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Chapter 012: Reporting and Interpreting Investments in Other Corporations

True / False Questions


1. The extent of influence and control over another company is a critical factor in determining
the proper method of accounting for a long-term investment in the common stock of another
company.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

2. Investments in bonds intended to be sold before they reach maturity should be reported
under the market value method.
TRUE

AACSB Tag: Communications


Difficulty: Medium
L.O.: 1

3. If a bond is bought at par value, then interest revenue will be equal to the cash revenue.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

4. An investor who owns more than 50% of the outstanding bonds of another corporation has
"significant influence" over that corporation.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

12-1
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

5. Objectives of a long-term investment in the common stock of another corporation include


earning a return on idle cash or obtaining influence or control over the other corporation.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

6. When we sell an investment in available-for-sale securities, an entry needs to be recorded


to offset the allowance to value at market account against the net unrealized gains/losses
account prior to recording the removal of the investment account.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

7. Most businesses prefer to treat their investment in stock, when less than 20% of the voting
stock is owned, as trading securities since those unrealized gains and losses stay on the
balance sheet and do not disrupt reported net income.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

8. The equity method requires the recognition of investment revenue for dividends received.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 3

12-2
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

9. When using the term investments in associated or affiliated companies on a balance sheet,
it implies a company has significant influence by owning between 20 and 50 percent of the
voting stock of that company.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

10. Tiger Corporation owns 30% of Woods Corp. for which they paid $5.5 million. Woods
Corp. paid a $100,000 dividend. The investment in affiliated companies account will increase
by $30,000, which is Tiger's proportionate share of the dividend.
FALSE

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

11. An investment accounted for under the equity method would record a reduction in the
investment account for their proportionate share of the investee's reported net loss.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 3

12. Any gains or losses on sale of investments as well as any unrealized gains or losses on
trading securities would have to be added back to or deducted from net income on the
statement of cash flows under the indirect method to remove the effects of investment
activities out of the operating activities section.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 3

12-3
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

13. In a 100% acquisition, the stockholders of the acquired company receive cash for their
shares of stock in the acquired company. The stockholders are no longer owners of either the
parent or the subsidiary.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

14. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million.
Allison's total assets at fair market value equaled $12.5 million and Allison had liabilities at
fair market value equal to $3.4 million. Madison Inc., will report goodwill of $0.9 million.
TRUE

AACSB Tag: Analytic


Difficulty: Easy
L.O.: 4

15. When the acquiring company purchases 100% of the investee's stock, the investee's assets
and liabilities will be consolidated with those of the acquiring company at their book values.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

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

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

12-4
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

17. Return on assets (ROA) is computed by dividing net income by total assets at the end of
the year.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 5

18. A low return on assets (ROA) is generally viewed as favorable in terms of effective
management of invested capital.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 5

19. Return on assets (ROA) is comprised of two separate ratios, profit margin and fixed asset
turnover.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 5

20. One of the important elimination entries when preparing consolidated statements is to
remove the investment in subsidiary account so it can be replaced with the investees' acquired
asset and liability accounts along with any acquired goodwill.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: Sup A

12-5
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

Multiple Choice Questions


21. Which of the following is the best description of investments in trading securities?
A. Investments in bonds that management intends to hold to maturity.
B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
C. Investments in more than fifty percent of the voting stock of another company.
D. Investments that grant the investor significant influence, but not control over the investee
company.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

22. Piano Company owns 55% of the voting common stock shares of Keys Corporation.
Which of the following is true?
A. The investment would be accounted for using the equity method.
B. The investment would be accounted for by consolidation.
C. The investment would be accounted for under the market value method.
D. The investment would be accounted for under the amortized cost method.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

23. Which of the following is the best description of investments in available-for-sale


securities?
A. Investments in bonds that management intends to hold to maturity.
B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future.
C. Investments in more than fifty percent of the voting stock of another company.
D. Investments in securities that are accounted for under the market value method other than
trading securities and held-to-maturity debt investments.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

12-6
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

24. Subsequent to acquisition, measurement of a long-term investment in another corporation


and the related investment revenue depends upon the extent to which the investing company
can exercise
A. significant control over the operating and financing policies of the other company.
B. significant influence or control over the operating and financing policies of the other
company.
C. significant influence or control over the operating policies of the other company.
D. significant influence or control over the financing policies of the other company.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

25. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2009. The bonds pay
dividends of 10%. Chang intends to hold these bonds to maturity. Which of the following
statements is false?
A. Since the bonds were issued at par value, the cash interest will be the same as interest
revenue.
B. The bonds will earn $75,000 of interest by December 31, 2009.
C. If sold before maturity, any gain or loss would be reported as an extraordinary item.
D. Since they were classified as held to maturity, the company would recognize no unrealized
gains or losses on the bonds over their lifetime.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 1

26. Significant influence over the operating and financing policies of another company may
be indicated by
A. participation on its board of directors.
B. participation in its policy-making process.
C. material transactions between the two companies.
D. All of the answers are correct.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

12-7
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

27. Global Company owns 30% of the outstanding voting stock of Local Corporation. Global
should use the following method to account for the investment
A. market value method.
B. equity method.
C. consolidated financial statement method.
D. Either the market value or equity method is acceptable.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

28. If a company purchased 15% of the outstanding voting shares of stock of another
company as a long-term investment in available-for-sale securities, the investor company
should use the following method:
A. consolidation.
B. equity.
C. market value.
D. payout.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

29. Use of the consolidated financial statement method of accounting for a long-term
investment in common stock of another company is required when the ownership of its voting
stock is
A. 20% or more.
B. less than 20%.
C. between 20% and 50%.
D. more than 50%.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

12-8
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

30. The equity method causes the investment account to approximate


A. original cost of the investment.
B. market value of the investment.
C. original cost of the investment minus any dividends received.
D. original cost of the investment plus a proportionate share of subsequent undistributed
earnings of the investee.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

31. Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato
Corporation as a long-term investment. Which of the following methods should be used by
Idaho Company in accounting for the investment?
A. Market value method.
B. Equity method.
C. Purchase method.
D. Because the stock is nonvoting, either the market value or the equity method is acceptable.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

12-9
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

32. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke
Corporation on January 1, 2009, at $40 per share as a long-term investment. The records of
Burke Corporation showed the following on December 31, 2009

Gilman Company should report the following on the December 31, 2009, balance sheet for its
investment in Burke Corporation.
A. $4,218,000.
B. $4,000,000.
C. $4,124,000.
D. $3,800,000.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

33. On January 1, 2009, Entertainment Company acquired 15% of the outstanding voting
stock of Rocker Company as a long-term investment in available-for-sale securities. On
December 31, 2009, Rocker Company reported net income of $1,500,000 and dividends
declared and paid of $250,000. For the year ended December 31, 2009, Entertainment
Company should report "Investment income" amounting to
A. $225,000.
B. $ 37,500.
C. $187,500.
D. zero.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

34. Which of the following statements is correct?


A. Any unrealized holding gain or loss on investments in trading securities is reported in the
income statement.
B. Any unrealized holding gain or loss on investments in available-for-sale securities is
reported in the income statement.
C. Investments in available-for-sale securities are reported in the income statement.
D. Any unrealized holding gain or loss on investments in trading securities or in available-forsale securities is reported in the income statement.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

35. Lyrical Company purchased equity securities for $500,000 and classified them as trading
securities on September 15, 2009. At December 31, 2009, the current market value of the
securities was $481,000. How should the investment be reported in the December 31, 2009
financial statements?
A. The investment in trading securities would be reported in the balance sheet at its $481,000
market value.
B. The investment in trading securities would be reported in the balance sheet at its $500,000
cost.
C. A realized holding loss on the trading securities of $19,000 would be reported on the
income statement.
D. The investment in trading securities would be reported in the balance sheet at its $481,000
market value and a realized holding loss on the trading securities of $19,000 would be
reported on the income statement.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

12-11
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

36. Libby Company purchased equity securities for $100,000 and classified them as availablefor-sale securities on September 15, 2009. At December 31, 2009, the current market value of
the securities was $105,000. How should the investment be reported in the December 31,
2009 financial statements?
A. The investment in available-for-sale securities would be reported in the balance sheet at its
$100,000 cost.
B. The investment in available for sale securities would be reported in the balance sheet at its
$105,000 market value.
C. An unrealized holding gain on available-for-sale securities of $5,000 would be reported in
the stockholders' equity section of the balance sheet.
D. The investment in available for sale securities would be reported in the balance sheet at its
$105,000 market value and an unrealized holding gain on available-for-sale securities of
$5,000 would be reported in the stockholders' equity section of the balance sheet.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

37. On January 1, 2009, Short Company purchased as an available-for-sale investment,


20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $ 1 par value
common stock at a cost of $50 per share. During November 2009, Daniel Corporation
declared and paid a cash dividend of $2 per share. At December 31, 2009, end of the
accounting period, Daniel Corporation's shares were selling at $48. At December 31, 2009,
the financial statements for Short Company should report the following amounts:

A.
B.
C.
D.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

38. Which of the following statements is true?


A. Investments in bonds are always passive investments.
B. Investments in stock can be passive investments if the investor owns less than 20% of the
voting stock.
C. Investments in stock that are classified as either trading securities or available-for-sale will
record unrealized gains or losses on the income statement under the market value method.
D. Investments in bonds are always passive investments and investments in stock can be
passive investments if the investor owns less than 20% of the voting stock.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

39. Which of the following statements is false?


A. Out of all the assets on the balance sheet, only passive investments in marketable securities
are reported using their market value.
B. Accountants can justify the use of the market value method because it is important to know
the cash value of these passive investments and because their market value is objectively
verifiable since they are actively traded.
C. Unrealized gains and losses recognized under the market value method are recorded in
stockholders' equity and do not affect net income.
D. Out of all the assets on the balance sheet, only passive investments in marketable securities
are reported using their market value and unrealized gains and losses recognized under the
market value method are recorded in stockholders' equity and do not affect net income.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

40. On July 1, 2009, 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 on December 31, 2009

The amount reported on the balance sheet by Wildlife Company for its investment at
December 31, 2009, would be
A. $160,000.
B. $162,000.
C. $182,000.
D. $200,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

41. On July 1, 2009, 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, 2009, were:
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 of Surf
Company at December 31, 2009, should be
A. $77,000.
B. $73,500.
C. $71,500.
D. $75,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

42. When accounting for investments in trading securities, any decline in market value below
cost of the investments is reported on the
A. income statement as a realized loss.
B. income statement as an unrealized holding loss.
C. balance sheet as a realized loss.
D. balance sheet as an unrealized holding loss in the stockholders' equity section.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

43. The primary difference in accounting for available-for-sale investments in stock and
accounting for trading investments in stock is due to
A. measuring the market value of the long-term and short-term portfolios of stock.
B. computing the cost at acquisition.
C. where the unrealized holding loss or gain on investments is reported in the financial
statements.
D. accounting for realized gains and losses on sales of the investment shares.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

44. On July 1, 2009, 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, 2009 were:
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, 2009 should be
A. $478,000
B. $460,000
C. $458,000
D. $480,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

45. Which of the following is true about passive investments?


A. The investing company must own less than 20% of the voting stock in the investee.
B. These investments must be reported at market value on the balance sheet even though the
historical cost principal is violated.
C. The market value method requires realized gains and losses to be recognized on the income
statement.
D. The investing company must own less than 20% of the voting stock in the investee and
these investments must be reported at market value on the balance sheet even though the
historical cost principal is violated.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

12-16
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

46. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What method of accounting will Phillips use to account for this investment?
A. Amortized cost method.
B. Equity method.
C. Market value method.
D. Consolidation.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

47. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What effect will the dividend have on Phillips' books?
A. It would increase cash and increase investment revenue.
B. It would increase cash and decrease investment in associated companies.
C. It would increase cash and increase net unrealized gains/losses.
D. It would increase cash and increase the allowance to value at market account.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

12-17
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

48. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What value will be reflected on Phillips' balance sheet at December 31, 2009?
A. $42,000,000
B. $45,000,000
C. $46,800,000
D. $47,200,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

49. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock
which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per
share. Phillips Corporation's intent is to keep these shares beyond the current year. On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend.
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their
reported 2009 net income was $52 million.
What amount will be reflected on Phillips' income statement for the year in connection with
their investment in Martin?
A. $400,000 investment revenue.
B. $5.2 million investment revenue.
C. Zero
D. $400,000 investment revenue and $3.0 million comprehensive income

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

12-18
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

50. Passive investments require use of the market value method for reporting them on the
balance sheet. Which of the following statements is false?
A. The market value is a more relevant value since the intent in purchasing these investments
is to generate cash inflow when it is needed and market value best reflects the expected cash
inflow from the sale of the investments.
B. It is very easy to determine the market value of passive investments since their market
value is quoted daily on the stock exchanges on which they trade.
C. The market value method allows gains and losses to be recognized immediately on all
passive investments by deducting them on the income statement.
D. None of the other answers is false.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

51. Which of the following statements is true?


A. Passive investments can be either short-term or long-term investments.
B. To qualify as a passive investment, the investor cannot own more than 25% of the voting
stock in the investee.
C. All unrealized gains and losses on passive investments must be reported on the income
statement for the year in which their fair market value rises or falls.
D. All of the answers are true.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

52. When the equity method is used in accounting for long-term investments in equity
securities, an increase or decrease in the investment should be recognized
A. when the investee company reports income.
B. when the investee company declares and pays a cash dividend.
C. when the investee company declares and pays (or issues) either a cash dividend or a stock
dividend.
D. on the basis of stock market fluctuations.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

12-19
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

53. Under the equity method, the investor's proportionate share of the income (or losses) of
the investee corporation impacts the
A. long-term investment account.
B. investment revenue account.
C. goodwill account.
D. long-term investment account and the equity in investee earnings account.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

54. Heartfelt Company owns a 40% interest in the voting common stock of Candle
Corporation as a long-term investment. For 2009, Candle Corporation reported net income of
$100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle
Corporation investment was $500,000 on January 1, 2009. Heartfelt should recognize income
from investee earnings for the year ended December 31, 2009 of
A. $200,000.
B. $40,000.
C. $36,000.
D. $57,750.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

55. On January 1, 2009, 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. At December 31, 2009, Arnold Corporation reported $30,000 net income and paid
$10,000 cash dividends. At December 31, 2009, the shares had a market value of $150,000.
This investment should be reported on the balance sheet of Palmer, Inc., on December 31,
2009, at
A. $150,000.
B. $158,000.
C. $145,000.
D. $148,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

56. On January 1, 2009, Calas Company acquired 40% of the outstanding voting stock of
Nick Company as a long-term investment. On December 31, 2009, Nick Company reported
net income of $10,000 and dividends declared and paid of $4,000. For the year ended
December 31, 2009, Calas Company should report "Income from investee earnings" of
A. $ 3,000.
B. $ 4,000.
C. $ 2,400.
D. $10,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

57. Which of the following statements is false?


A. When an investment in another company is purchased, it is a cash outflow under investing
activities.
B. When investment assets are sold, it is a cash inflow under investing activities.
C. Any gains or losses in connection with investment assets are reported as an inflow or
outflow of cash connected to operating activities.
D. None of the other answers is false.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

58. Which of the following statements is false?


A. Dividends received from investment assets increase cash flow from investing activities.
B. Only realized gains and losses increase or decrease cash flow from operating activities.
Unrealized gains and losses have no effect on cash flow from operating activities.
C. Sale of investment assets is cash inflow from investing activities.
D. None of the other answers is false.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

12-21
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

59. Lopez Corporation's 2009 statement of cash flows reported the following information.
Proceeds from disposals of investments were $161 million; purchases of investments were
$46 million, and depreciation and amortization of $5 million.
How much will be reported as net cash inflow or outflow from investing activities as a result
of these items for the year ended December 31, 2009?
A. Net cash outflow from investing activities $207 million.
B. Net cash outflow from investing activities $115 million.
C. Net cash inflow from investing activities $115 million.
D. Net cash inflow from investing activities $207 million.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 3

60. In 2009, Morelli, Inc. reported the following items in their statement of cash flows.
Purchases of property, plant, and equipment $1,336 million, proceeds from the sale of
marketable securities $13,079 million, and cash paid for investment acquisitions $115 million.
How much will be reported as cash inflow or outflow from investing activities related to these
items?
A. $11,628 million in net cash inflow.
B. $11,628 million in net cash outflow.
C. $14,530 million in net cash inflow.
D. $14,530 million in net cash outflow.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 3

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

61. Which of the following statements is true?


A. When the equity method is used to account for an investment in an investee, the reported
share of investee income must be added to net income on the statement of cash flows.
B. When the equity method is used to account for an investment in an investee, the cash
dividends received are cash inflow from investing activities.
C. Any realized or unrealized gains or losses that were reported on the income statement
under the market value method must be removed from net income in the operating activities
section of the statement of cash flows.
D. All of the statements are true.

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 3

62. 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, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What method of accounting will Photo finish use to account for this investment?
A. Amortized cost method.
B. Equity method.
C. Market value method.
D. Consolidation.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 3

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

63. 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, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What effect will the dividend have on Photo Finish's books?
A. It would increase cash and increase investment revenue.
B. It would increase cash and decrease investment in associated companies.
C. It would increase cash and increase net unrealized gains/losses.
D. It would increase cash and increase the allowance to value at market account.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

64. 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, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What value will be reflected on Photo Finish's balance sheet at December 31, 2009?
A. $20,000,000
B. $23,000,000
C. $23,600,000
D. $24,000,000

AACSB Tag: Analytic


L.O.: 3

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

65. 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, 2009. On December 12, 2009, Click It Corporation paid a $1 million cash
dividend and reported net income for the year ended December 31, 2009 of $10 million. On
December 31, 2009, Click It Corporation's stock was trading at $11.50 per share.
What amount will be reflected on Photo Finish's income statement for the year ended
December 31, 2009 in connection with their investment in Click It Corporation?
A. $400,000 investment revenue.
B. $3.6 million investment revenue.
C. Zero
D. $4.0 million equity in investee earnings.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

66. 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?
A. The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed
at their fair market values on the date of acquisition.
B. Fun with Florals Corporation will use the equity method of accounting for this investment.
C. Fun with Florals Corporation will report Crafts to Go Corporation's revenues and expenses
on a consolidated income statement.
D. Fun with Florals will use the market value method of accounting for this investment.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

67. The balance sheet of Mini Company was as follows immediately before it was acquired
by Maxi Company

On January 1, 2009, 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 and liabilities, what was the amount of goodwill purchased
by Maxi Company?
A. $20,000.
B. $40,000.
C. $50,000.
D. $60,000.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 4

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

68. Paxton Corporation acquired all of the outstanding voting stock of Stanley Company and
the acquisition was reported under the purchase method. How should the assets and liabilities
of the acquired company be reported on the consolidated financial statements of Paxton
Corporation immediately after the acquisition?
A. Nominal estimated values determined by the parent company.
B. Market values on the date of the acquisition.
C. The previously reported book values.
D. Valued by applying the Consumer Price Index to cost.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

69. Goodwill would be reported only under which of the following methods?
A. Cost method.
B. Equity method.
C. Inspection method.
D. Purchase method.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

70. During 2009, Manning Corporation purchased 100% of the outstanding voting shares of
Brady Corporation for $4.0 million. Brady Corporation'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 Corporation's liabilities equaled $3.2 million. The amount of goodwill that will be
recognized on Mannings books is
A. Zero
B. $2,200,000
C. $700,000
D. $1,000,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

71. Goodwill should


A. be written off as soon as possible against retained earnings.
B. not be amortized because it has an indefinite life.
C. written off as soon as possible as an expense.
D. amortized over a maximum of thirty years.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

72. Which of the following is the primary justification for reporting on a consolidated basis?
A. The companies are legally and in economic substance separate.
B. The companies are legally and in economic substance one entity.
C. The companies are legally one entity but they are separate in economic substance.
D. The companies are legally separate but they are one entity in economic substance.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

73. On January 1, 2009, Red Company purchased Patriot Shop for $400,000 cash. Red
Company received the assets listed below and assumed accounts payable (owed by Patriot
Shoe Company) amounting to $30,000.

What amount of Goodwill will be recorded in the transaction?


A. $35,000.
B. $20,500.
C. $50,000.
D. $45,000.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 4

74. Quizmos Company purchased 100% of the stock of Subs Corporation for $3,000,000
cash. The book value and the market value of the net assets purchased were $2,200,000 and
$2,800,000, respectively. To record the acquisition, Quizmos Company should debit
A. Investment in Subs for $3,000,000.
B. Investment in Subs for $2,800,000.
C. Investment in Subs for $2,200,000.
D. Cash for $3,000,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

75. In developing a consolidated balance sheet under the purchase method, which of the
following amounts is not eliminated?
A. Parent's investment account balance for the subsidiary.
B. Subsidiary's common stock account balance.
C. Retained earnings balance of the subsidiary.
D. Mortgage payable at the bank.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

76. In 2009, Yellow Inc. reported net income of $839.6 million and total assets of $9,178.2
million. In 2008, they had a net income of $237.9 million and total assets of $5,931.7 million.
Calculate Yellow Inc.'s 2009 return on assets (ROA).
A. 3.9%
B. 4.0%
C. 11.1%
D. None of these.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

77. In 2009, Running Shoe reported return on assets (ROA) of 8.5%. A competitor, Walking
Shoe reported an ROA of 10.0% in 2009. Which of the following statements is correct?
A. From the information provided, in 2009, Running Shoe earned less on its asset investment
in comparison to Walking Shoe.
B. Walking Shoe should pay dividends in 2009 of $.10 per share as a result of the reported
ROA.
C. From the information provided, we cannot determine the causes for Running Shoe ROA
being slightly lower than that of Walking Shoe.
D. You cannot compare the two companies' ROA.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 5

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

78. Which of the following statements about return on assets (ROA) is true based only on the
information given?
A. If we increase total assets, we will cause ROA to increase.
B. If we increase net sales, we will affect profit margin but not ROA.
C. If we increase net sales, we will affect ROA but not profit margin.
D. If we can increase sales 10% and income by 18%, without additional investment in assets,
we will increase both profit margin and ROA.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

79. In 2009, American Bio reported net income of $2,363 million. Their total revenue was
$10,550 million. Their average total assets were $27,667 million. Compute their profit
margin, asset turnover and return on assets (ROA) respectively.
A. 22.4%, .38, 8.5%.
B. 18.9%, .69, 13.1%.
C. 14.6%, 1.59, 23.2%.
D. None of the other answers is correct,

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

80. In a recent year, Windsor's Boats reported an asset turnover ratio of 2.46 times and a profit
margin of 19.8%. In the same year, Sarah's Sail Boats reported an asset turnover ratio of 1.27
times and a profit margin of 9.9%. Which of the following statements is false?
A. Sarah's did a better job of turning over its assets.
B. Windsor's did a better job of generating profit from its sales.
C. Windsor's return on assets (ROA) is 48.7% while Sarah's return on assets is 12.6%.
D. None of the other answers is false.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

Essay Questions
81. Complete the following matrix by writing a brief explanation in each cell to indicate the
appropriate approach for long-term investments.

AACSB Tag: Analytic


Difficulty: Easy
L.O.: 1

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

82. A. Discuss the similarities of accounting for available-for-sale and trading securities
portfolios. B. Discuss the differences encountered in accounting for available-for-sale and
trading securities portfolios.
A. The similarities of accounting for available-for-sale and trading securities portfolios
include the fact that both investments are accounted for using the market value method
because neither control nor significant influence is demonstrated. That is, the investments are
typically less than 20% of the investee's voting stock. Both categories report the investments
on the balance sheet at the current market value. Both types of investments could be included
in the current asset section. Bond investments that are not held-to-maturity will follow the
rules outlined above.
B. The differences encountered in accounting for available-for-sale and trading securities
portfolios are as follows:Trading securities are always classified as current assets. Availablefor-sale securities are classified as current assets only if management intends to sell them
within a year of the balance sheet date. Otherwise, they are reported under the long-term
investment section (noncurrent) under assets on the balance sheet.Unrealized holding gains
and losses are reported on the income statement for trading securities. The unrealized holding
gains and losses for available-for-sale securities are reported as a component of stockholders'
equity on the balance sheet. They are not an element in computing net income on the income
statement. When trading securities are sold, the gain or loss is determined by comparing the
market value at the end of the previous accounting period to the sales price. Therefore, only
an "incremental" gain or loss is reported on the income statement in the year of the sale. In
contrast, the gain or loss to be reported on the sale of available-for-sale securities is
accomplished by comparing the historical cost (acquisition amount) of the investment to the
sales price. That is, the total gain or loss experienced during the entire holding period for the
investment is reported on the income statement in the year of the sale. Any unrealized holding
gain or loss previously included in the stockholders' equity section is removed from the
accounts.

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Difficulty: Medium
L.O.: 1

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

83. On January 1, 2009, Heitzman Company purchased the following shares as a long-term
investment in available-for-sale securities:

Calculate the balance in the account, "Allowance to Adjust Long-term Investments to


Market," on A. December 31, 2009 and B. December 31, 2010.
On December 31, 2009: $350,000

$342,000 = $8,000 credit because market is below cost.

B. On December 31, 2010: $26,000 debit balance because market exceeds cost.

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Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

84. On January 1, 2009, 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 Corporation reported 2009 net income of $30,000 and
declared and paid cash dividends of $20,000. The market price of the Wayne Corporation's
stock at the end of 2009 was $10 per share. Calculate the carrying value of John's investment
at the end of 2009.
1,000/10,000 = 10%; must use the market value method.
($9
1,000) + ($1
1,000) = $10,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations


85. On January 31, 2009, 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.

All of the Bailey Corporation stock was sold for $13,500 on January 12, 2011. Give the
required journal entries at the following dates: January 31, 2009, December 31, 2009,
December 31, 2010 and January 12, 2011.

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

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Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations


86. On March 1, 2011, Young Company purchased the following stock 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:

Give the required journal entries at the following dates: Match 1, 2011, December 31, 2011
and December 31, 2012

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

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Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations


87. On January 1, 2009, Presto Corporation purchased, as a long-term investment, 5,000
shares of the outstanding common stock of Shazam Corporation at $30 per share. During the
year ended December 31, 2009, the following events occurred at Shazam Corporation:

A. Give the journal entry for Presto Corporation to record the investment.
B. Assume two independent situations, Case A 10% ownership and Case B 40%
ownership. For each case, make the following entries:
1. To recognize net income for 2009.
2. To record cash dividend declared and received.
3. To record market price of stock at year-end.

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Difficulty: Medium
L.O.: 2

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

88. On January 1, 2010, Alden Company acquired 15,000 shares of the nonvoting common
stock of Maxim Corporation as a long-term investment at a cost of $225,000. Maxim reported
a 2010 net income of $35,000. On January 2, 2011, Maxim declared and paid a $10,000 cash
dividend. The market value of the Maxim stock held by Alden on December 31, 2010, was
$224,000. Alden Company has recorded only the following journal entries:

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, 2010?
C. What condition, if changed, would require that the equity method be used?
D. Assuming the market value method is used; calculate the valuation of the net investment
on January 3, 2011.
A. Market value method, as is indicated by the revenue entry on January 2, 2011.
B. No adjusting entry should be made for dividends. Alden should have made an adjusting
entry of $1,000 on December 31, 2010 to adjust the investment to market price.
C. Equity method would be used if Alden owned between 20% and 50%.
D. The balance in the investment account at January 3, 2011 would be $224,000 = $225,000
$1,000

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

89. Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock
which constitutes 10% of Creole's voting stock on June 30, 2009 for $42 per share. Orleans
Corporation's intent is to keep these shares beyond the current year. On December 20, 2009,
Creole Corporation declared and paid a previously declared $4,000,000 cash dividend. On
December 31, Creole's stock was trading at $45 per share and their reported 2009 net income
was $52 million.
A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2009.
B. Record the transaction for the dividend received by Orleans on December 20, 2009.
C. Record any year-end entries needed by Orleans Corporation.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

90. On December 31, 2010, Jean World Corporation recorded the following journal entry
relating to its investment in 9,000 shares of common stock of Soda Corporation.

At December 31, 2010, Soda Corporation reported net income of $120,000. Earlier in the
year, Soda Corporation 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?
A. Equity method.
B. $120,000
Percentage of Soda stock held by Jean World = $54,000
Percentage of Soda stock held by Jean World = 45%
Total number of Soda shares outstanding
45% = 9,000 shares
Total number of Soda shares outstanding = 20,000

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Difficulty: Medium
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

91. 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, 2009. At December 31,
2009, Stewart Corporation reported net income of $100,000 and declared and paid dividends
of $10,000. The market price of the Stewart Corporation stock at December 31, 2009 was $18
per share. Calculate the net balance in Martha Company's investment account at December
31, 2009.
5,000/12,500 = 40% ownership; must use the equity method.
(5,000
$20) + ($100,000
40%)
($10,000
40%) = $136,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

92. Donald Corporation purchased 3,000 shares of the outstanding common voting stock of
Apprentice Corporation on January 2, 2009, for $80 per share. At the date of purchase
Apprentice Corporation had outstanding 10,000 shares of common stock (par $50). On
December 31, 2009, Apprentice Corporation reported net income of $60,000 -and paid a
$5,000 cash dividend. The December 31, 2009, market value of Apprentice Corporation's
stock was $79. Give the journal entries required for Donald Corporation on January 2, 2009
and December 31, 2009.

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Difficulty: Medium
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Chapter 012: Reporting and Interpreting Investments in Other Corporations

93. 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 longterm investments.
A. The criteria for applying the equity method of accounting for long-term investments are
based on the ownership level of the investor in the voting stock of the investee. The
presumption is that if the investor owns at least 20% of the investee's voting stock but not
more than 50% of such stock, the investor has significant influence over the investee. This
means that the investor has an important impact on the operating and financing policies of the
investee. Significant influence is typically achieved by the investor being on the investee's
board of directors, management personnel is interchanged between the two companies, and
other such evidence of influence.
B. The rational for the equity method of accounting is rather like an "accrual" system. That is,
the relationship of the investee and investor is typically expected to be a long-term
association. As such, the investor recognizes income on an accrual rather than a cash basis.
The proportionate share of income in the investee is recognized on the income statement and
the investment (asset) account is increased. When actual dividends are received by the
investor, they reduce the investment account since some of the previously recognized income
is being distributed.

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

94. Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1
par value common stock for $20 million (2 million shares at a $10 market price) on March 31,
2009. On December 12, 2009, Nutribar paid a $1 million cash dividend and reported net
income for the year ended December 31, 2009 of $10 million. On December 31, 2009,
Nutribar's stock was trading at $11.50 per share.
A. Record the journal entry on Kudos Corporation's book for the acquisition of Nutribar
Corporation on March 31, 2009.
B. Record the cash dividend received by Kudos Corporation on December 12, 2009.
C. Record any end of year entries needed on Kudos Corporation's books.

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

95. In 2009, 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 cash flows statement (added or deducted).

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

96. In 2009, 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 cash flows (added or deducted).

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

97. Discuss how the equity method prevents managers of the investor corporation from
manipulating income related to dividends from the investee.
When one corporation exerts significant influence over another (such influence results from
ownership of 20 to 50 percent of the common shares), it is unreasonable to assume that
transactions between those corporations are made at "arm's length" as assumed in financial
accounting. Without the equity method, managers of the investor company could manipulate
income by influencing the investee's dividend policy. Large dividend payments could be used
to bolster income in bad years. The equity method prevents this type of manipulation by
requiring dividends received to be offset against the investment account rather than
recognized as income.

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 3

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

98. On January 1, 2009, Fall Corporation purchased 100% of the outstanding voting shares of
Foliage Corporation for $600,000. The book and market values of Foliage Corporation's
assets and liabilities are listed below:

Calculate the amount of goodwill that should be recognized.

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

99. On January 2, 2009, 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.
A. Give the journal entry that would appear on the books of each company at the acquisition
date.
B. How much goodwill should Parent Company recognize on the consolidated financial
statements at the date of acquisition?

A.
Sub Company:
No entry is made by the subsidiary because only the subsidiary stockholders are affected.
B. Parent Company should recognize goodwill of:
$900,000 ($800,000 + $40,000) = $60,000

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

100. The following information was taken from the financial statements of Tommy's Toys for
the years 2007 through 2010 in millions of dollars.

A. Calculate the return on assets (ROA) for the years 2008 through 2010. Decompose ROA
into its two components, asset turnover and profit margin.
B. Evaluate Tommy's Toys return on assets (ROA).
A.

B. Their ROA was lower in 2009 as a result of a significant reduction in net income. In 2009,
the profit margin was also lower. Over the three years, their asset turnover ratio stayed steady
which means any changes in the ROA were caused by the erratic profit margin.

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Chapter 012: Reporting and Interpreting Investments in Other Corporations

Matching Questions
101. Match the methods with the situations for long-term investors.
Owns 20% of the common stock (voting) of another corporation. Equity method
1. Owns 100% of the preferred stock
(nonvoting) of another corporation.
2. Owns 5% of the common stock (voting) of
another corporation.
3. Owns 51% of the common stock (voting) of
another corporation.
4. Owns 20% of the common stock (voting) of
another corporation.
5. Owns 30% of the common stock (voting) of
another corporation.
6. Owns 25% of the outstanding bonds payable
of another corporation.
7. Owns 25% of the preferred stock
(nonvoting).

Equity method

Market value method

Market value method

Market value method 2


None of the methods are
correct. 6
Consolidated financial
statement method 3
Equity method

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

102. For each item below, indicate the best description.

1. Purchase method
acquisition
2. Market value method
3. Equity method
4. Consolidated financial
statements
5. Goodwill

Amount paid by parent in excess of the market


value of the net assets of the subsidiary. 5
Investor has control. 4
Parent consolidates subsidiary at market values
instead of book values. 1
None of the answers is correct. 2
Investor has significant influence but not
control. 3

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

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