58
59
99) On March 1, 2019, Young Company paid cash to purchase the following stocks as long-term
investments:
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:
Stock
Dec. 31, 2019
Dec. 31, 2020
Old common
$6
$7
ABC common
$24
$25
XYZ common
$21
$17
Prepare the required journal entries at the following dates: March 1, 2019, December 31, 2019
and December 31, 2020.
60
61
100) On January 1, 2019, 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 2019,
the following events occurred at Shazam Corporation:
Net Income reported for 2019
$20,000
Dividends declared and paid (per share)
$0.50
Market price per share of common stock
at December 31, 2019
$28.00
A. Prepare the journal entry for Presto Corporation to record the 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 2019.
2. To record cash dividend declared and received.
3. To record any adjustment to market price of stock at year-end.
101) On January 1, 2019, Alden Company acquired 15,000 shares (4%) of the nonvoting
preferred stock of Maxim Corporation as a long-term investment for $225,000. Maxim reported
a 2019 net income of $35,000. On January 2, 2020, Maxim declared and paid a $10,000 cash
dividend on the preferred stock. The fair value of the Maxim stock held by Alden on December
31, 2019, was $224,000. Alden Company has recorded only the following journal entries:
January 1, 2019:
Investments
225,000
Cash
225,000
December 31, 2019 (end of the accounting period):
No entry
January 2, 2020:
Cash
400
Dividend revenue
400
Based on the above information, answer the following questions:
A.
What method did Alden use to account for the investment?
B.
Did Alden fail to make an adjusting entry on December 31, 2019?
C.
What condition, if changed, would require that the equity method be used?
D.
Assuming the fair value method is used; calculate the valuation of the
investment on January 3, 2020.
102) Orleans Corporation purchased 1,000,000 shares of Creole Corporation’s common stock,
which constitutes 10% of Creole’s voting stock on June 30, 2019 for $42 per share. Orleans’
intent is to keep these shares beyond the current year. On December 20, 2019, Creole paid a
$4,000,000 cash dividend. On December 31, 2019, Creole’s stock was trading at $45 per share
and their reported 2019 net income was $52 million.
A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2019.
B. Record the transaction for the dividend received by Orleans on December 20, 2019.
C. Record any year-end entries needed by Orleans Corporation.
103) Describe the difference in accounting for debt investments classified as available-for-sale
versus the accounting for equity securities.
104) On December 31, 2019, Jean World Corporation recorded the following journal entry
relating to its investment in 9,000 shares of common stock of Soda Corporation.
12/31/2019:
Investments
54,000
Equity in investee earnings
54,000
At the end of 2019, Soda Corporation reported net income of $120,000.
Earlier in the year, Soda declared and paid dividends of $18,000.
A. What method is being used to account for this investment?
B. What is the total number of shares outstanding of Soda’s common stock?
105) As a long-term investment, Martha Company purchased 5,000 of the 12,500 outstanding
voting shares of Stewart Corporation at $20 per share on January 1, 2019. At the end of 2019,
Stewart reported net income of $100,000 and declared and paid dividends of $10,000. The
market price of the Stewart stock at the end of 2019 was $23 per share.
Calculate the net balance in Martha’s investment account at the end of 2019.
106) Donald Corporation purchased 3,000 shares of the outstanding common voting stock of
Apprentice Corporation on January 2, 2019, for $80 per share. At the date of purchase
Apprentice Corporation had outstanding 10,000 shares of common stock with a par value of $50
per share. During 2019, Apprentice reported net income of $60,000 and declared and paid a
$5,000 cash dividend. The December 31, 2019, fair value of Apprentice’s stock was $84.
Prepare the journal entries required for Donald Corporation on January 2, 2019 and December
31, 2019.
107) A. Discuss the criteria for applying the equity method of accounting for long-term
investments.
B. Discuss the rationale for the equity method procedures of accounting for long-term
investments.
108) On March 31, 2019, Kudos Corporation paid $20,000,000 for 2,000,000, $1 par value,
shares of the voting stock of Nutribar Corporation. This investment represented 40% of
Nutribar’s outstanding shares. On December 12, 2019, Nutribar declared and paid a $1,000,000
cash dividend and reported net income for the year ended 2019 of $10,000,000. On December
31, 2019, Nutribar’s stock was trading at $11.50 per share.
A. Record the journal entry on Kudos’ book for the acquisition of Nutribar on March 31, 2019.
B. Record the cash dividend received by Kudos on December 12, 2019.
C. Record any end of year entries needed on Kudos’ books.
109) During 2019, the following items were reported on ShoeCo’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 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.
Purchases of passive equity investments
$64
Dividends received from equity affiliates
10
Equity in investee earnings
38
Debt available-for-sale securities, sales proceeds
27
Loss on sale of debt available-for-sale securities
(6)
Unrealized gain on debt trading securities
15
Purchases of passive equity investments
Investing
Dividends received from equity affiliates
Operating
Equity in investee earnings
Operating
proceeds
Investing
securities
Operating
Unrealized gain on debt trading securities
Operating
110) During 2019, the following items were reported on The Mickey Company’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 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.
Equity in investee earnings
48
Proceeds from the sale of investments
14
Purchases of investments
67
Dividends received from equity investments
36
Equity in investee earnings
Operating
Proceeds from the sale of investments
Investing
Purchases of investments
Investing
Dividends received from equity investments
Operating
111) Discuss how the equity method of accounting for investments prevents managers of the
investor corporation from manipulating income related to dividends from the investee.
112) On January 1, 2019, 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, 2019 are listed below:
Item
Book Value
Fair value
Equipment
$60,000
$80,000
Trucks
40,000
55,000
Factory
300,000
320,000
Other assets
130,000
100,000
Liabilities
100,000
105,000
What amount of goodwill, if any, will be recorded by Fall Corporation as a result of this
investment?
Equipment
Trucks
Factory
Other assets
Fair value of assets
Less: Fair value of liabilities
Fair value of assets minus liabilities
Amount paid for Fall Corporation
Fair value of assets minus liabilities
Goodwill
113) On January 2, 2019, 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.
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.