and liabilities of another company in a statutory merger. Which statement is false? a.
The acquiring company reports the acquired assets and liabilities at fair value at the date of acquisition. b. The acquiring company does not report acquired intangible assets unless they are already reported on the acquired company’s books. c. The acquired company no longer exists as a separate entity. d. the acquiring company does not revalue its assets and liabilities to fair value at the date of acquisition. ANS:b 27. Topic: Joint ventures LO 3 U. S. GAAP general requires joint ventures to be reported as: a. equity method investments. b. trading securities. c. consolidated controlled investments. d. available-for-sale securities. ANS:a 28. Topic: HTM securities LO 2
Held-to-maturity investments are reported at: a. fair value, with unrealized gains and losses reported on the income statement. b. fair value, with unrealized gains and losses reported in other comprehensive income. c. amortized cost. d. cost, with unrealized gains and losses reported on the income statement. ANS:c 29. Topic: Proportionate consolidation LO 5 Proportionate consolidation is: a. used to report investments in marketable securities, held for long-term investment. b. not allowed in the U. S. c. a way to report all the assets and liabilities of another company on the investor’s books. d. an alternative way to report controlling investments under IFRS. ANS:b 0. Topic: Impairment testing of investments LO 2, 3 Impairment testing requires a comparison of an asset’s book value with its fair value, with impairment losses reported on the income statement. Which of the following investments are NOT tested for impairment? a. trading securities b. Held-to-maturity investments c. Equity method investments d. Joint ventures ANS:a 31. Topic: Investment valuation LO 2, 3, 4 If a company elects the fair value option under SFAS 159 for all of its eligible investments, which of its investments are not reported at fair value, with unrealized gains and losses reported in income? a. significant influence investments . available-for-sale investments c. held-to-maturity investments d. controlled investments ANS:d 32. Topic: Controlling investment LO 4 When a company owns a controlling interest in the stock of another legally separate company, the acquired company is called a: a. variable interest entity. b. subsidiary. c. equity method investment. d. held-to-maturity investment. ANS:b 33. Topic: Joint ventures LO 3 If a U. S. company invests in a joint venture, it may report the investment as: a. a trading investment. b. a held-to-maturity investment. c. an equity method investment. d. a statutory merger. ANS:c 34. Topic: Investments with no influence LO 2
SFAS 115 divides investments with readily determinable fair values into what categories? a. trading and held-to-maturity investments b. trading, held-to-maturity, and equity methodinvestments c. available-for-sale and held-to-maturity investments d. trading, available-for-sale, and held-to-maturity investments ANS:d 35. Topic: HTM investments LO 2 Impairment losses on held-to-maturity investments are: a. not reported. b. reported in other comprehensive income. c. reported as a direct adjustment to beginning retained earnings. d. reported on the income statement. ANS:d 36. Topic: Trading investments LO 2 Impairment losses on trading investments are: a. not reported. b. eported in other comprehensive income. c. reported as a direct adjustment to beginning retained earnings. d. reported on the income statement. ANS:a 37. Topic: Equity method investments LO 3 Impairment losses on equity method investments are: a. not reported. b. reported in other comprehensive income. c. reported as a direct adjustment to beginning retained earnings. d. reported on the income statement. ANS:d 38. Topic: Equity method investments LO 3 Impairment losses are reported on a equity method investment when: a. its fair value is less than its book value. b. its fair value is less than its book value, and the decline is judged to be other than temporary. . its fair value is zero. d. its fair value is less than its book value, and there is an active market for the investment. ANS:b 39. Topic: Equity method investments LO 3 Equity in net income is affected by all but which one of these items related to the investee? a. impairments of indefinite life intangibles of the investee b. markup on inventory sold by the investee to the investor c. markup on inventory sold by the investor to the investee d. amortization of previously unreported intangibles of the investee ANS:a 40. Topic: Controlling investment LO 4 A company acquires all of the assets and liabilities of another company.
Which one of the following increases the amount of goodwill the acquiring company reports? a. The acquired company’s equipment is undervalued. b. The acquired company has previously unreported intangibles. c. The acquired company’s debt is undervalued. d. The acquired company’s inventory is undervalued. ANS:c 41. Topic: Stock acquisition LO 4 A company acquires all of the voting stock in Prolin Company, and records the transaction by debiting “Investment in Prolin Company. ” The company is accounting for its investment as a: a. statutory consolidation. b. variable interest entity. c. joint venture. d. stock acquisition. ANS:d 42. Topic: IFRS for intercorporate investments LO 5
Following IFRS, impairment loss for intercorporate investments with significant influence occurs when: a. book value is higher than market value. b. book value is higher than the higher of market value or value-in-use. c. the decline in value is other than temporary. d. the present value of the investment’s future cash flows is greater than its carrying value. ANS:b 43. Topic: IFRS for intercorporate investments LO 5 What is “value-in-use,” as used in reporting intercorporate investments, per IFRS? a. Present value of the investment’s future expected cash flows. b. Market value of the investment in an active market. c. Present value of the investment’s future dividend payments. d. Market value of the investment when acquired. ANS:a 44.
Topic: IFRS for intercorporate investments LO 5 Following IFRS, when are held-to-maturity investments considered to be impaired? a. Book value is greater than market value, and there is objective evidence of loss events. b. Book value is greater than market value, and there is an active market for the investment. c. Book value is greater than value-in-use, and the decline is considered to be other than temporary. d. Book value is greater than value-in-use, and the investment no longer pays dividends or interest. ANS:a 45. Topic: IFRS for intercorporate investments LO 5 Which statement below is false concerning IFRS for marketable debt and equity investments? a.
Trading investments are reported at fair value, with unrealized gains and losses reported in income. b. Available-for-sale investments are reported at fair value, with unrealized gains and losses reported in equity. c. Impairment losses are reported in equity, and cannot be reversed. d. Held-to-maturity investments are reported at amortized cost. ANS:c 46. Topic:IFRS for intercorporate investments LO 5 Which statement is true concerning proportionate consolidation? Proportionate consolidation: a. is allowed for investments with significant influence and controlling intercorporate investments. b. reports the intercorporate investment at net book value as an asset on the investor’s balance sheet. . increases the investor’s leverage (total liabilities/total assets) if the investee has higher leverage than the investor. d. increases the investor’s total equity if the investee has positive retained earnings. ANS:c 47. Topic: Motivations for intercorporate investments LO 1 Which item below is least likely to be a reason a company invests in the securities of another company? a. Earn a return on temporarily idle cash. b. Speculate based on private information that the stock price will increase. c. Balance a risk-adjusted portfolio with the expectation of dividends and capital gains. d. Facilitate activity along the supply chain. ANS:b 48.
Topic: Motivations for intercorporate investments LO 1 Sharil Company owns 40% of Tonlen Company. What is the most likely reason Sharil made this investment? a. Earn a return on temporarily idle cash. b. Speculate based on private information that the stock price will increase. c. Balance a risk-adjusted portfolio with the expectation of dividends and capital gains. d. Facilitate activity along the supply chain. ANS:d 49. Topic: U. S. GAAP for equity method investments LO 3 Following U. S. GAAP, when should a company use the equity method to report an intercorporate investment? a. The company significantly influences the decisions of the investee. b.
The investee is the company’s major supplier. c. The company owns 20 – 50% of the investee’s voting stock. d. The company is holding the investment in its long-term portfolio. ANS:c 50. Topic: IFRS for equity method investments LO 5 Following IFRS, when should a company use the equity method to report an intercorporate investment? a. The company significantly influences the decisions of the investee. b. The investee is the company’s major supplier. c. The company owns 20 – 50% of the investee’s voting stock. d. The company is holding the investment in its long-term portfolio. ANS:a PROBLEMS Use the following information to complete problems 1 and 2 below: |Date of acquisition |Cost |Fair value |Date sold |Selling price | |Investment | | |12/31/11 | | | |Heman Company stock |4/20/11 |$42,000 |$33,000 |2/10/12 |$36,000 | |Itol Corporation stock | 8/1/11 | 23,000 |N/A |9/15/11 | 25,000 | |Jambo Company stock | 9/2/11 | 18,000 | 14,000 |1/14/12 | 12,000 | 1. Topic: Trading investments LO 2 Krotar Corporation holds these investments and classifies them as trading securities. Its accounting year ends December 31. Required Prepare the journal entries to record the events related to these intercorporate investments. ANS: 4/20/11 Investment in securities | |42,000 | | | |Cash | |42,000 | 8/1/11 |Investment in securities | |23,000 | | | |Cash | |23,000 | 9/2/11 |Investment in securities | |18,000 | | | |Cash | |18,000 | 9/15/11 Cash | |25,000 | | | |Investment in securities | |23,000 | | |Gain on securities (income) | |2,000 | 12/31/11 |Loss on securities (income) | |13,000 | | | |Investment in securities | |13,000 | $(13,000) = ($33,000 – $42,000) + ($14,000 – $18,000) 1/14/12 Cash | |12,000 | | |Loss on securities (income) | |2,000 | | | |Investment in securities | |14,000 | 2/10/12 |Cash | |36,000 | | | |Investment in securities | |33,000 | | |Gain on securities (income) | |3,000 | 2. Topic: AFS investments LO 2 Krotar Corporation holds these investments and classifies them as available-for-sale securities. Its accounting year ends December 31.
Required Prepare the journal entries to record the events related to these intercorporate investments. ANS: 4/20/11 |Investment in securities | |42,000 | | | |Cash | |42,000 | 8/1/11 |Investment in securities | |23,000 | | | |Cash | |23,000 | 9/2/11 Investment in securities | |18,000 | | | |Cash | |18,000 | 9/15/11 |Cash | |25,000 | | | |Investment in securities | |23,000 | | |Gain on securities (income) | |2,000 | 12/31/11 Loss on securities (OCI) | |13,000 | | | |Investment in securities | |13,000 | $(13,000) = ($33,000 – $42,000) + ($14,000 – $18,000) 1/14/12 |Cash | |12,000 | | |Loss on securities (income) | |6,000 | | | |Investment in securities | |14,000 | | |AOCI | |4,000 | 2/10/12 Cash | |36,000 | | |Loss on securities (income) | |6,000 | | | |Investment in securities | |33,000 | | |AOCI | |9,000 | 3. Topic: Investments in debt and equity securities LO 2 Here is information for various investments held by Best Beverages, and values reported on its January 1, 2012 balance sheet: ASSETS Trading securities Investment in Cougar Company stock…………………………. $ 450,000 Available-for-sale securities Investment in Daley Company stock…………………………… 1,000,000 Investment in Egan Corporation stock…………………………. 700,000 Held-to-maturity securities -year 000 Held-to-maturity securities -year $1,000,000 face value bond issued by Franklin Company paying 5% interest annually on December 31, yielding 4% annually, due December 31, 2013……………….. 1,018,861 ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized loss on Daley Company stock………………………. 200,000 Unrealized gain on Egan Corporation stock…………………….. 100,000 During 2012 the following events occurred: 1. Sold Cougar Company stock for $510,000. 2. Bought Gordon Corporation stock, held as a trading security, for $350,000. Fair value at December 31, 2012: $375,000. 3. Sold Daley Company stock for $950,000. 4. Held Egan Corporation stock; fair value at December 31, 2012: $695,000. 5.
Received interest on Franklin Company bond; fair value at December 31, 2012: $1,100,000. Required Fill in the amounts reported on Best Beverages’ 2012 financial statements. Show your work in the space below each answer. 2012 INCOME STATEMENT Interest revenue on Franklin bond$______________ Gain or loss on sale of Cougar stock$______________ gain loss (circle) Gain or loss on sale of Daley stock$______________ gain loss (circle) Other income statement gains or losses (specify stock, amount, and whether it is a gain or loss) DECEMBER 31, 2012 BALANCE SHEET ASSETS Investment in Gordon Corporation stock$____________ Investment in Egan Corporation stock$____________
Investment in Franklin Company bond$____________ ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized gains and losses (specify security, amount, and whether it is a gain or loss) ANS: 2012 INCOME STATEMENT Interest revenue on Franklin bond$40,754 (= 4% x 1,018,861) Gain or loss on sale of Cougar stock$60,000 gain (= $510,000 – $450,000) Gain or loss on sale of Daley stock$250,000 loss (= $950,000–$1,000,000–$200,000) Other income statement gains or losses Unrealized gain on Gordon stock (trading)$25,000 (= $375,000 – $350,000) DECEMBER 31, 2012 BALANCE SHEET ASSETS Investment in Gordon Corporation stock$ 375,000 Investment in Egan Corporation stock$ 695,000
Investment in Franklin Company bond$1,009,615 (= $1,018,861 – ($50,000 – $40,754) ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized gains and losses Unrealized gain on Egan stock (AFS)$95,000 (= $695,000 –$700,000 +$100,000) 4. Topic:Equity method investments LO 3 On January 2, 2010 Cornwall Corporation acquired 35% if the voting stock of Kingston Company for $4,000,000 in cash. The book values of Kingston’s reported assets and liabilities approximated their fair values, but Kingston had unreported customer lists (3-year life, straight-line) valued at $300,000, and brand names (indefinite life) valued at $1,000,000. During 2010 Kingston reported total income of $600,000 and paid total dividends of $200,000.
Kingston reported $25,000 in unrealized losses on trading securities and $10,000 in unrealized losses on AFS securities. Kingston sold $5,000,000 in merchandise to Cornwall at a markup of 20% on cost; $312,000 remains in Cornwall’s ending inventory. Kingston’s brand names are impaired by $150,000 in 2010. Cornwall uses the equity method to report its investment in Kingston. Required a. Compute Cornwall’s equity in net income of Kingston for 2010, reported on Cornwall’s income statement. b. Make the entry or entries necessary to report the above events for 2010 on Cornwall’s books. ANS: a. |Share of reported income |35% x $600,000 $ 210,000 | |Less revaluation writeoff: customer lists | | | | |$300,000/3 x 35% |(35,000) | |Less unconfirmed profit in ending inventory | | | | |($312,000–$312,000/1. 2) x 35% |(18,200) | |Equity in net income | |$ 156,800 | b. Investment in Kingston | |4,000,000 | | | |Cash | |4,000,000 | |Investment in Kingston | |156,800 | | | |Equity in net income | |156,800 | |Cash | |70,000 | | | |Investment in Kingston | |70,000 | OCI | |3,500 | | | |Investment in Kingston | |3,500 | 5. Topic: Proportionate consolidation LO 5 On January 1, 2007, Coca-Cola and another company jointly acquired Jugos del Valle. Each acquiring company paid $10 million to acquire 50% of Jugos. At the date of acquisition, Jugos’ book value was $6 million. It had unreported technology (indefinite life) valued at $5 million, and the remainder of Jugos’ assets and liabilities were fairly stated. It is now December 31, 2009. Coca-Cola treats Jugos as an equity method investment. The balance sheets of the two companies are as follows (in thousands): |Coca-Cola |Jugos | |Current assets |$ 3,000 |$ 500 | |Plant & equipment, net |80,000 |30,000 | |Investment in Jugos |10,750 | _____ | | Total assets |$ 93,750 |$ 30,500 | | | | | |Liabilities |$ 35,750 |$ 23,000 | |Capital stock |14,000 |2,000 | |Retained earnings |44,000 |5,500 | | Total liabilities & equity |$ 93,750 |$ 30,500 | Required Present Coca-Cola’s balance sheet at December 31, 2009, assuming Coca-Cola uses proportionate consolidation to report its investment in Jugos. ANS: (in thousands) Current assets |$ 3,250 |Liabilities |$ 47,250 | |P&E, net |95,000 |Capital stock |14,000 | |Technology |2,500 |Retained earnings |44,000 | |Goodwill | 4,500 | |______ | |Total |$105,250 |Total |$105,250 | 6. Topic: Statutory merger LO 4 Delicious Delicacies acquires the assets and liabilities of Elegant Eateries on January 2, 2013, for $7,000,000 cash. At that date, Elegant Eateries’ balance sheet is as follows: Assets | |Liabilities and equity | | |Current assets |$1,300,000 |Current liabilities |$1,100,000 | |Plant & equipment, net | 8,000,000 |Long-term debt |5,000,000 | | |________ |Capital stock |3,200,000 | |Totals |$9,300,000 |Totals |$9,300,000 | Elegant’s current assets are overvalued by $200,000, and its plant and equipment is overvalued by $1,000,000. Elegant has previously unreported intangibles of $2,000,000. Required Prepare the journal entry made by Delicious Delicacies to record its acquisition of Elegant Eateries. ANS: Current assets | |1,100,000 | | |Plant & equipment | |7,000,000 | | |Intangibles | |2,000,000 | | |Goodwill | |3,000,000 | | | |Current liabilities | |1,100,000 | | |Long-term debt | |5,000,000 | | |Cash | |7,000,000 | 7. Topic: Statutory merger LO 4
Akron Industries acquires the assets and liabilities of Dayton Inc. on January 2, 2011 for $60,000,000 cash. Dayton Inc. has the following assets and liabilities, at fair value: Cash…………………………………………$ 400,000 Receivables…………………………………. 1,500,000 Inventories………………………………….. 5,400,000 Buildings & equipment…………………….. 72,000,000 Current liabilities…………………………… 6,500,000 Notes payable………………………………. 34,000,000 Required a. Calculate the goodwill Akron records for this acquisition. b. If Dayton’s notes payable had a market value of $40,000,000, how is goodwill affected? Calculate the amount and direction of change. ANS: a. Price paid | | | |Fair value of identifiable net assets acquired: | |$60,000,000 | | Cash |$ 400,000 | | | Receivables |1,500,000 | | | Inventories |5,400,000 | | | Buildings & equipment |72,000,000 | | | Current liabilities | (6,500,000) | | | Notes payable | (34,000,000) |38,800,000 | |Goodwill | |$21,200,000 | b. If notes payable have a market value of $40,000,000, an increase of $6,000,000, the fair value of identifiable net assets acquired declines to $32,800,000 (= $38,800,000 – $6,000,000) and goodwill increases to $27,200,000 (= $21,200,000 + $6,000,000). 8. Topic: Statutory mergers, stock acquisitions LO 4 Creative Cutlery Inc. acquires Fairport Company on January 2, 2012 for $100,000,000 cash.
Fairport has the following assets and liabilities, at fair value: Current assets………………………………. $ 2,400,000 Buildings & equipment…………………….. 55,000,000 Patents & trademarks………………………. 10,800,000 Current liabilities…………………………… 7,000,000 Long-term debt. ……………………………. 35,000,000 Fairport also has developed technology, appropriately recorded as an asset on acquisition and valued at $30,000,000 that does not appear on its balance sheet. Required a. Prepare the journal entry Creative Cutlery makes to record the acquisition of Fairport, assuming this is a statutory merger. b. Repeat requirement a, assuming this is a stock acquisition. ANS: a. Current assets | |2,400,000 | | |Plant & equipment | |55,000,000 | | |Patents & trademarks | |10,800,000 | | |Developed technology | |30,000,000 | | |Goodwill | |43,800,000 | | | |Current liabilities | |7,000,000 | | |Long-term debt | |35,000,000 | | |Cash | |100,000,000 | b. Investment in Fairport | |100,000,000 | | | |Cash | |100,000,000 | 9. Topic: Equity method investments LO 3 Larkland Company acquires 30% of the voting stock of Martin Corporation on January 2, 2011. At the date of acquisition, Martin’s recorded net assets of $6,000,000 approximated fair value, but it had limited life intangibles, not currently reported on its balance sheet, valued at $4,000,000, with a remaining life of 5 years, and unlimited life intangibles, not currently reported on its balance sheet, valued at $3,000,000. During 2012, Martin Corporation reports net income of $5,000,000 and pays dividends of $2,000,000.
Impairment testing reveals that the unlimited life intangibles are impaired by $600,000 during 2012. Required Calculate equity in net income of Martin Corporation, to be reported on Larkland’s income statement. ANS: |30% net income |30% x $5,000,000 |$1,500,000 | |Amortization |30% x ($4,000,000/5) | (240,000) | |Equity in net income | |$1,260,000 | Note: Equity in net income is not adjusted for impairment of indefinite life intangibles. 10. Topic: Equity method investments LO 3
Delano Corporation acquires 25% of the voting stock of Harley Company on January 3, 2011, for $23,000,000. At that date, the book values of Harley’s assets and liabilities approximated fair value. During 2011, Harley reported net income of $7,000,000 and paid dividends of $2,000,000. Harley’s ending inventory contains $1,200,000 purchased from Delano. Delano sold the inventory to Harley at a markup of 20% on cost. Delano’s ending inventory contains $1,560,000 purchased from Harley. Harley sold the inventory to Delano at a markup of 30% on cost. Required a. Calculate equity in net income of Harley, reported on Delano’s 2011 income statement. b. Calculate Investment in Harley, reported on Delano’s December 31, 2011 balance sheet. ANS: a. 25% net income |25% x $7,000,000 |$1,750,000 | |Unconfirmed profit on upstream ending inventory |25% x ($1,560,000 – $1,560,000/1. 3) | | | | |(90,000) | |Unconfirmed profit on downstream ending inventory |25% x ($1,200,000 – $1,200,000/1. 2) | | | | |(50,000) | |Equity in net income | |$1,610,000 | b. Investment in Harley, 1/3/11 |$23,000,000 | |Equity in net income, 2011 |1,610,000 | |Dividends, 2011 (=$2,000,000 x 25%) | (500,000) | |Investment in Harley, 12/31/11 |$24,110,000 | 11. Topic: Equity method investments LO 3 Grant Company acquires 40% of the voting stock of Jake Corporation on January 1, 2010, for $50,000,000. At that date, Jake reported plant and equipment at $4,000,000 more than its fair value.
The plant and equipment had a remaining life of 20 years, straight-line. Jake also had limited life intangible assets, not reported on its balance sheet, with a fair market value of $10,000,000, 4 year remaining life, straight-line. During the 5-year period from January 1, 2010 through December 31, 2014 Jake reported total net income of $23,000,000 and paid $8,000,000 in dividends. During 2015, Jake reported net income of $3,000,000 and paid $800,000 in dividends. Required a. Calculate equity in net income of Jake, reported on Grant’s 2015 income statement. b. Calculate Investment in Jake, reported on Grant’s December 31, 2015 balance sheet. ANS: a. 40% net income |40% x $3,000,000 |$1,200,000 | |Depreciation adjustment |40% x ($4,000,000/20) | 80,000 | |Equity in net income | |$1,280,000 | Note: intangibles’ life is over in 2015, so no amortization is taken. b. |Investment, 1/1/10 | |$50,000,000 | |Share of net income, 2010-2014 |40% x $23,000,000 |9,200,000 | |Depr. adjustment, 2010-2014 |$80,000 x 5 |400,000 | |Amort. djustment, 2010-2014 | | (10,000,000) | |Dividends, 2010-2014 |40% x $8,000,000 | (3,200,000) | |Equity in net income, 2015 | |1,280,000 | |Dividends, 2015 |40% x $800,000 | (320,000)| |Investment, 12/31/15 | |$47,360,000 | 12. Topic: Equity method investments LO 3 Santor Company acquires 35% of the voting stock of Tinto Corporation on January 1, 2010, for $12,000,000, which was 35% of Tinto’s book value. It is now December 31, 2012. Santor sells merchandise to Tinto at a markup of 15% on cost. Tinto sells merchandise to Santor at a markup of 25% on cost. Below are the inventory balances held by Santor, purchased from Tinto, and held by Tinto, purchased from Santor, at various dates. |Inventory held by Santor, purchased from |Inventory held by Tinto, purchased from | | |Tinto |Santor | |December 31, 2010 |$1,500,000 |$575,000 | |December 31, 2011 |2,000,000 |747,500 | |December 31, 2012 |2,250,000 |828,000 | Tinto reports total net income of $2,500,000 for 2010 and 2011, and $750,000 for 2012. Tinto pays no dividends during this period. Required a. Calculate equity in net income of Tinto, reported on Santor’s 2012 income statement. b. Calculate the Investment in Tinto balance, reported on Santor’s December 31, 2012 balance sheet. ANS: a. |35% net income |35% x $750,000 |$262,500 | |Unconfirmed profit on upstream ending inventory |35% x ($2,250,000 – $2,250,000/1. 25) | | | |(157,500) | |Unconfirmed profit on downstream ending inventory |35% x ($828,000 – $828,000/1. 15) | | | | |(37,800) | |Confirmed profit on upstream beginning inventory |35% x ($2,000,000 – $2,000,000/1. 25) | | | | |140,000 | |Confirmed profit on downstream beginning inventory |35% x ($747,500 – $747,500/1. 5) | | | | |34,125 | |Equity in net income | |$241,325 | b. |Investment, 1/1/10 | |$12,000,000 | |Share of net income, 2010-2011 |35% x $2,500,000 |875,000 | |Unconfirmed profit on upstream ending inventory |35% x ($2,000,000 – $2,000,000/1. 25) | | | | |(140,000) | |Unconfirmed profit on downstream beginning inventory |35% x ($747,500 – $747,500/1. 5) | | | | |(34,125) | |Equity in net income, 2012 | |241,325 | |Investment, 12/31/12 | |$12,942,200 | Note: Confirmed and unconfirmed profits on December 31, 2010 and 2011 inventories cancel out over time. Only the December 31, 2012 inventory profits affect the investment balance. 13. Topic: Proportionate consolidation and equity method for joint ventures LO 5 On January 1, 2011, Transcom Corporation and another company created a joint venture. Each company contributed $25 million and has a 50% interest in the joint venture. At December 31, 2011, the end of Transcom’s accounting year, Transcom and the joint venture report the following balance sheets: (in thousands) |Transcom |Joint Venture | |Current assets |$ 15,000 |$ 10,000 | |Land, buildings and equipment, net |200,000 |45,000 | |Intangible assets |– |25,000 | |Investment in joint venture | 25,000 | — | | Total assets |$240,000 |$ 80,000 | | | | | |Liabilities |$120,000 |$ 25,000 | |Capital stock |100,000 |50,000 | |Retained earnings | 20,000 | 5,000 | | Total liabilities & equity |$240,000 |$ 80,000 | Transcom’s Investment balance has not yet been adjusted to its correct year-end value. The joint venture paid no dividends during 2011. Required a. What method does Transcom use to report its investment in the joint venture, per U. S. GAAP? b. Prepare Transcom’s adjusting entry needed at year-end to bring the Investment account to its correct December 31, 2011 value. c. Present Transcom’s December 31, 2011 balance sheet, following U. S. GAAP. d. Now assume Transcom follows IFRS and uses proportionate consolidation to account for its investment in the joint venture. Present Transcom’s December 31, 2011 balance sheet. ANS: a. Equity method b. Investment in joint venture | |2,500,000 | | | |Equity in income of joint venture | | | | | | |2,500,000 | c. (in thousands) |Current assets |$ 15,000 |Liabilities |$ 120,000 | |Land, buildings, & equipment, net |200,000 |Capital stock |100,000 | |Investment in joint venture | 27,500 |Retained earnings | 22,500 | |Total |$242,500 |Total |$242,500 | d. (in thousands) Current assets |$ 20,000 |Liabilities |$132,500 | |Land, buildings, & equipment, net |222,500 |Capital stock |100,000 | |Intangible assets | 12,500 |Retained earnings | 22,500 | |Total |$255,000 |Total |$255,000 | 14. Topic: HTM investments LO2 A company invests in a 5-year, $2,500,000 face value, 5% corporate bond on July 1, 2013, and classifies it as a held-to-maturity investment. The bond is priced to yield 8%. The company’s accounting year ends June 30 of each year. Required a. How much did the company pay for the corporate bond? b.
Assuming the company continues to hold the bond through fiscal 2016, and no impairment losses have been reported on the investment, what amounts does it report for interest revenue on the fiscal 2016 income statement, and what is the balance for the investment at June 30, 2016? c. Assume the company believes the investment may be impaired at June 30, 2016. How would the company determine whether or not the investment is impaired? d. If no previous impairment has been reported, and the company estimates that the June 30, 2106 investment fair value is $1,500,000 and impairment loss recognition is appropriate, make the entry to record the impairment loss. ANS: a. ($125,000/1. 08) + ($125,000/(1. 082) + $125,000/(1. 083) + ($125,000/(1. 084) + (2,625,000/(1. 085) = $2,200,547 b. An amortization table through the end of fiscal 2016 follows: |Interest revenue |Addition to investment account | | | |(8% x previous year’s investment|(interest revenue – $125,000) | | | |balance) | |Year-end investment balance | |Fiscal year | | | | |Beginning | | |$2,200,547 | |2014 |$176,044 |$51,044 |2,251,591 | |2015 |180,127 |55,127 |2,306,718 | |2016 |184,537 |59,537 |2,366,255 | Interest revenue for fiscal 2016 is $184,537. The June 30, 2016 investment balance is $2,366,255. c. SFAS 115 requires that an impairment loss be reported if the decline in fair value is “other than temporary. Evidence might include a significant reduction in expected revenues for the corporation which issued the bond, or evidence that it has or plans to declare bankruptcy. d. The impairment loss is ($2,366,255 – $1,500,000) = $866,255. The entry is: |Impairment loss on HTM securities (income)| | | | | | |866,255 | | | |Investment in HTM securities | |866,255 | 15. Topic: Statutory merger LO 4 Fortuna Industries acquires the assets and liabilities of Gantry Inc. n January 2, 2010 for $50,000,000 cash. At that date, Gantry’s balance sheet is as follows: |Assets | |Liabilities and equity | | |Cash, receivables |$ 400,000 |Accounts payable |$ 3,000,000 | |Merchandise inventory |2,000,000 |Bonds payable |220,000,000 | |Land, buildings, and equipment, net | | | | | |245,000,000 |Common stock 150,000 | | | |Additional paid-in capital | | | | | |25,000,000 | | | |Retained earnings |1,000,000 | | | |Accumulated other comprehensive | | | |___________ |income |(1,750,000) | |Total |$247,400,000 | |$247,400,000 | At January 2, 2010, Gantry’s assets and liabilities have the following fair values: |Fair value, 1/2/10 | |Cash, receivables |$ 400,000 | |Merchandise inventory |1,300,000 | |Land, buildings, and equipment |190,000,000 | |Accounts payable |3,000,000 | |Bonds payable |214,000,000 | Gantry has no unrecorded intangibles. Required a. Prepare the journal entry made by Fortuna to record its acquisition of Gantry. b. Gantry’s book value is $24,400,000. Explain why Fortuna paid $50,000,000, or $25,600,000 more than book value, for Gantry. ANS: a. Cash, receivables | |400,000 | | |Merchandise inventory | |1,300,000 | | |Land, buildings, and equipment | | | | | | |190,000,000 | | |Goodwill | |75,300,000 | | | |Accounts payable | |3,000,000 | | |Bonds payable | |214,000,000 | | |Cash | |50,000,000 | b. Gantry’s book values differ from fair value as follows: |Fair value – book value | |Merchandise inventory |$ (700,000) | |Land, buildings, and equipment |(55,000,000) | |Bonds payable | 6,000,000 | |Total |$(49,700,000) | This analysis indicates that Fortuna should pay $49,700,000 less than book value for Gantry. Fortuna was willing to pay $25,600,000 more than book value, indicating that Gantry has unidentifiable intangible assets, valued at $75,300,000 (= $25,600,000 + $49,700,000), which it records as goodwill. These assets could include reputation, work force, and other intangibles expected to create future revenues. On the other hand, Fortuna could have paid too much for Gantry, perhaps due to pressure from competing potential buyers or from Gantry’s existing shareholders. Use the following information to complete problems 16 and 17 below: | | |Fair value | | | | |Date of acquisition | |12/31/12 |Date sold |Selling price | |Investment | |Cost | | | | |Actel Company stock |9/3/12 |$25,000 |$20,000 |1/10/13 |$18,000 | |Bella Corporation stock |10/15/12 | 36,000 | 38,000 |2/17/13 | 35,000 | |Cripton Company stock |12/4/12 | 12,000 | 10,000 |2/20/13 | 16,000 | Assume the accounting year ends December 31. 16. Topic: Trading and AFS investments LO 2
The Actel and Cripton investments are classified as available-for-sale, and the Bella investment is classified as a trading investment. Required Calculate the gain or loss on these investments, to be reported on the 2012 and 2013 income statements. ANS: 2012 income statement Unrealized gain on Bella stock$ 2,000 2013 income statement Realized loss on Actel stock$ (7,000) Realized loss on Bella stock (3,000) Realized gain on Cripton stock 4,000 Net loss$ (6,000) 17. Topic: Trading and AFS investments LO 2 The Actel and Cripton investments are classified as trading, and the Bella investment is classified as available-for-sale. Required
Calculate the gain or loss on these investments, to be reported on the 2012 and 2013 income statements. ANS: 2012 income statement Unrealized loss on Actel stock$ (5,000) Unrealized loss on Cripton stock (2,000) Net loss$ (7,000) 2013 income statement Realized loss on Actel stock$ (2,000) Realized loss on Bella stock (1,000) Realized gain on Cripton stock 6,000 Net gain$ 3,000 18. Topic: Equity method investment LO 3 Pronto Company acquires 45% of the voting stock of Rexo Corporation on January 1, 2008, for $50,000,000, and treats it as an equity method investment. At the date o
Approximate price: $22
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