Chapter 12 – Reporting and Interpreting Investments in Other Corporations
49. On July 1, 2010, as a long-term investment in available-for-sale securities, Wildlife
Supply Company purchased 6,000 shares of the preferred stock (nonvoting) of Nature
Company for $30 per share (18,000 shares outstanding). The records of Nature Company
reflect the following:
The amount reported on the balance sheet by Wildlife Company for its investment at
December 31, 2010 would be which of the following?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
50. On July 1, 2010, Surf Company purchased long-term investments in available-for-sale
securities as follows:
Blue Corporation common stock (par $5) 2,000 shares at $16 per share.
Black Company preferred stock (par $20) 1,500 shares at $30 per share.
The quoted market prices per share on December 31, 2010 were as follows:
Blue Corporation stock, $15 per share
Black Company stock, $30 per share
Each of the long-term investments represents 10% of the total shares outstanding. The
combined carrying value of the long-term investments reported in the balance sheet at
December 31, 2010 would be which of the following?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
51. When accounting for investments in trading securities, any decline in market value below
cost of the investments is reported in which of the following ways?
52. The primary difference in accounting for available-for-sale investments in stock and
accounting for trading investments in stock is which of the following?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
53. On July 1, 2010, Carter Company purchased trading securities as follows:
Dark Corporation common stock (par $1) 10,000 shares at $25 per share.
Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share.
The quoted market prices per share on December 31, 2010 were as follows:
Dark Corporation stock, $27 per share
Janvrin Corporation stock, $104 per share
Each of the investments represented 5% of the total shares outstanding. The carrying value
amount of the investments at December 31, 2010 should be
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
54. Which of the following is true about passive investments?
55. Phillips Corporation purchased 1,000,000 shares of Martin Corporation’s common stock
which constitutes 10% of Martin’s voting stock on June 30, 2010 for $42 per share. Phillips’
intent is to keep these shares beyond the current year. On December 20, 2010, Martin paid a
$4,000,000 cash dividend. On December 31, Martin’s stock was trading at $45 per share and
their reported 2010 net income was $52 million. What method of accounting will Phillips use
to account for this investment?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
56. Phillips Corporation purchased 1,000,000 shares of Martin Corporation’s common stock
which constitutes 10% of Martin’s voting stock on June 30, 2010 for $42 per share. Phillips’
intent is to keep these shares beyond the current year. On December 20, 2010, Martin paid a
$4,000,000 cash dividend. On December 31, Martin’s stock was trading at $45 per share and
their reported 2010 net income was $52 million. What effect will the dividend have on
Phillips’ 2010 financial statements?
57. Phillips Corporation purchased 1,000,000 shares of Martin Corporation’s common stock
which constitutes 10% of Martin’s voting stock on June 30, 2010 for $42 per share. Phillips’
intent is to keep these shares beyond the current year. On December 20, 2010, Martin paid a
previously declared $4,000,000 cash dividend. On December 31, Martin’s stock was trading at
$45 per share and their reported 2010 net income was $52 million. What investment value
will be reflected on Phillips’ balance sheet at December 31, 2010?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
58. When is the equity method used to account for long-term investments in stocks?
59. Which of the following statements regarding the accounting for an investment using the
equity method is incorrect?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
60. Heartfelt Company owns a 40% interest in the voting common stock of Candle
Corporation, accounted for using the equity method. During 2010, Candle Corporation
reported net income 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, 2010. How much income
should Heartfelt report during 2010 from the Candle investment?
61. Heartfelt Company owns a 40% interest in the voting common stock of Candle
Corporation, accounted for using the equity method. During 2010, Candle Corporation
reported net income 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, 2010. At what amount is
the Candle investment reported on the December 31, 2010 balance sheet?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
62. On January 1, 2010, Palmer, Inc. bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000. The equity method of accounting for this investment is
used. During 2010, Arnold Corporation reported $30,000 of net income and paid $10,000 in
cash dividends. At the end of 2010, the shares had a market value of $150,000. At what
amount should the Arnold investment be reported at on the December 31, 2010 balance
sheet?
63. On January 1, 2010, Palmer, Inc. bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000. The equity method of accounting for this investment is
used. During 2010, Arnold Corporation reported $30,000 of net income and paid $10,000 in
cash dividends. At the end of 2010, the shares had a market value of $150,000. How much
income will Palmer report from the Arnold investment during 2010?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
64. On January 1, 2010, Calas Company acquired 40% of the outstanding voting stock of
Nick Company as a long-term investment. During 2010, Nick reported net income of $10,000
and declared and paid dividends of $4,000. During 2010, Calas Company should report
“Income from investee earnings” of
65. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell
Corporation at a cost of $150,000. The equity method of accounting for this investment is
used. During 2010, Shell Corporation reported $40,000 of net income and paid $5,000 in cash
dividends. At the end of 2010, the shares had a market value of $160,000. How much
investment income will Turtle report from the Shell investment during 2010?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
66. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell
Corporation at a cost of $150,000. The equity method of accounting for this investment is
used. During 2010, Shell Corporation reported $40,000 of net income and paid $5,000 in cash
dividends. At the end of 2010, the shares had a market value of $160,000. What investment
balance will be reported on Turtle’s December 31, 2010 balance sheet?
67. When is the equity method not used to account for long-term investments in stocks?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
68. Which of the following statements is false?
69. Which of the following statements is correct?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
70. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation’s $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2011. On December 31, 2011, Click It paid a $1 million cash dividend
declared earlier in 2011 and reported net income for the year ended 2011 of $10 million. On
December 31, 2011, Click It’s stock was trading at $11.50 per share.
What effect will the dividend have on Photo Finish’s financial statements?
71. Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation’s $1 par value common stock for $20 million (2 million shares at a $10 market
price) on March 31, 2011. On December 31, 2011, Click It paid a $1 million cash dividend
declared earlier in 2011 and reported net income for the year ended 2011 of $10 million. On
December 31, 2011, Click It’s stock was trading at $11.50 per share. At what amount will the
Click It investment be reported on Photo Finish’s December 31, 2011 balance sheet?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
72. Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation
under the purchase method. Which of the following statements about the consolidated
statements is true?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
73. The balance sheet of Mini Company was as follows immediately before it was acquired
by Maxi Company:
On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding
common stock of Mini Company. The current market value of Mini Company’s plant and
equipment was $140,000 on the date of acquisition. If the market value and book value are the
same for Mini’s remaining assets, what was the amount of goodwill purchased by Maxi
Company?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
74. On January 1, 2010, 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 market value of SCD’s plant and equipment was $100,000 in excess of
the equipment’s book value. If the market value and book value are the same for SCD’s
remaining assets, what was the amount of goodwill purchased by Shelley Company?
75. On January 1, 2010, Sheldon Company paid $750,000 cash for 100% of the outstanding
common stock of Mullen Company; Mullen’s stockholders equity on the date of acquisition
was $550,000. The current market value of Mullen’s net assets was $70,000 in excess of their
book value. What was the amount of goodwill purchased by Sheldon Company?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
76. The balance sheet of Mini Company was as follows immediately before it was acquired
by Maxi Company:
On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding
common stock of Mini Company. The current market value of Mini Company’s plant and
equipment was $140,000 on the date of acquisition. If the market value and book value are the
same for Mini’s remaining assets, what is the net increase in Maxi’s assets as a result of the
merger with Mini?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
77. Paxton Corporation acquired all of the outstanding voting stock of Stanley Company.
How should the assets and liabilities of the acquired company be reported on the consolidated
financial statements immediately after the acquisition?
78. During 2010, Manning Corporation purchased 100% of the outstanding voting shares of
Brady Corporation for $4.0 million. Brady’s assets had a book value of $5.0 million and fair
market value of $6.5 million. The book value as well as fair market value of Brady’s liabilities
equaled $3.2 million. How much was paid for goodwill?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
79. How is goodwill accounted for subsequent to acquisition?
80. Which of the following is the primary justification for reporting the acquisition of a
controlling interest on a consolidated basis?
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
81. On January 1, 2010, Red Company purchased Patriot Shop for $400,000 cash. Red
Company received the assets listed below and assumed accounts payable (owed by Patriot)
amounting to $30,000.
What amount of Goodwill will be recorded in the transaction?