Chapter 14: Intercorporate Investments in Common Stock
Student: ___________________________________________________________________________
1. The accounting for investments in common stock depends on (1) the expected holding period, and (2) the
2. Securities that firms expect to sell within the next year appear as investment securities in current assets on the
3. Securities that firms expect to hold for more than one year from the date of the balance sheet appear in
4. U.S. GAAP and IFRS view investments of between 20% and 50% of the voting stock of another company as
5. U.S. GAAP and IFRS view investments of less than 20% of the voting shares of another company as
6. U.S. GAAP and IFRS view ownership of more than 50% of an investee as implying an ability to control the
7. The rationale for the equity method is that it better measures an investor’s income from investing activities
when, because of its ownership interest, it can exert significant influence over the operations and dividend
8. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
9. A major mining company owns a mining subsidiary in South America, where the government enforces
stringent control over cash payments outside the country. The parent cannot control all the assets of the
subsidiary, despite owning a majority of the voting shares, but should prepare consolidated statements with the
10. In the acquisition method for a business combination, the excess of the fair value of the consideration over
11. The summary of significant accounting principles, a required part of the financial statement notes, must
include a statement about the parent’s consolidation policy. If an investor does not consolidate a significant
12. If an entity qualifies as a variable interest entity (VIE), U.S. GAAP requires the primary beneficiary of the
14. If the combined market value of trading securities at the end of the year is less than the market value of the
19. When an investor owns less than a majority of the voting stock of another corporation, the accountant must
judge when the investor can exert significant influence. For the sake of uniformity, U.S. GAAP and IFRS
presume that significant influence exists at ownership of _____ or more of the voting stock of the
20. U.S. GAAP and IFRS require firms to account for minority, active investments, generally those where the
investor owns between _____ using the equity method. Under the equity method, the investor recognizes as
revenue (expense) each period its share of the net income (loss) of the investee. The investor recognizes
21. Under the equity method, the investor recognizes as revenue (expense) each period _____. The investor
23. The rationale for the equity method is that it better measures an investor’s income from investing activities
26. The equity method records the initial purchase of an investment in voting common stock at _____. Each
period, the investor treats as revenue its share of the _____ of the investee. The investor treats dividends
27. Marcoff Corporation acquires 30% of the outstanding voting common shares of the Invicta Corporation for
$600,000. Marcoff Corporation acquires the investment in Invicta Corporation by buying previously issued
shares of Invicta Corporation from other investors.
28. Penney Corporation acquires 30% of the outstanding voting common shares of the Instat Corporation for
$600,000. Penney Corporation acquires the investment in Instat Corporation by buying previously issued shares
of Instat Corporation from other investors.
Between the time of the acquisition and the end of Penney Corporation’s next accounting period, Instat
29. Marcoff Corporation acquires 30% of the outstanding voting common shares of the Invicta Corporation for
$600,000. Marcoff Corporation acquires the investment in Invicta Corporation by buying previously issued
shares of Invicta Corporation from other investors.
If Invicta Corporation declares and pays a dividend of $30,000 to holders of its common stock, Marcoff
30. Power Corporation acquires 30% of the outstanding voting common shares of the Inroad Corporation for
$600,000. Power Corporation acquires the investment in Inroad Corporation by buying previously issued shares
of Inroad Corporation from other investors.
Power Corporation records income earned by Inroad Corporation as a(n) _____, while the dividend _____,
31. Pager Corporation acquires 30% of the outstanding voting common shares of the Intercomm Corporation for
$600,000. Pager Corporation acquires the investment in Intercomm Corporation by buying previously issued
shares of Intercomm Corporation from other investors.
Suppose that Intercomm Corporation reports earnings of $100,000 and pays dividends of $40,000, during the
32. Pagoli Corporation acquires 30% of the outstanding voting common shares of the Inform Corporation for
$600,000. Pagoli Corporation acquires the investment in Inform Corporation by buying previously issued shares
of Inform Corporation from other investors.
Between the time of the acquisition and the end of Pagoli Corporation’s next accounting period, Inform
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Inform Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
33. acker Corporation acquires 30% of the outstanding voting common shares of the Insight Corporation for
$600,000. Packer Corporation acquires the investment in Insight Corporation by buying previously issued
shares of Insight Corporation from other investors.
Between the time of the acquisition and the end of Packer Corporation’s next accounting period, Insight
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Insight Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
Assume now that Packer Corporation sells one-fourth of its investment in Insight Corporation for $165,000.
34. Potion Corporation acquires 30% of the outstanding voting common shares of the Formula Corporation for
$600,000. Potion Corporation acquires the investment in Formula Corporation by buying previously issued
shares of Formula Corporation from other investors.
Between the time of the acquisition and the end of Potion Corporation’s next accounting period, Formula
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Formula Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
During the next accounting period, Potion Corporation sells one-fourth of its investment in Formula
Corporation for $165,000.
35. Parton Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for
$600,000. Parton Corporation acquires the investment in Import Corporation by buying previously issued shares
of Import Corporation from other investors.
When Parton Corporation acquired 30% of Import Corporation’s common shares for $600,000, Import
Corporation’s total shareholders’ equity was $1.5 million. Parton Corporation’s cost exceeds the carrying value
of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)]. Parton Corporation may pay this
36. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
When Purchaser Corporation acquired 30% of Investee Corporation’s common shares for $600,000, Investee
Corporation’s total shareholders’ equity was $1.5 million. Purchaser Corporation’s cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)]. What is/are the accounting
37. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors. When Purchaser Corporation acquired 30% of
Investee Corporation’s common shares for $600,000, Investee Corporation’s total shareholders’ equity was $1.5
million. Purchaser Corporation’s cost exceeds the carrying value of the net assets acquired by $150,000 [
$600,000 - (0.30 x $1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchase price as follows: $100,000 to remeasure
38. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Investee Corporation’s other comprehensive income during the first period is as follows:
Unrealized Holding Gains from Marketable Securities. . .$ 3,000
Unrealized Losses from Cash Flow Hedges . . . . . . . . . . (2,000)
Other Comprehensive Income. . . . . . . . . . . . . . . . . . . . $ 1,000
Purchaser Corporation would make the following entry to recognize its share of the items of other
39. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
41. In Year 2, ABC Corp. acquired a 15% interest in XYZ, Inc., for $50,000. During the year, XYZ paid
dividends of $10,000 and had net income of $30,000. ABC sold the shares of XYZ for $65,000 cash. What
43. If Barton Company purchases a minority active interest in Laramie Company for $150,000, Barton will
44. Pareto Corporation owns 40% of Spring Corporation. During Year 3, Spring has net income of $60,000.
45. If Wabasso Company pays $55,000 in dividends to its corporate investor Lament Corporation (Lament
owns 35% of The Wabasso Company), what entry should Lament Corporation record when it receives the
46. InvestCo purchases 30% of NewCo's stock on January 1, Year 1, for $100,000. In Year 1, NewCo paid total
dividends of $30,000 and had a net income of $70,000. In Year 2, NewCo suffered a loss of $20,000 and paid
no dividends. On January 1, Year 3, InvestCo sells its investment in NewCo for $105,000. How is the sale
47. Pense Co. purchased 40% of the stock of Stretch Co. in Year 1 for $100,000. Stretch had net income in Year
1 of $50,000 and net income in Year 2 of $30,000. Stretch also paid total dividends of $20,000 in Year 2. On
January 1, Year 3, Pense Co. sold its investment in Stretch Co. to GE Capital Corporation (GE) for $130,000.
48. For which type of investments would unrealized increases and decreases be recorded directly in an owners'
49. The equity method of accounting for an investment in the common stock of another company should be
50. When an investor uses the equity method to account for investments in common stock, cash dividends
51. Park Inc. owns 35 percent of Exeter Corporation. During the calendar year 2013, Exeter had net earnings of
$300,000 and paid dividends of $36,000. Park mistakenly accounted for the investment in Exeter using the cost
method rather than the equity method of accounting. What effect would this have on the investment account and
52. U.S. GAAP view investments of between 20 and 50 percent of the voting stock of another company (unless
56. Business firms have several reasons for preferring to operate as a group of legally separate corporations,
rather than as a single entity. From the standpoint of the parent company, the more important reasons for
57. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
64. (CMA adapted, Dec 92 #9) In a business combination that is accounted for as a purchase and does not
create negative goodwill, the assets of the acquired company are to be recorded on the books of the acquiring
69. Which of the following investments in securities would require the preparation of consolidated financial
70. U.S. GAAP view investments of over 50 percent of the voting stock of another company (for the purpose of
71. Often, the parent does not own 100% of the voting stock of a consolidated subsidiary. The parent refers to
73. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
74. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
76. Marley Company had the following portfolio of securities at the end of its first year of operations:
Year-End
Security
Classification
Cost
Market Value
A
Trading
$18,000
$23,000
B
Trading
$25,000
$27,000
77. What role does management intent play in the accounting treatment of marketable equity securities?
78. In 2013, Kentucky Inc. purchased stock as follows:
(a)
Acquired 2,000 shares of Gallen Corp. common stock (par value $20) in exchange for 1,200 shares of Kentucky Inc.
preferred stock (par value $30). The preferred stock had a market value of $75 per share on the date of the exchange.
(b)
Purchased 800 shares of Carlton Corp. common stock (par value $10) at $70 per share, plus a brokerage fee of $800.
79. Why would a firm choose to acquire less than 50 percent of an organization yet not desire to exercise
significant influence within the organization?
80. Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each
of the following independent cases:
CASE A
CASE B
CASE C
P's ownership of S
A
30%
40%
Investment in beginning of year
$100
B
$130
Investment in end of year
105
$128
C
S's income (loss)
100
90
40
S's dividends paid
80
30
20
81. The Flavor Company owns 25 percent of the shares of Mac, and accounts for its investment using the equity
method. During the year Mac earned income of $1,500 million and declared dividends. Flavor’s share of the
dividends were $150.0 million.
Required:
82. Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each
of the following independent cases:
84. The Canada Corporation has been using the equity method for its 100-percent owned subsidiary, Trenton
Company, which has both assets and liabilities on its balance sheet and both revenues and expenses on its
income statement. Trenton has positive cash flow from operations. Canada now consolidates the accounts of the
Trenton Company, which it has owned 100 percent since organizing it. Trenton has no investments of its own
and regularly declares dividends greater than zero, but less than net income.
Required:
Answer the following questions with one of these: larger, smaller, unchanged, or insufficient (information given
to answer question).
85. The adjusted, preclosing trial balances of Pie Company and Soup Company on December 31, Year 2, appear
below.
Pie Company
Soup Company
$ 4,000
$ 1,000
Accounts Receivable
Merchandise Inventory
10,000
10,000
Investment in Soup Company
9,000
--
Land
l,000
2,000
Buildings and Equipment, net
5,000
Accounts Payable
$17,500
$12,500
Bonds Payable
5,000
4,000
Common Stock
2,500
1,000
86. Piu Co. owns 100% of Xu Co. Piu has owned Xu since Xu was incorporated. At December 31, $15,000 of
Xu’s accounts receivable represent amounts payable by Piu. $10,000 of Piu’s accounts receivable represent
amounts payable by Xu. During the current year, Xu sold $10,000 in merchandise to Piu (at cost its cost of
$10,000). Piu has sold all the merchandise purchased from Xu.
CONDENSED BALANCE SHEETS
As of December 31
Assets
Piu
Xu
Accounts receivable
$ 60,000
$ 40,000
Investment in Xu (equity)
130,000
-
Other assets
1,000,000
200,000
Total assets
$1,190,000
$240,000
Liabilities and Equity
Accounts payable
$ 50,000
$ 20,000
Other liabilities
640,000
90,000
Common stock
100,000
150,000
87. On January 1, Year 1, Plano Co. purchased for $180,000, 90% of Santa Fe Co. at a time when Santa Fe had
a book value of $200,000. There were no intercompany transactions during year 4.
CONDENSED BALANCE SHEETS
As of December 31, Year 4
Assets
Plano
Santa Fe
Accounts receivable
$ 50,000
$ 40,000
Investment in Santa Fe (equity)
270,000
-
Other assets
1,680,000
710,000
Total assets
$2,000,000
$750,000
Liabilities and Equity
Accounts payable
$ 40,000
$ 50,000
Other liabilities
1,360,000
400,000
Common stock
200,000
200,000
88. Given the following separate company balance sheets and income statements, answer the following
questions.
CONDENSED BALANCE SHEETS
As of December 31, Year 4
Assets
Plea
Settle
Accounts receivable
$ 50,000
$ 40,000
Investment in Settle (equity)
300,000
-
Other assets
1,680,000
710,000
Total assets
$2,030,000
$750,000
Liabilities and Equity
Accounts payable
$ 70,000
$ 50,000
Other liabilities
1,360,000
400,000
Common stock
200,000
200,000
Retained earnings
400,000
100,000
Total liabilities and equity
$2,030,000
$750,000
CONDENSED INCOME STATEMENT
for the year ended December 31, Year 4
89. Given the following consolidated balance sheet and additional information, prepare a separate company
balance sheet and income statement for P.
-
P owns 100% of S.
-
S sold $20,000 of inventory to P.
-
P sold all of the inventory it purchased from S.
-
$10,000 of S's accounts receivable are payable by P.
CONSOLIDATED BALANCE SHEET
As of December 31, Year 4
Assets
Accounts receivable
$ 50,000
Other assets
1,680,000
Total assets
$1,730,000
Liabilities and Equity
Accounts payable
$ 80,000
Other liabilities
1,200,000
Common stock
50,000
Retained earnings
400,000
Total liabilities and equity
$1,730,000
CONSOLIDATED INCOME STATEMENT
for the year ended December 31, Year 4
Sales
$780,000
Total revenues
$780,000
Cost of goods sold
$490,000
Depreciation
120,000
90. Large, global enterprises typically have an equity interest in other entities throughout the world. Some of the
Company E
23.8%
Company F
20%
91. Parent Computer Corporation acquired significant influence over Child Computer Company on January 2
92. Describe the accounting and reporting of investments in common stock.
93. Describe the accounting for minority, active investments.
94. Why do accountants sometimes refer to the equity method as a one-line consolidation?
95. Discuss the accounting for majority, active investments.
96. Describe U.S. GAAP and IFRS requirements in accounting for the business combination.
97. Describe what a consolidated income statement shows.
98. What is a noncontrolling interest in a consolidated subsidiary?
99. Describe the limitations of consolidated statements.
100. Describe the U.S. GAAP requirement in accounting for joint venture investments.,
101. Variable interest entities have what characteristics?
102. What are qualifying special purpose entities?
103. On July 1, 2013, Mecca Group purchased for cash 35 percent of the outstanding capital stock of Wembley
Studios. Both Mecca Group and Wembley Studios have a December 31 year-end. Wembley Studios, whose
common stock is actively traded in the over-the-counter market, reported its total net income for the year
to Mecca Group and also paid cash dividends on November 15, 2013, to Mecca Group and its other
stockholders.
How should Mecca Group report the above facts in its December 31, 2013, balance sheet and its income
statement for the year then ended? Discuss the rationale for your answer.
104. The equity method of accounting should be applied by an investor to an investment in the voting stock of
Chapter 14: Intercorporate Investments in Common Stock Key
1. The accounting for investments in common stock depends on (1) the expected holding period, and (2) the
2. Securities that firms expect to sell within the next year appear as investment securities in current assets on the
3. Securities that firms expect to hold for more than one year from the date of the balance sheet appear in
4. U.S. GAAP and IFRS view investments of between 20% and 50% of the voting stock of another company as
5. U.S. GAAP and IFRS view investments of less than 20% of the voting shares of another company as
6. U.S. GAAP and IFRS view ownership of more than 50% of an investee as implying an ability to control the
7. The rationale for the equity method is that it better measures an investor’s income from investing activities
when, because of its ownership interest, it can exert significant influence over the operations and dividend
8. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
9. A major mining company owns a mining subsidiary in South America, where the government enforces
stringent control over cash payments outside the country. The parent cannot control all the assets of the
subsidiary, despite owning a majority of the voting shares, but should prepare consolidated statements with the
10. In the acquisition method for a business combination, the excess of the fair value of the consideration over
11. The summary of significant accounting principles, a required part of the financial statement notes, must
include a statement about the parent’s consolidation policy. If an investor does not consolidate a significant
12. If an entity qualifies as a variable interest entity (VIE), U.S. GAAP requires the primary beneficiary of the
14. If the combined market value of trading securities at the end of the year is less than the market value of the
19. When an investor owns less than a majority of the voting stock of another corporation, the accountant must
judge when the investor can exert significant influence. For the sake of uniformity, U.S. GAAP and IFRS
presume that significant influence exists at ownership of _____ or more of the voting stock of the
20. U.S. GAAP and IFRS require firms to account for minority, active investments, generally those where the
investor owns between _____ using the equity method. Under the equity method, the investor recognizes as
revenue (expense) each period its share of the net income (loss) of the investee. The investor recognizes
21. Under the equity method, the investor recognizes as revenue (expense) each period _____. The investor
23. The rationale for the equity method is that it better measures an investor’s income from investing activities
26. The equity method records the initial purchase of an investment in voting common stock at _____. Each
period, the investor treats as revenue its share of the _____ of the investee. The investor treats dividends
27. Marcoff Corporation acquires 30% of the outstanding voting common shares of the Invicta Corporation for
$600,000. Marcoff Corporation acquires the investment in Invicta Corporation by buying previously issued
shares of Invicta Corporation from other investors.
28. Penney Corporation acquires 30% of the outstanding voting common shares of the Instat Corporation for
$600,000. Penney Corporation acquires the investment in Instat Corporation by buying previously issued shares
of Instat Corporation from other investors.
Between the time of the acquisition and the end of Penney Corporation’s next accounting period, Instat
29. Marcoff Corporation acquires 30% of the outstanding voting common shares of the Invicta Corporation for
$600,000. Marcoff Corporation acquires the investment in Invicta Corporation by buying previously issued
shares of Invicta Corporation from other investors.
If Invicta Corporation declares and pays a dividend of $30,000 to holders of its common stock, Marcoff
30. Power Corporation acquires 30% of the outstanding voting common shares of the Inroad Corporation for
$600,000. Power Corporation acquires the investment in Inroad Corporation by buying previously issued shares
of Inroad Corporation from other investors.
Power Corporation records income earned by Inroad Corporation as a(n) _____, while the dividend _____,
31. Pager Corporation acquires 30% of the outstanding voting common shares of the Intercomm Corporation for
$600,000. Pager Corporation acquires the investment in Intercomm Corporation by buying previously issued
shares of Intercomm Corporation from other investors.
Suppose that Intercomm Corporation reports earnings of $100,000 and pays dividends of $40,000, during the
32. Pagoli Corporation acquires 30% of the outstanding voting common shares of the Inform Corporation for
$600,000. Pagoli Corporation acquires the investment in Inform Corporation by buying previously issued shares
of Inform Corporation from other investors.
Between the time of the acquisition and the end of Pagoli Corporation’s next accounting period, Inform
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Inform Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
33. acker Corporation acquires 30% of the outstanding voting common shares of the Insight Corporation for
$600,000. Packer Corporation acquires the investment in Insight Corporation by buying previously issued
shares of Insight Corporation from other investors.
Between the time of the acquisition and the end of Packer Corporation’s next accounting period, Insight
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Insight Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
Assume now that Packer Corporation sells one-fourth of its investment in Insight Corporation for $165,000.
34. Potion Corporation acquires 30% of the outstanding voting common shares of the Formula Corporation for
$600,000. Potion Corporation acquires the investment in Formula Corporation by buying previously issued
shares of Formula Corporation from other investors.
Between the time of the acquisition and the end of Potion Corporation’s next accounting period, Formula
Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock.
Formula Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent
accounting period.
During the next accounting period, Potion Corporation sells one-fourth of its investment in Formula
Corporation for $165,000.
35. Parton Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for
$600,000. Parton Corporation acquires the investment in Import Corporation by buying previously issued shares
of Import Corporation from other investors.
When Parton Corporation acquired 30% of Import Corporation’s common shares for $600,000, Import
Corporation’s total shareholders’ equity was $1.5 million. Parton Corporation’s cost exceeds the carrying value
of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)]. Parton Corporation may pay this
36. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
When Purchaser Corporation acquired 30% of Investee Corporation’s common shares for $600,000, Investee
Corporation’s total shareholders’ equity was $1.5 million. Purchaser Corporation’s cost exceeds the carrying
value of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)]. What is/are the accounting
37. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors. When Purchaser Corporation acquired 30% of
Investee Corporation’s common shares for $600,000, Investee Corporation’s total shareholders’ equity was $1.5
million. Purchaser Corporation’s cost exceeds the carrying value of the net assets acquired by $150,000 [
$600,000 - (0.30 x $1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchase price as follows: $100,000 to remeasure
38. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
Investee Corporation’s other comprehensive income during the first period is as follows:
Unrealized Holding Gains from Marketable Securities. . .$ 3,000
Unrealized Losses from Cash Flow Hedges . . . . . . . . . . (2,000)
Other Comprehensive Income. . . . . . . . . . . . . . . . . . . . $ 1,000
Purchaser Corporation would make the following entry to recognize its share of the items of other
39. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation
for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously
issued shares of Investee Corporation from other investors.
41. In Year 2, ABC Corp. acquired a 15% interest in XYZ, Inc., for $50,000. During the year, XYZ paid
dividends of $10,000 and had net income of $30,000. ABC sold the shares of XYZ for $65,000 cash. What
43. If Barton Company purchases a minority active interest in Laramie Company for $150,000, Barton will
44. Pareto Corporation owns 40% of Spring Corporation. During Year 3, Spring has net income of $60,000.
45. If Wabasso Company pays $55,000 in dividends to its corporate investor Lament Corporation (Lament
owns 35% of The Wabasso Company), what entry should Lament Corporation record when it receives the
46. InvestCo purchases 30% of NewCo's stock on January 1, Year 1, for $100,000. In Year 1, NewCo paid total
dividends of $30,000 and had a net income of $70,000. In Year 2, NewCo suffered a loss of $20,000 and paid
no dividends. On January 1, Year 3, InvestCo sells its investment in NewCo for $105,000. How is the sale
47. Pense Co. purchased 40% of the stock of Stretch Co. in Year 1 for $100,000. Stretch had net income in Year
1 of $50,000 and net income in Year 2 of $30,000. Stretch also paid total dividends of $20,000 in Year 2. On
January 1, Year 3, Pense Co. sold its investment in Stretch Co. to GE Capital Corporation (GE) for $130,000.
48. For which type of investments would unrealized increases and decreases be recorded directly in an owners'
49. The equity method of accounting for an investment in the common stock of another company should be
50. When an investor uses the equity method to account for investments in common stock, cash dividends
51. Park Inc. owns 35 percent of Exeter Corporation. During the calendar year 2013, Exeter had net earnings of
$300,000 and paid dividends of $36,000. Park mistakenly accounted for the investment in Exeter using the cost
method rather than the equity method of accounting. What effect would this have on the investment account and
52. U.S. GAAP view investments of between 20 and 50 percent of the voting stock of another company (unless
56. Business firms have several reasons for preferring to operate as a group of legally separate corporations,
rather than as a single entity. From the standpoint of the parent company, the more important reasons for
57. For various reasons, a single economic entity may exist in the form of a parent and several legally separate
64. (CMA adapted, Dec 92 #9) In a business combination that is accounted for as a purchase and does not
create negative goodwill, the assets of the acquired company are to be recorded on the books of the acquiring
69. Which of the following investments in securities would require the preparation of consolidated financial
70. U.S. GAAP view investments of over 50 percent of the voting stock of another company (for the purpose of
71. Often, the parent does not own 100% of the voting stock of a consolidated subsidiary. The parent refers to
73. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
74. The usual criterion for preparing consolidated financial statements is voting control in the form of majority
ownership of common stock. However, for some entities common stock ownership does not indicate control
because the common stock of the entity lacks one or more of the economic characteristics associated with
75. Consolidated financial statements are typically prepared when one company has
A. accounted for its investment in another company by the equity method.
B. significant influence over the operating and financial policies of another company.
C. the controlling financial interest in another company.
D. a substantial equity interest in the net assets of another company.
E. All of these answer choices are correct.
76. Marley Company had the following portfolio of securities at the end of its first year of operations:
Year-End
Security
Classification
Cost
Market Value
A
Trading
$18,000
$23,000
B
Trading
$25,000
$27,000
77. What role does management intent play in the accounting treatment of marketable equity securities?
Management's intent determines whether marketable securities are held as trading securities or securities
available for sale. If the securities are held as trading securities, the income statement shows unrealized holding
gains/losses. If they are held as securities available for sale, other comprehensive income contains unrealized
holding gains/losses.
78. In 2013, Kentucky Inc. purchased stock as follows:
(a)
Acquired 2,000 shares of Gallen Corp. common stock (par value $20) in exchange for 1,200 shares of Kentucky Inc.
preferred stock (par value $30). The preferred stock had a market value of $75 per share on the date of the exchange.
(b)
Purchased 800 shares of Carlton Corp. common stock (par value $10) at $70 per share, plus a brokerage fee of $800.
79. Why would a firm choose to acquire less than 50 percent of an organization yet not desire to exercise
significant influence within the organization?
80. Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each
of the following independent cases:
CASE A
CASE B
CASE C
P's ownership of S
A
30%
40%
Investment in beginning of year
$100
B
$130
Investment in end of year
105
$128
C
S's income (loss)
100
90
40
S's dividends paid
80
30
20
81. The Flavor Company owns 25 percent of the shares of Mac, and accounts for its investment using the equity
method. During the year Mac earned income of $1,500 million and declared dividends. Flavor’s share of the
dividends were $150.0 million.
Required:
a.
What amount of income did Flavor report from its investment in Mac?
b.
What amount of cash flow from operations did Flavor report for the year from its investment in Mac?
82. Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each
of the following independent cases:
CASE A
CASE B
CASE C
P's ownership of S
40%
25%
40%
Investment in S--beginning of year
$100
$100
$130
Investment in S--end of year
$120
$150
$120
S's income (loss)
A
300
C
S's dividends paid
80
B
0
83. State the purpose of consolidated financial statements. Define which subsidiaries must be included in
consolidated financial statements.
84. The Canada Corporation has been using the equity method for its 100-percent owned subsidiary, Trenton
Company, which has both assets and liabilities on its balance sheet and both revenues and expenses on its
income statement. Trenton has positive cash flow from operations. Canada now consolidates the accounts of the
Trenton Company, which it has owned 100 percent since organizing it. Trenton has no investments of its own
and regularly declares dividends greater than zero, but less than net income.
Required:
Answer the following questions with one of these: larger, smaller, unchanged, or insufficient (information given
to answer question).
a.
What would be the effect on net income of Canada Corporation?
b.
What would be the effect on revenues, including investment income, of Canada Corporation?
c.
What would be the effect on investments of Canada Corporation?
d.
What would be the effect on assets of Canada Corporation?
e.
What would be the effect on liabilities of Canada Corporation?
f.
What would be the effect on the debt/equity ratio (= Liabilities/Total Equities)?
85. The adjusted, preclosing trial balances of Pie Company and Soup Company on December 31, Year 2, appear
below.
Pie Company
Soup Company
$ 4,000
$ 1,000
Accounts Receivable
Merchandise Inventory
10,000
10,000
Investment in Soup Company
9,000
--
Land
l,000
2,000
Buildings and Equipment, net
5,000
Accounts Payable
$17,500
$12,500
Bonds Payable
5,000
4,000
Common Stock
2,500
1,000
Additional Paid-in Capital
1,000
2,500
Retained Earnings, January 1
10,500
2,000
Sales
35,000
25,000
Equity in Earnings of Soup Company
5,000
--
Cost of Goods Sold
25,000
17,500
86. Piu Co. owns 100% of Xu Co. Piu has owned Xu since Xu was incorporated. At December 31, $15,000 of
Xu’s accounts receivable represent amounts payable by Piu. $10,000 of Piu’s accounts receivable represent
amounts payable by Xu. During the current year, Xu sold $10,000 in merchandise to Piu (at cost its cost of
$10,000). Piu has sold all the merchandise purchased from Xu.
CONDENSED BALANCE SHEETS
As of December 31
Assets
Piu
Xu
Accounts receivable
$ 60,000
$ 40,000
Investment in Xu (equity)
130,000
-
Other assets
1,000,000
200,000
Total assets
$1,190,000
$240,000
Liabilities and Equity
Accounts payable
$ 50,000
$ 20,000
Other liabilities
640,000
90,000
Common stock
100,000
150,000
Retained earnings
400,000
(20,000)
Total liabilities and equity
$1,190,000
$240,000
CONDENSED INCOME STATEMENT
for Current Year
87. On January 1, Year 1, Plano Co. purchased for $180,000, 90% of Santa Fe Co. at a time when Santa Fe had
a book value of $200,000. There were no intercompany transactions during year 4.
CONDENSED BALANCE SHEETS
As of December 31, Year 4
Assets
Plano
Santa Fe
Accounts receivable
$ 50,000
$ 40,000
Investment in Santa Fe (equity)
270,000
-
Other assets
1,680,000
710,000
Total assets
$2,000,000
$750,000
Liabilities and Equity
Accounts payable
$ 40,000
$ 50,000
Other liabilities
1,360,000
400,000
Common stock
200,000
200,000
Retained earnings
400,000
100,000
Total liabilities and equity
$2,000,000
$750,000
CONDENSED INCOME STATEMENT
for Current Year
88. Given the following separate company balance sheets and income statements, answer the following
questions.
CONDENSED BALANCE SHEETS
As of December 31, Year 4
Assets
Plea
Settle
Accounts receivable
$ 50,000
$ 40,000
Investment in Settle (equity)
300,000
-
Other assets
1,680,000
710,000
Total assets
$2,030,000
$750,000
Liabilities and Equity
Accounts payable
$ 70,000
$ 50,000
Other liabilities
1,360,000
400,000
Common stock
200,000
200,000
Retained earnings
400,000
100,000
Total liabilities and equity
$2,030,000
$750,000
CONDENSED INCOME STATEMENT
for the year ended December 31, Year 4
Plea
Settle
Sales
$800,000
$200,000
Equity in earnings of Settle
20,000
-
89. Given the following consolidated balance sheet and additional information, prepare a separate company
balance sheet and income statement for P.
-
P owns 100% of S.
-
S sold $20,000 of inventory to P.
-
P sold all of the inventory it purchased from S.
-
$10,000 of S's accounts receivable are payable by P.
CONSOLIDATED BALANCE SHEET
As of December 31, Year 4
Assets
Accounts receivable
$ 50,000
Other assets
1,680,000
Total assets
$1,730,000
Liabilities and Equity
Accounts payable
$ 80,000
Other liabilities
1,200,000
Common stock
50,000
Retained earnings
400,000
Total liabilities and equity
$1,730,000
CONSOLIDATED INCOME STATEMENT
for the year ended December 31, Year 4
Sales
$780,000
Total revenues
$780,000
Cost of goods sold
$490,000
Depreciation
120,000
Other expenses
15,000
Tax expense
55,000
Total expenses
$680,000
Net income
$100,000
CONDENSED BALANCE SHEETS
As of December 31, Year 4
Assets
P
S
Accounts receivable
(a)
$ 40,000
Investment in S (equity)
(b)
-
Other assets
(c)
400,000
Total assets
(d)
$440,000
Liabilities and Equity
90. Large, global enterprises typically have an equity interest in other entities throughout the world. Some of the
interests represent wholly-owned (100%-owned) subsidiaries, while others represent lesser percentages of
ownership. These large global conglomerates provide information on the percentage ownership of their various
affiliated companies in the notes to the consolidated financial statements.
The following list of companies represents the ownership percentage of selected companies by a large global
company:
Company A
50% plus
one share
Company B
100%
Company C
68%
Company D
50%
Company E
23.8%
Company F
20%
Required:
Explain how you would expect the global company holding the indicated interests to account for each of the companies listed above, based on the
percentage ownership reported.
Co
mp
an
y
A,
50
%
plu
s
on
e
sha
re,
wo
uld
be
co
ns
oli
dat
ed
Co
mp
an
y
B,
10
0%
,
wo
uld
be
co
ns
oli
dat
ed
Co
mp
an
y
C,
68
%,
wo
uld
be
co
ns
oli
dat
ed
Co
mp
an
y
D,
50
%,
wo
uld
not
be
co
ns
oli
dat
ed
23.
8%
,
wo
uld
not
be
co
ns
oli
dat
ed
Co
mp
an
y
F,
20
%,
wo
uld
not
be
co
ns
oli
dat
ed
Co
mp
ani
es
D
an
d E
wo
uld
be
acc
ou
nte
d
for
usi
91. Parent Computer Corporation acquired significant influence over Child Computer Company on January 2
by purchasing 20 percent of its outstanding stock for $100 million. Parent attributes the entire excess of cost
over book value acquired to a patent, which it amortizes over 10 years. Child Computer had earnings of $100
million and declared dividends of $30 million during the year. The accounts receivable of Parent Computer
Corporation at December 31 included $600,000 due from Child Computer. Parent Computer Corporation
accounts for its investment in Child Computer using the equity method. Parent Computer Corporation considers
reducing its ownership from 20 percent to 19.5 percent so that it no longer has to use the equity method.
Comment on the ethical implications of this possibility.
Ethical issues confront Parent Computer Corporation’s management when they make financial reporting
decisions. Among the questions that one might raise are: (1)does the action violate a known law or regulation
and (2) has the firm provided sufficient disclosure about the action for the users of financial statements to make
92. Describe the accounting and reporting of investments in common stock.
1. In minority, passive investments, an investor acquires the common stock of another entity (the investee) for
2. In minority, active investments, an investor acquires common shares of an investee with
3. In majority, active investments, an investor acquires shares of an investee so that the investor can control the
93. Describe the accounting for minority, active investments.
MINORITY, ACTIVE INVESTMENTS
P’s investment in S represents a proportionate share of the shareholders’ equity of S. P may pay more than the
94. Why do accountants sometimes refer to the equity method as a one-line consolidation?
95. Discuss the accounting for majority, active investments.
MAJORITY, ACTIVE INVESTMENTS
1. To reduce the parent’s legal or operational risk.
2. To reduce the costs of dealing with jurisdiction-specific differences in corporate laws and tax rules.
3. To expand or diversify.
4. To reduce the costs of divesting assets.
Firms generally save costs if they sell the common stock of a subsidiary rather than trying to sell each of its
assets separately. In addition, a sale of shares transfers all known and, perhaps, unknown liabilities to a buyer.
Consolidated financial statements also provide more helpful information than does the equity method, because
96. Describe U.S. GAAP and IFRS requirements in accounting for the business combination.
THE PURCHASE TRANSACTION
1. Acquires the assets and assumes the liabilities of another corporation, or
2. Acquires all, or a majority, of another corporation’s common shares and thereby acquires
a controlling interest in the net assets of the other corporation.
1. Measure the identifiable tangible and intangible assets and liabilities of the acquired
2. The acquirer compares the fair value of the cash, common stock, or other consideration
97. Describe what a consolidated income statement shows.
98. What is a noncontrolling interest in a consolidated subsidiary?
99. Describe the limitations of consolidated statements.
100. Describe the U.S. GAAP requirement in accounting for joint venture investments.,
JOINT VENTURE INVESTMENTS
101. Variable interest entities have what characteristics?
2. The equity owners lack meaningful decision rights.
102. What are qualifying special purpose entities?
103. On July 1, 2013, Mecca Group purchased for cash 35 percent of the outstanding capital stock of Wembley
Studios. Both Mecca Group and Wembley Studios have a December 31 year-end. Wembley Studios, whose
common stock is actively traded in the over-the-counter market, reported its total net income for the year
to Mecca Group and also paid cash dividends on November 15, 2013, to Mecca Group and its other
stockholders.
How should Mecca Group report the above facts in its December 31, 2013, balance sheet and its income
statement for the year then ended? Discuss the rationale for your answer.
2013.
104. The equity method of accounting should be applied by an investor to an investment in the voting stock of
1.
Investor representation of the board of directors of the investee.
2.
Investor participation in policy making processes.
3.
Material intercompany transactions between the investor and investee companies.
4.
Interchange of investor and investee managerial personnel.
5.
Technological dependency of one entity on the other.
6.
The extent of investor ownership in relation to the concentration of other shareholdings.