102.
On March 1, 2017, Young Company paid cash to purchase the following stocks as long-term
investments in available-for-sale securities:
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, 2017
Dec. 31, 2018
Old common
$6
$7
ABC common
$24
$25
XYZ common
$21
$17
Required:
Prepare the required journal entries at the following dates: March 1, 2017, December 31,
2017 and December 31, 2018.
Cash
Net unrealized gains and losses
103.
On January 1, 2016, 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 2016,
the following events occurred at Shazam Corporation:
Net Income reported for 2016
$20,000
Dividends declared and paid (per share)
$0.50
Market price per share of common stock
at December 31, 2016
$28.00
Required:
A. Prepare the journal entry for Presto Corporation to record the investment (use an account
titled “Long-term 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 2016.
2. To record cash dividend declared and received.
3. To record any adjustment to market price of stock at year-end.
Long-term investment
Cash
1. To recognize net income for 2016:
Long-term investment
2. To record cash dividend declared and paid
104.
On January 1, 2016, Alden Company acquired 15,000 shares of the nonvoting common stock of
Maxim Corporation as a long-term investment. Maxim reported a 2016 net income of $35,000.
On January 2, 2017, Maxim declared and paid a $10,000 cash dividend. The fair value of the
Maxim stock held by Alden on December 31, 2016, was $224,000. Alden Company has
recorded only the following journal entries:
January 1, 2016:
Long-term investment, Maxim
stock (15,000 shares)
225,000
Cash
225,000
December 31, 2016 (end of the accounting period):
No entry
January 2, 2017:
Cash
400
Investment income
400
Required:
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, 2016?
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 net investment on
January 3, 2017.
105.
Orleans Corporation purchased 1,000,000 shares of Creole Corporation’s common stock,
which constitutes 10% of Creole’s voting stock on June 30, 2016 for $42 per share. Orleans’
intent is to keep these shares beyond the current year. On December 20, 2016, Creole paid a
$4,000,000 cash dividend. On December 31, 2016, Creole’s stock was trading at $45 per share
and their reported 2016 net income was $52 million.
Required:
A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2016.
B. Record the transaction for the dividend received by Orleans on December 20, 2016.
C. Record any year-end entries needed by Orleans Corporation.
106.
Describe the difference in the calculation of the realized gain or loss on the sale of an
investment when the trading security classification is used relative to use of the available–for–
sale classification.
107.
On December 31, 2016, Jean World Corporation recorded the following journal entry relating to
its investment in 9,000 shares of common stock of Soda Corporation.
12/31/2016:
Long-term investment
in common stock
54,000
Equity in affiliate
earnings
54,000
At the end of 2016, Soda Corporation reported net income of $120,000.
Earlier in the year, Soda declared and paid dividends of $18,000.
Required:
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?
108.
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, 2016. At the end of 2016,
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 2016 was $23 per share.
Required:
Calculate the net balance in Martha’s investment account at the end of 2016.
109.
Donald Corporation purchased 3,000 shares of the outstanding common voting stock of
Apprentice Corporation on January 2, 2016, 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 2016, Apprentice reported net income of $60,000 and declared and paid
a $5,000 cash dividend. The December 31, 2016, fair value of Apprentice’s stock was $84.
Required:
Prepare the journal entries required for Donald Corporation on January 2, 2016 and December
31, 2016.
January 2, 2016:
110.
Required:
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.
111.
Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation’s $1 par
value common stock for $20 million, in exchange for 2 million shares at a $10 market price, on
March 31, 2016. On December 12, 2016, Nutribar declared and paid a $1 million cash dividend
and reported net income for the year ended 2016 of $10 million. On December 31, 2016,
Nutribar’s stock was trading at $11.50 per share.
Required:
A. Record the journal entry on Kudos’ book for the acquisition of Nutribar on March 31, 2016.
B. Record the cash dividend received by Kudos on December 12, 2016.
C. Record any end of year entries needed on Kudos’ books.
112.
During 2016, the following items were reported on ShoeCo‘s statement of cash flows in
millions of dollars.
Required:
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.
Investments in unconsolidated affiliates,
purchases
$64
Dividends received from equity affiliates
10
Equity in affiliate earnings
38
Available-for-sale securities, sales proceeds
27
Loss on sale of available-for-sale securities
(6)
Unrealized gain on trading securities
15
Effect
Equity in affiliate earnings
Operating
sale securities
securities
113.
During 2016, the following items were reported on The Mickey Company’s statement of cash
flows in millions of dollars.
Required:
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 income of affiliates
48
Proceeds from the sale of investments
14
Purchases of investments
67
Dividends received from equity investments
36
Equity income of affiliates
Purchases of investments
114.
Discuss how the equity method of accounting for investments prevents managers of the
investor corporation from manipulating income related to dividends from the investee.
115.
On January 1, 2016, 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, 2016 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
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
116.
On January 2, 2016, 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.
Required:
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.