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TEST BANK

CHAPTER 1

Intercorporate Investments: An Overview

MUTIPE CHOICE

Use t!e "o##owin$ in"ormation on a compan%&s investments in e'(it% sec(rities to answer

'(estions 1) * +e#ow,

The company’s accounting year ends December 31,

Investment

-ate o"

ac'(isition

Cost .air va#(e

1/0101

-ate

so#2

Se##in$

price

Ajax Company stock 6/2/13 !"# !3$# 2/1/1" !32#

%ri& Corporation stock $/1/13 2# '/A 11/1$/13 26#

Coy Company stock (/2/13 16# 16#$ 1/1)/1" 23#

1* Topic: Acco(ntin$ "or tra2in$ sec(rities

O 1

+, the abo-e in-estments are categori.ed as trading securities# hat amount is reported,or gain or &oss on securities# on the 213 income statement0

a* !1#$ gain b* !6# gainc* no gain or &ossd* !"#$ &oss

A' a

2* Topic: Acco(ntin$ "or tra2in$ sec(rities

O 1

+, the abo-e in-estments are categori.ed as trading securities# hat amount is reported ,or gain or &oss on securities# on the 21" income statement0

a* !1# &oss b* !"# &ossc* !3#$ gain

d* !6# &oss

A' c




3* Topic: Acco(ntin$ "or A.S sec(rities

O 1

+, the abo-e in-estments are categori.ed as a-ai&ab&e,orsa&e securities# hat amount isreported ,or gain or &oss on securities# on the 213 income statement0

a* !1#$ gain b* !6# gainc* no gain or &ossd* !"#$ &oss

A' b

"* Topic: Acco(ntin$ "or A.S sec(rities

O 1

+, the abo-e in-estments are categori.ed as a-ai&ab&e,orsa&e securities# hat amount isreported as gain or &oss on securities# on the 21" income statement0

a* !6# &oss b* !"# &ossc* !3#$ gaind* !1# &oss

A' d

Use t!e "o##owin$ in"ormation to answer '(estions 3)4 +e#ow:

A company ho&ds a !1# ,ace -a&ue corporate bond# bought 4anuary 1# 213# paying "5annua&&y on December 31# and maturing December 31# 216* The company paid !3#) ,or the bond# to yie&d 65* The company categori.es the bond as a he&dtomaturity in-estment# and itsaccounting year ends December 31*

$* Topic: Acco(ntin$ "or HTM sec(rities

O 1

7hat amount i&& the company report as interest re-enue on the bond ,or 21"0

a* !"# b* !$#$("c* !$#6)d* !6#

A' c

© Cambridge Business Publishers, 2013

1-2 Advanced Accounting, 2nd Edition




6* Topic: Acco(ntin$ "or HTM sec(rities

O 1

7hat is the entry to record receipt o, interest and principa& on December 31# 216#assuming no impairment on the bond throughout its &i,e0

a* Cash 1"#+nterest re-enue $#(()+n-estment in bond (#113

b* Cash 1"#+nterest re-enue "#+n-estment in bond 1#

c* Cash 16#+nterest re-enue 6#+n-estment in bond 1#

d* Cash 1"#+nterest re-enue $#$("+n-estment in bond (#"16

A' a

)* Topic: Acco(ntin$ "or HTM sec(rities

O 1

Assume the market -a&ue o, the bond on December 31# 213 is !(## and no pre-iousimpairment has been reported* The dec&ine in -a&ue is considered to be other thantemporary* 7hat impairment &oss is reported on the company’s 213 income statement0

a* !2# b* !13#)c* !1"#6$"d* !2"#

A' c




Use t!e "o##owin$ in"ormation to answer '(estions 5)11 +e#ow:

8eregrine Company ac9uires 35 o, the -oting stock o, :a&con Corporation ,or !6## on4anuary 1# 21"* At the time# the book -a&ue o, :a&con as !2##* During 21" :a&conreported net income o, !2## and paid di-idends o, !$#* %oth companies ha-e

December 31 yearends*

(* Topic: E'(it% met!o2 investments

O /

7hat is the in-estment ba&ance on 8eregrine’s ba&ance sheet on December 31# 21"0

a* !6## b* !6#1$#c* !6#6#d* !6#"$#

A' d

* Topic: E'(it% met!o2 investments

O /

'o assume :a&con’s book -a&ue at the date o, ac9uisition as !1"### and theexcess paid o-er book -a&ue is attributed to pre-ious&y unrecorded intangib&es ith anestimated remaining &i,e o, 1 years* traight&ine amorti.ation is appropriate* 7hatamount does 8eregrine report as e9uity in net income o, :a&con ,or 21"0

a* ! 2)# b* !1#(2#c* ! "2#d* ! 6#

A' c

1* Topic: E'(it% met!o2 investments

O /

Assume the same in,ormation as in 9uestion * 7hat is the in-estment ba&ance onDecember 31# 21"# reported on 8eregrine’s ba&ance sheet0

a* !6#2)# b* !6#1$#c* !)#6)#d* !6##

A' a







O /

'o assume 8eregrine’s 21" ending in-entory contains !12# in merchandise purchased ,rom :a&con# at a markup o, 25 on cost* 7hat is the impact on 21" e9uityin net income0

a* ! )#2 &oer b* ! 6# &oer c* !2# &oer d* none

A' b

Use t!e "o##owin$ in"ormation to answer '(estions 1/ an2 1 +e#ow:

8eregrine Company ac9uires a&& o, the -oting stock o, :a&con Corporation ,or !3## on4anuary 1# 21"# in a statutory merger* :a&con’s 4anuary 1# 21" ba&ance sheet is as ,o&&os

Current assets !2##8&ant ; e9uipment )##Current &iabi&ities 1$##<ongterm debt $$##

12* Topic: Stat(tor% mer$er

O

Assume the book -a&ues o, :a&con’s assets and &iabi&ities e9ua& their ,air -a&ues* =omuch goodi&& does 8eregrine report0

a* !1## b* !c* !1$##d* !2##

A' a





O

'o assume :a&con’s p&ant and e9uipment is o-er-a&ued by !$##* =o muchgoodi&& does 8eregrine report0

a* !2$## b* !1##c* !1$##d* none

A' c

Use t!e "o##owin$ in"ormation to answer '(estions 1* an2 13 +e#ow:

At the beginning o, the current year# 4a&u *A* enters a joint -enture ith another company to

de-e&op ne techno&ogy* >ach company in-ests ?1## ,or a $5 interest in the joint-enture* During the year# the joint -enture reports income o, ?2# and pays di-idends o, ?6#* At the end o, the year the joint -enture’s ba&ance sheet reports ?$## in assets and ?2#(6# in &iabi&ities* 4a&u reports ?22## in assets and ?1## in &iabi&ities ,romits on operations*

1"* Topic: 6oint vent(res

O /7 *

+, 4a&u uses the e9uity method to report its in-estment in the joint -enture# hat are itstota& &iabi&ities at the end o, the year0

a* ?1## b* ?12#(6#c* ?11#"3#d* ? 2#(6#

A' a

1$* Topic: 6oint vent(res

O *

+, 4a&u uses proportionate conso&idation to report its in-estment in the joint -enture# hatare its tota& &iabi&ities at the end o, the year0

a* ?1## b* ?12#(6#c* ?11#"3#d* ? 2#(6#

A' c


1- Advanced Accounting, 2nd Edition




16* Topic: E'(it% met!o2 investment

O /

@onroe Company ons "5 o, the -oting stock o, 'arta& +ndustries# ac9uired at book-a&ue* 'arta& reports income o, !6# ,or 213* 'arta& regu&ar&y se&&s merchandise to@onroe at a markup o, 35 on cost* @onroe’s 213 beginning in-entory inc&udes

!1$6# purchased ,rom 'arta&* +ts 213 ending in-entory inc&udes !26# purchased,rom 'arta&* @onroe uses the e9uity method to report its in-estment in 'arta&* >9uity innet income o, 'arta& ,or 213 is

a* !2"#6 b* !23#"c* !216#d* !26"#

A' b

Use t!e "o##owin$ in"ormation to answer '(estions 14 8 /9 +e#ow:

n 4anuary 1# 21"# &a Company paid !3((# ,or a !"# ,ace -a&ue 35 corporate bondyie&ding "5# interest paid annua&&y on December 31# and c&assi,ies it as he&dtomaturity* &a’sreporting year ends December 31*

1)* Topic: HTM investment

O 1

n its 21" income statement# &a reports interest re-enue on the corporate bond o,

a* !12# b* !11#66)c* !1$#$$6d* !16#

A' c

1(* Topic: HTM investment

O 1

n its 21" ba&ance sheet# &a reports the in-estment at

a* !3(#6)( b* !32#6$c* !"#d* !32#"$6

A' d




1* Topic: HTM investment

O 1

n its 21$ ba&ance sheet# &a reports the in-estment at

a* !3$#(1

b* !3)#26c* !36#1$"d* !3(#231

A' c

2* Topic: HTM investment

O 1

7hat is the &i,e o, this bond0

a* 2 years

b* " yearsc* 6 yearsd* 3 years

A' d

21* Topic: Tra2in$ investment

O 1

n December 2# 213# a company pays !"# ,or a stock# c&assi,ied as a tradingsecurity* n December 31# 213# the company’s yearend# the stock has a market -a&ueo, !3(#* The company se&&s the stock in 21" ,or !"1#* n its income statement#the company reports

a* a &oss o, !2# in 213# and a gain o, !3# in 21"* b* no gain or &oss in 213# and a gain o, !1# in 21"*c* a gain o, !1# in 213# and no gain or &oss in 21"*d* no gain or &oss in 213# and a gain o, !3# in 21"*

A' a


1-! Advanced Accounting, 2nd Edition




22* Topic: A.S investment

O 1

n December 2# 213# a company pays !"# ,or a stock# c&assi,ied as an a-ai&ab&e,orsa&e security* n December 31# 213# the company’s yearend# the stock has a market-a&ue o, !3(#* The company se&&s the stock in 21" ,or !"1#* n its income

statement# the company reports

a* a &oss o, !2# in 213# and a gain o, !3# in 21"* b* no gain or &oss in 213# and a gain o, !1# in 21"*c* a gain o, !1# in 213# and no gain or &oss in 21"*d* no gain or &oss in 213# and a gain o, !3# in 21"*

A' b


O

8orter Corporation ac9uires a&& o, Buinn Company’s assets and &iabi&ities on 4anuary 1#21"# ,or !1## in cash* At the date o, ac9uisition# Buinn’s ba&ance sheet reportedassets o, !$## and &iabi&ities o, !"6##* +n-estigation re-ea&s that Buinn’sreported p&ant assets are under-a&ued by !2#$#* 8orter reports ho much goodi&&on this ac9uisition0

a* !6## b* !2#$#c* !3#$#d* !2##

A' c

2"* Topic: Stat(tor% mer$er

O

and Corporation ac9uires a&& o, outhern Company’s assets and &iabi&ities on 4anuary 1#21"# ,or !1$## in cash* At the date o, ac9uisition# outhern’s ba&ance sheetreported assets o, !)$## and &iabi&ities o, !6$##* +n-estigation re-ea&s thatouthern’s reported p&ant assets are o-er-a&ued by !1#"#* and reports ho muchgoodi&& on this ac9uisition0

a* !$## b* !6#"#c* !3#6#d* !2##

A' b




2$* Topic: 6oint vent(res

O /7 *

At the beginning o, the current year# Trux# +nc* enters a joint -enture ith anothercompany* >ach company in-ests ?2$## ,or a $5 interest in the joint -enture*During the year# the joint -enture reports income o, ?1#$# and pays no di-idends*

At the end o, the year the joint -enture’s ba&ance sheet reports ?6$## in assets and ?13#$# in &iabi&ities* +, Trux uses proportionate conso&idation to report itsin-estment in the joint -enture# its &iabi&ities i&& be

a* the same as i, it used the e9uity method to report the in-estment* b* ?13#$# higher than i, it used the e9uity method to report the in-estment*c* ?2$## &oer than i, it used the e9uity method to report the in-estment*d* ?6#)$# higher than i, it used the e9uity method to report the in-estment*

A' d

26* Topic: Contro##in$ investmentO

A company ac9uires a&& o, the assets and &iabi&ities o, another company in a statutorymerger* 7hich statement is false0

a* The ac9uiring company reports the ac9uired assets and &iabi&ities at ,air -a&ue atthe date o, ac9uisition*

b* The ac9uiring company does not report ac9uired intangib&e assets un&ess they area&ready reported on the ac9uired company’s books*

c* The ac9uired company no &onger exists as a separate entity*d* the ac9uiring company does not re-a&ue its assets and &iabi&ities to ,air -a&ue at the

date o, ac9uisition*

A' b

2)* Topic: I.RS "or oint vent(res

O *

As o, 213# +: re9uires joint -entures to be reported as

a* e9uity method in-estments* b* trading securities*c* e9uity method or proportionate&y conso&idated in-estments*d* a-ai&ab&e,orsa&e securities*

A' a






2(* Topic: HTM sec(rities

O 1

=e&dtomaturity in-estments are reported at

a* ,air -a&ue# ith unrea&i.ed gains and &osses reported on the income statement*

b* ,air -a&ue# ith unrea&i.ed gains and &osses reported in other comprehensi-eincome*c* amorti.ed cost*d* cost# ith unrea&i.ed gains and &osses reported on the income statement*

A' c

2* Topic: Impairment testin$ o" A.S sec(rities

O 1

A ** company ho&ds a-ai&ab&e,orsa&e securities that it reports at ,air -a&ue* +tdetermines that pre-ious&y reported dec&ines in -a&ue are Eother than temporary*F The

e,,ect o, this decision is to

a* reduce accumu&ated other comprehensi-e income* b* reduce reported net income*c* reduce the asset# in-estment in A: securities*d* increase stockho&ders’ e9uity*

A' b

3* Topic: Impairment testin$ o" investments

O 17 /

+mpairment testing re9uires a comparison o, an asset’s book -a&ue ith its ,air -a&ue#ith impairment &osses reported on the income statement* 7hich o, the ,o&&oingin-estments are 'T tested ,or impairment0

a* trading securities b* =e&dtomaturity in-estmentsc* >9uity method in-estmentsd* 4oint -entures

A' a




31* Topic: Investment va#(ation

O 17 /7

+, a company e&ects the ,air -a&ue option under ASC Topic 825 ,or a&& o, its e&igib&ein-estments# hich o, its in-estments are not reported at ,air -a&ue# ith unrea&i.ed gainsand &osses reported in income0

a* signi,icant in,&uence in-estments b* a-ai&ab&e,orsa&e in-estmentsc* he&dtomaturity in-estmentsd* contro&&ed in-estments

A' d

32* Topic: Impairment o" A.S sec(rities

O 1

The impairment &oss on A: securities is ca&cu&ated as

a* tota& origina& cost* b* the di,,erence beteen current market -a&ue and origina& cost*c* the di,,erence beteen current market -a&ue and book -a&ue*d* tota& market -a&ue*

A' b

33* Topic: 6oint vent(res

O /

+, a ** company in-ests in a joint -enture# it may report the in-estment as

a* a trading in-estment* b* a he&dtomaturity in-estment*c* an e9uity method in-estment*d* a statutory merger*

A' c






3"* Topic: E'(it% met!o2 investments

O /

A%C Company uses the e9uity method to report its in-estment in 2$5 o, the stock o,GHI Company* +ts origina& in-estment cost exceeded 2$5 o, the book -a&ue o, GHI bya &arge amount* A%C is computing e9uity in net income o, GHI ,or the current year#

hich is ,i-e years a,ter the ac9uisition* ;!ic! sit(ation +e#ow re9uires A%C to a2(st the e9uity in net income number ,or riteo,,s o, the di,,erence beteen in-estment costand GHI’s book -a&ue0 Attribute the di,,erence to

a* goodi&&* b* brand names ith inde,inite &i,e*c* databases ith a 3year &i,e*d* p&ant assets ith a 2year &i,e*

A' d

3$* Topic: Impairment o" HTM investmentsO 1

A he&dtomaturity in-estment ith a book -a&ue o, !"## is determined to beimpaired in 21" and is ritten don to !1##* +n 21$# the in-estment’s -a&ueincreases to !$#$#* +n 21$# ,o&&oing ** JAA8#

a* a !"#$# gain is reported in income* b* a !3## gain is reported in income*c* a !"#$# gain is reported in C+*d* no gain is reported*

A' d

36* Topic: I.RS "or impairment o" HTM investments

O *

A debt security carried at amorti.ed cost ith a book -a&ue o, !"## is determinedto be impaired in 21" and is ritten don to !1##* +n 21$# the in-estment’s-a&ue increases to !$#$#* +n 21$# ,o&&oing +:#

a* a !"#$# gain is reported in income* b* a !3## gain is reported in income*c* a !"#$# gain is reported in C+*d* no gain is reported*

A' b




3)* Topic: E'(it% met!o2 investments

O /

+mpairment &osses on e9uity method in-estments are

a* not reported*

b* reported in other comprehensi-e income*c* reported as a direct adjustment to beginning retained earnings*d* reported on the income statement*

A' d

3(* Topic: E'(it% met!o2 investments

O /

The ** JAA8 impairment test ,or e9uity method in-estments re9uires recognition o,impairment &osses hen

a* ,air -a&ue is &ess than cost* b* a signi,icant &oss e-ent occurs*c* ,air -a&ue &ess than cost and the dec&ine in -a&ue is other than temporary*d* cost exceeds the greater o, market -a&ue or -a&ueinuse*

A' c


O /

>9uity in net income is a,,ected by a&& but hich one o, these items re&ated to thein-estee0

a* impairments o, inde,inite &i,e intangib&es o, the in-estee b* markup on in-entory so&d by the in-estee to the in-estor c* markup on in-entory so&d by the in-estor to the in-esteed* amorti.ation o, pre-ious&y unreported intangib&es o, the in-estee

A' a

"* Topic: Contro##in$ investment

O

A company ac9uires a&& o, the assets and &iabi&ities o, another company* 7hich one o,the ,o&&oing increases the amount o, goodi&& the ac9uiring company reports0

a* The ac9uired company’s e9uipment is under-a&ued* b* The ac9uired company has pre-ious&y unreported intangib&es*c* The ac9uired company’s debt is under-a&ued*d* The ac9uired company’s in-entory is under-a&ued*

A' c






"1* Topic: Stoc< ac'(isition

O

A company ac9uires a&& o, the -oting stock o, 8re-in Company# and records thetransaction by debiting E+n-estment in 8re-in Company*F The company is accounting ,or its in-estment as a

a* statutory conso&idation* b* -ariab&e interest entity*c* joint -enture*d* stock ac9uisition*

A' d

"2* Topic: I.RS "or intercorporate investments

O *

nder current standards# an +: company i&& report impairment &osses on A: and

=T@ in-estments hen

a* their book -a&ue is greater than the present -a&ue o, the ,uture expected cash,&os*

b* the company be&ie-es the &oss is permanent and i&& not re-erse*c* their book -a&ue is greater than their current market -a&ue*d* there is a speci,ic &oss e-ent# regard&ess o, hether or not it is temporary*

A' d


O *

7hat is E-a&ueinuse#F as used in reporting intercorporate in-estments# per +:0

a* 8resent -a&ue o, the in-estment’s ,uture expected cash ,&os* b* @arket -a&ue o, the in-estment in an acti-e market*c* 8resent -a&ue o, the in-estment’s ,uture di-idend payments*d* @arket -a&ue o, the in-estment hen ac9uired*

A' a




""* Topic: I.RS "or intercorporate investments

O *

:o&&oing +:# hen are he&dtomaturity in-estments considered to be impaired0

a* %ook -a&ue is greater than market -a&ue# and there is objecti-e e-idence o, &oss

e-ents* b* %ook -a&ue is greater than market -a&ue# and there is an acti-e market ,or thein-estment*

c* %ook -a&ue is greater than -a&ueinuse# and the dec&ine is considered to be otherthan temporary*

d* %ook -a&ue is greater than -a&ueinuse# and the in-estment no &onger paysdi-idends or interest*

A' a

"$* Topic: I.RS "or intercorporate investments

O *7hich statement be&o is false concerning current +: ,or marketab&e debt and e9uityin-estments0

a* Trading in-estments are reported at ,air -a&ue# ith unrea&i.ed gains and &ossesreported in income*

b* A-ai&ab&e,orsa&e in-estments are reported at ,air -a&ue# ith unrea&i.ed gainsand &osses reported in e9uity*

c* +mpairment &osses are reported in e9uity# and cannot be re-ersed*d* =e&dtomaturity in-estments are reported at amorti.ed cost*

A' c


O /7 *

nder current standards# hen is an impairment &oss reported on a signi,icant in,&uencein-estment in the stock o, another company# ,o&&oing ** JAA8 and +:0

U,S, =AAP I.RS

a* ther than temporary impairment %ook -a&ue is greater than the higher o,market -a&ue or -a&ueinuse

b* %ook -a&ue is greater than the higher o,market -a&ue or -a&ueinuse

ther than temporary impairment

c* 'ot reported +, a E&oss e-entF occurs

d* +, a E&oss e-entF occurs 'ot reported

A' a






")* Topic: I.RS "or intercorporate investments

O *

IFRS 9 ,or ,inancia& instruments# not yet e,,ecti-e# changes ho ,inancia& instruments arereported* 7hat is one o, the pro-isions o, IFRS 90

a* >9uity in-estments can be either :K8< or :KC+* b* Debt securities can be either :K8< or :KC+*c* +mpairment &osses are triggered by E&oss e-ents*Fd* 'o impairment testing is re9uired ,or any in-estment type*

A' a

"(* Topic: I.RS "or oint vent(res

O *

7hich o, the ,o&&oing statements is true concerning proportionate conso&idation ,or joint -entures0

a* +t is a&&oed under ** JAA8 but not under +:* b* +t as abo&ished under +: ,or most joint -entures# as o, 213*c* +t is a&&oed ,or separate reporting o, the joint -enture’s ,inancia& statements*d* +t is a ay to a-oid reporting the joint -enture’s &e-erage on the in-estor’s ba&ance

sheet*

A' b

"* Topic: U,S, =AAP "or e'(it% met!o2 investments

O /

:o&&oing ** JAA8# hen shou&d a company use the e9uity method to report anintercorporate in-estment0

a* The company signi,icant&y in,&uences the decisions o, the in-estee* b* The in-estee is the company’s major supp&ier*c* The company ons 2 L $5 o, the in-estee’s -oting stock*d* The company is ho&ding the in-estment in its &ongterm port,o&io*

A' a




$* Topic: I.RS "or e'(it% met!o2 investments

O *

:o&&oing +:# hen shou&d a company use the e9uity method to report anintercorporate in-estment0

a* The company signi,icant&y in,&uences the decisions o, the in-estee* b* The in-estee is the company’s major supp&ier*c* The company ons 2 L $5 o, the in-estee’s -oting stock*d* The company is ho&ding the in-estment in its &ongterm port,o&io*

A' a


1-1! Advanced Accounting, 2nd Edition




PROBEMS

Use t!e "o##owin$ in"ormation to comp#ete pro+#ems 1 an2 / +e#ow:

Investment-ate o"

ac'(isitionCost .air va#(e

1/0101-ateso#2

Se##in$price

Donar Company stock "/2/13 !"$# !3# 2/1/1" !3$#

>t&ak Corporation stock (/1/13 2$# '/A /1$/13 1#

:ren Company stock /2/13 2# 2"# 1/1"/1" 21#

1* Topic: Tra2in$ investments

O 1

Jua-a&ite Corporation ho&ds these in-estments and c&assi,ies them as trading securities*+ts accounting year ends December 31*

Required

8repare the journa& entries to record the e-ents re&ated to these intercorporatein-estments*

"/2/13

+n-estment in securities "$#

Cash "$#

(/1/13

+n-estment in securities 2$#

Cash 2$#

/2/13

+n-estment in securities 2#

Cash 2#

/1$/13

Cash 1#

<oss on securities MincomeN 6#


12/31/13<oss on securities MincomeN 11#


!M11#N O M!3# !"$#N P M!2"# !2#N




1/1"/1"

Cash 21#


+n-estment in securities 2"#

2/1/1"Cash 3$#


Jain on securitiesMincomeN $#

2* Topic: A.S investments

O 1

Jua-a&ite Corporation ho&ds these in-estments and c&assi,ies them as a-ai&ab&e,orsa&esecurities* +ts accounting year ends December 31*

Required 8repare the journa& entries to record the e-ents re&ated to these intercorporatein-estments*

"/2/13

+n-estment in securities "$#

Cash "$#

(/1/13


Cash 2$#

/2/13


Cash 2#

/1$/13

Cash 1#



12/31/13

<oss on securities MC+N 11#+n-estment in securities 11#

!M11#N O M!3# !"$#N P M!2"# !2#N






1/1"/1"

Cash 21#

C+ "#

+n-estment in securities 2"#

Jain on securities MincomeN 1#

2/1/1"

Cash 3$#



C+ 1$#

3* Topic: Investments in 2e+t an2 e'(it% sec(rities

O 1

=ere is in,ormation ,or -arious in-estments he&d by %est %e-erages# and -a&ues reportedon its 4anuary 1# 21" ba&ance sheet

A>TTrading securities+n-estment in Cougar Company stockQQQQQQQQQQ* ! "$#

A-ai&ab&e,orsa&e securities+n-estment in Da&ey Company stockQQQQQQQQQQQ 1##+n-estment in >gan Corporation stockQQQQQQQQQQ* )#

=e&dtomaturity securities"year !1## ,ace -a&ue bond issued by :rank&in

Company paying $5 interest annua&&y on December 31#yie&ding "5 annua&&y# due December 31# 21$QQQQQQ** 1#1(#(61

ACC@<AT>D T=> C@8>=>'+K> +'C@>nrea&i.ed &oss on Da&ey Company stockQQQQQQQQQ* 2#nrea&i.ed gain on >gan Corporation stockQQQQQQQQ** 1#

During 21" the ,o&&oing e-ents occurred

1* o&d Cougar Company stock ,or !$1#*2* %ought Jordon Corporation stock# he&d as a trading security# ,or !3$#* :air

-a&ue at December 31# 21" !3)$#*3* o&d Da&ey Company stock ,or !$#*"* =e&d >gan Corporation stockR ,air -a&ue at December 31# 21" !6$#*$* ecei-ed interest on :rank&in Company bondR ,air -a&ue at December 31# 21"

!1#1#*




Required

:i&& in the amounts reported on %est %e-erages’ 21" ,inancia& statements* ho yourork in the space be&o each anser*

21" +'C@> TAT>@>'T

+nterest re-enue on :rank&in bond !SSSSSSSSSSSSSS

Jain or &oss on sa&e o, Cougar stock !SSSSSSSSSSSSSS gain &oss

Mcirc&eNJain or &oss on sa&e o, Da&ey stock !SSSSSSSSSSSSSS gain &oss

Mcirc&eN

ther income statement gains or &osses Mspeci,y stock# amount# and hether it is a gain or

&ossN

D>C>@%> 31# 21" %A<A'C> =>>TA>T

+n-estment in Jordon Corporation stock !SSSSSS >>>>>>

+n-estment in >gan Corporation stock !SSSSSSSSSSSS

+n-estment in :rank&in Company bond !SSSSSSS >>>>>

ACC@<AT>D T=> C@8>=>'+K> +'C@>nrea&i.ed gains and &osses Mspeci,y security# amount# and hether it is a gain or &ossN

A'

21" +'C@> TAT>@>'T+nterest re-enue on :rank&in bond !"#)$" MO "5 x 1#1(#(61NJain or &oss on sa&e o, Cougar stock !6# gain MO !$1# L !"$#NJain or &oss on sa&e o, Da&ey stock !2$# &oss MO !$#L!1##L!2#Nther income statement gains or &ossesnrea&i.ed gain on Jordon stock MtradingN !2$# MO !3)$# L !3$#N

D>C>@%> 31# 21" %A<A'C> =>>TA>T+n-estment in Jordon Corporation stock ! 3)$#+n-estment in >gan Corporation stock ! 6$#+n-estment in :rank&in Company bond !1##61$ MO !1#1(#(61 L M!$# L !"#)$"N






ACC@<AT>D T=> C@8>=>'+K> +'C@>nrea&i.ed gains and &ossesnrea&i.ed gain on >gan stock MA:N !$# MO !6$# L!)# P!1#N

"* Topic: Investments in A.S an2 HTM sec(rities7 impairment

O 1A company has in-estments in A: and =T@ securities* +n,ormation on thesein-estments ,or 21" is as ,o&&os

• An A: security ith origina& cost o, !1# has a !12$# ,air -a&ue at the

beginning o, 21"* At the end o, 21"# its ,air -a&ue is !)## and it is determinedthat the security is impaired*

• A 2year bond is purchased at the beginning o, 21"# at a price to yie&d 35#

c&assi,ied as =T@* The bond has a ,ace -a&ue o, !1### coupon rate "5#interest paid at the end o, each year* At the end o, 21"# the bond has a ,air -a&ue o,!"## and it is determined that the security is impaired*

8repare the journa& entries to record the e-ents o, 21"* ho your ork c&ear&y* oundto the nearest do&&ar i, necessary*

A'

A: security


C+ 2$#

+n-estment in securities $$#

=T@ security

"#/M1*3N P 1#"#/M1*3N2 O 1#1#13$ ba&ance# beginning o, 21"

+n-estment in securities 1#1#13$

Cash 1#1#13$

>nd o, 21"

Cash "#

+nterest re-enue 3#$)"

+n-estment in securities #"26

>nding in-estment ba&ance O !1#1#13$ L !#"26 O !1##):air -a&ue "#+mpairment &oss ! 6#)

<oss on securities MincomeN 6#)

+n-estment in securities 6#)




$* Topic: E'(it% met!o2 investments

O /

n 4anuary 2# 213 Corna&& Corporation ac9uired 3$5 i, the -oting stock o, ingstonCompany ,or !"## in cash* The book -a&ues o, ingston’s reported assets and&iabi&ities approximated their ,air -a&ues# but ingston had unreported customer &ists M3

year &i,e# straight&ineN -a&ued at !3## and brand names Minde,inite &i,eN -a&ued at!1##*

During 213 ingston reported tota& income o, !6# and paid tota& di-idends o,!2#* ingston reported !2$# in unrea&i.ed &osses on trading securities and!1# in unrea&i.ed &osses on A: securities* ingston so&d !$## inmerchandise to Corna&& at a markup o, 25 on costR !312# remains in Corna&&’sending in-entory* ingston’s brand names are impaired by !1$# in 213*

Corna&& uses the e9uity method to report its in-estment in ingston*

Required a* Compute Corna&&’s e9uity in net income o, ingston ,or 213# reported onCorna&&’s income statement*

b* @ake the entry or entries necessary to report the abo-e e-ents ,or 213 onCorna&&’s books*

A'a*

hare o, reported income 3$5 x !6# ! 21#

<ess re-a&uation riteo,,customer &ists !3#/3 x 3$5 M3$#N

<ess uncon,irmed pro,it in ending in-entory M!312#L!312#/1*2N x 3$5 M1(#2N

>9uity in net income ! 1$6#(

b*

+n-estment in ingston "##

Cash "##

+n-estment in ingston 1$6#(

>9uity in net income 1$6#(

Cash )#+n-estment in ingston )#

C+ 3#$

+n-estment in ingston 3#$






6* Topic: Proportionate conso#i2ation

O *

n 4anuary 1# 2)# CocaCo&a and another company joint&y ac9uired 4ugos de& Ka&&e*>ach ac9uiring company paid !1 mi&&ion to ac9uire $5 o, 4ugos* At the date o,ac9uisition# 4ugos’ book -a&ue as !6 mi&&ion* +t had unreported techno&ogy Minde,inite

&i,eN -a&ued at !$ mi&&ion# and the remainder o, 4ugos’ assets and &iabi&ities ere ,air&ystated*

+t is no December 31# 212* CocaCo&a treats 4ugos as an e9uity method in-estment*Assume that the ba&ance sheets o, the to companies are as ,o&&os (in thousands)

Coca)Co#a 6($os

Current assets ! 3# ! $

8&ant ; e9uipment# net (# 3#

+n-estment in 4ugos 1#)$ SSSSS

Tota& assets ! 3#)$ ! 3#$

<iabi&ities ! 3$#)$ ! 23#

Capita& stock 1"# 2#

etained earnings ""# $#$

Tota& &iabi&ities ; e9uity ! 3#)$ ! 3#$

Required

8resent CocaCo&a’s ba&ance sheet at December 31# 212# assuming CocaCo&a usesproportionate conso#i2ation to report its in-estment in 4ugos*

A'

(in thousands)

Current assets ! 3#2$ <iabi&ities ! ")#2$

8;># net $# Capita& stock 1"#

Techno&ogy 2#$ etained earnings ""#

Joodi&& "#$ SSSSSS

Tota& !1$#2$ Tota& !1$#2$




)* Topic: Stat(tor% mer$er

O

De&icious De&icacies ac9uires the assets and &iabi&ities o, >&egant >ateries on 4anuary 2#213# ,or !## cash* At that date# >&egant >ateries’ ba&ance sheet is as ,o&&os

Assets ia+i#ities an2 e'(it%Current assets ! 1## Current &iabi&ities ! #

8&ant ; e9uipment# net 1## <ongterm debt (##

SSSSSSSS Capita& stock 2#1#

Tota&s !11## Tota&s !11##

>&egant’s current assets are o-er-a&ued by !"## and its p&ant and e9uipment iso-er-a&ued by !"##* >&egant has pre-ious&y unreported brand names o,!$##*

Required

8repare the journa& entry made by De&icious De&icacies to record its ac9uisition o,>&egant >ateries*

A'

Current assets 6#

8&ant ; e9uipment 6##

%rand names $##

Joodi&& 6#3#

Current &iabi&ities #

<ongterm debt (##

Cash ##

(* Topic: Stat(tor% mer$er

O

Akron +ndustries ac9uires the assets and &iabi&ities o, Dayton +nc* on 4anuary 2# 21" ,or!6## cash* Dayton +nc* has the ,o&&oing assets and &iabi&ities# at ,air -a&ue

CashQQQQQQQQQQQQQQQQ ! "#ecei-ab&esQQQQQQQQQQQQQ* 1#$#+n-entoriesQQQQQQQQQQQQQ** $#"#%ui&dings ; e9uipmentQQQQQQQQ** )2##

Current &iabi&itiesQQQQQQQQQQQ 6#$# 'otes payab&eQQQQQQQQQQQQ* 3"##

Required

a* Ca&cu&ate the goodi&& Akron records ,or this ac9uisition* b* +, Dayton’s notes payab&e had a market -a&ue o, !"### ho is goodi&&

a,,ected0 Ca&cu&ate the amount and direction o, change*






A'

a*

8rice paid

:air -a&ue o, identi,iab&e net assets ac9uired !6##

Cash ! "# ecei-ab&es 1#$#

+n-entories $#"#

%ui&dings ; e9uipment )2##

Current &iabi&ities M6#$#N

'otes payab&e M3"##N 3(#(#

Joodi&& !21#2#

b* +, notes payab&e ha-e a market -a&ue o, !"### an increase o, !6###the ,air -a&ue o, identi,iab&e net assets ac9uired dec&ines to !32#(# MO!3(#(# L !6##N and goodi&& increases to !2)#2# MO !21#2#

P !6##N*

* Topic: Stat(tor% mer$ers7 stoc< ac'(isitions

O

+nternationa& %e-erages ac9uires >cop&astics ecyc&ing Company on 4anuary 2# 21" ,or!2## in cash* >cop&astics has the ,o&&oing assets and &iabi&ities# at ,air -a&ue

Cash ; recei-ab&esQQQQQQQQQQ* ! 2##+n-entoriesQQQQQQQQQQQQQ* 1$##%ui&dings ; e9uipmentQQQQQQQQ** )$##8atents ; trademarksQQQQQQQQQ* 6##

Current &iabi&itiesQQQQQQQQQQQ 2)##<ongterm debt*QQQQQQQQQQQ* "$##

>cop&astics a&so has de-e&oped techno&ogy# appropriate&y recorded as an asset onac9uisition and -a&ued at !2### that does not appear on its ba&ance sheet*

Required

a* 8repare the journa& entry +nternationa& %e-erages makes to record the ac9uisitiono, >cop&astics# assuming this is a statutory merger*

b* epeat re9uirement a# assuming this is a stock ac9uisition*




A'a*

Cash ; recei-ab&es 2##

+n-entories 1$##

8&ant ; e9uipment )$##

8atents ; trademarks 6##De-e&oped techno&ogy 2##

Joodi&& 1$"##

Current &iabi&ities 2)##

<ongterm debt "$##

Cash 2##

b*

+n-estment in >cop&astics 2##

Cash 2##

1* Topic: E'(it% met!o2 investmentsO /

<ark&and Company ac9uires 35 o, the -oting stock o, @artin Corporation on 4anuary 2#21"* At the date o, ac9uisition# @artin’s recorded net assets o, !6##approximated ,air -a&ue# but it had &imited &i,e intangib&es# not current&y reported on its ba&ance sheet# -a&ued at !"### ith a remaining &i,e o, $ years# and un&imited &i,eintangib&es# not current&y reported on its ba&ance sheet# -a&ued at !3##* During21"# @artin Corporation reports net income o, !$## and pays di-idends o,!2##* +mpairment testing re-ea&s that the un&imited &i,e intangib&es are impaired by!6# during 21"*

Required Ca&cu&ate e9uity in net income o, @artin Corporation# to be reported on <ark&and’sincome statement*

A'

35 net income 35 x !$## !1#$#

Amorti.ation 35 x M!"##/$N M2"#N

>9uity in net income !1#26#

'ote >9uity in net income is not adjusted ,or impairment o, inde,inite &i,e intangib&es*







O /

De&ta Corporation ac9uires "5 o, the -oting stock o, Da-idson Company on 4anuary 3#213# ,or !"##* At that date# the book -a&ues o, Da-idson’s assets and &iabi&itiesapproximated ,air -a&ue* During 213# Da-idson reported net income o, !6## and

paid di-idends o, !1##* Da-idson’s ending in-entory contains !1#(# purchased ,rom De&ta* De&ta so&d the in-entory to Da-idson at a markup o, 25 on cost*De&ta’s ending in-entory contains !1#$# purchased ,rom Da-idson* Da-idson so&dthe in-entory to De&ta at a markup o, 35 on cost*

Required

a* Ca&cu&ate e9uity in net income o, Da-idson# reported on De&ta’s 213 incomestatement*

b* Ca&cu&ate +n-estment in Da-idson# reported on De&ta’s December 31# 213 ba&ance sheet*

A'

a*

"5 net income "5 x !6## !2#"#

ncon,irmed pro,it on upstreamending in-entory

"5 x M!1#$# !1#$#/1*3N M1(#N

ncon,irmed pro,it on donstreamending in-entory

"5 x M!1#(# !1#(#/1*2N M)2#N

>9uity in net income !2#1"(#

b*

+n-estment in Da-idson# 1/3/13 !"##>9uity in net income# 213 2#1"(#

Di-idends# 213 MO!1## x "5N M"#N

+n-estment in Da-idson# 12/31/13 !"1#)"(#





O /

Jrant Company ac9uires "5 o, the -oting stock o, 4ake Corporation on 4anuary 1#21# ,or !$##* At that date# 4ake reported p&ant and e9uipment at !"##more than its ,air -a&ue* The p&ant and e9uipment had a remaining &i,e o, 2 years#

straight&ine* 4ake a&so had &imited &i,e intangib&e assets# not reported on its ba&ancesheet# ith a ,air market -a&ue o, !1### " year remaining &i,e# straight&ine*During the $year period ,rom 4anuary 1# 21 through December 31# 21" 4ake reportedtota& net income o, !23## and paid !(## in di-idends* During 21$# 4akereported net income o, !3## and paid !(# in di-idends*

Required

a* Ca&cu&ate e9uity in net income o, 4ake# reported on Jrant’s 21$ incomestatement*

b* Ca&cu&ate +n-estment in 4ake# reported on Jrant’s December 31# 21$ ba&ancesheet*

A'

a*

"5 net income "5 x !3## !1#2#

Depreciation adjustment "5 x M!"##/2N (#

>9uity in net income !1#2(#

'ote intangib&es’ &i,e is o-er in 21$# so no amorti.ation is taken*

b*

+n-estment# 1/1/1 !$##hare o, net income# 2121" "5 x !23## #2#

Depr* adjustment# 2121" !(# x $ "#

Amort* adjustment# 2121" "5 x !1## M"##N

Di-idends# 2121" "5 x !(## M3#2#N

+n-estment# 12/31/1" $2#"#

>9uity in net income# 21$ 1#2(#

Di-idends# 21$ "5 x !(# M32#N

+n-estment# 12/31/1$ !$3#36#







O /

o&ac Company ac9uires 2$5 o, the -oting stock o, Ta&go Corporation on 4anuary 1#212# ,or !12### hich as 2$5 o, Ta&go’s book -a&ue* +t is no December 31#21"* o&ac se&&s merchandise to Ta&go at a markup o, 35 on cost* Ta&go se&&s

merchandise to o&ac at a markup o, 3$5 on cost* %e&o are the in-entory ba&ances he&d by o&ac# purchased ,rom Ta&go# and he&d by Ta&go# purchased ,rom o&ac# at -ariousdates*

Inventor% !e#2 +% So#ac7

p(rc!ase2 "rom Ta#$o

Inventor% !e#2 +% Ta#$o7

p(rc!ase2 "rom So#ac

December 31# 212 !2#2$# !)$"#

December 31# 213 2#)# )$#

December 31# 21" 3#3)$# 1#"#

Ta&go reports tota& net income o, !3#$# ,or 212 and 213# and !1#"# ,or

21"* Ta&go pays no di-idends during this period*

Required

a* Ca&cu&ate e9uity in net income o, Ta&go# reported on o&ac’s 21" incomestatement*

b* Ca&cu&ate the +n-estment in Ta&go ba&ance# reported on o&ac’s December 31#21" ba&ance sheet*

A'

a*

2$5 net income 2$5 x !1#"# !3$#ncon,irmed pro,it on upstreamending in-entory

2$5 x M!3#3)$# !3#3)$#/1*3$N M21(#)$N

ncon,irmed pro,it on donstreamending in-entory

2$5 x M!1#"# !1#"#/1*3N M6#N

Con,irmed pro,it on upstream beginning in-entory

2$5 x M!2#)# !2#)#/1*3$N 1)$#

Con,irmed pro,it on donstream beginning in-entory

2$5 x M!)$# !)$#/1*3N $6#2$

>9uity in net income# 21" !32#$




b* *

+n-estment# 1/1/12 !12##

hare o, net income# 212213 2$5 x !3#$# ()$#

ncon,irmed pro,it on upstreamending in-entory

2$5 x M!2#)# !2#)#/1*3$N M1)$#N

ncon,irmed pro,it on donstream beginning in-entory

2$5 x M!)$# !)$#/1*3N M$6#2$N

+n-estment# 12/31/13 12#6"3#)$

>9uity in net income# 21" 32#$

+n-estment# 12/31/1" !12#"6#2$

'ote Con,irmed and uncon,irmed pro,its on December 31# 212 in-entories cance& outo-er time* n&y the December 31# 213 in-entory pro,its a,,ect the December 31# 213in-estment ba&ance*

1"* Topic: HTM investments

O 1A company in-ests in a $year# !2#$# ,ace -a&ue# $5 corporate bond on 4u&y 1#213# and c&assi,ies it as a he&dtomaturity in-estment* The bond is priced to yie&d (5*The company’s accounting year ends 4une 3 o, each year*

Required

a* =o much did the company pay ,or the corporate bond0 b* Assuming the company continues to ho&d the bond through ,isca& 216# and no

impairment &osses ha-e been reported on the in-estment# hat amounts does itreport ,or interest re-enue on the ,isca& 216 income statement# and hat is the ba&ance ,or the in-estment at 4une 3# 2160

c* Assume the company be&ie-es the in-estment may be impaired at 4une 3# 216*=o ou&d the company determine hether or not the in-estment is impaired0

d* +, no pre-ious impairment has been reported# and the company estimates that the4une 3# 216 in-estment ,air -a&ue is !1#$# and impairment &ossrecognition is appropriate# make the entry to record the impairment &oss*






A'

a* M!12$#/1*(N P M!12$#/M1*(2N P !12$#/M1*(3N P M!12$#/M1*("N PM2#62$#/M1*($N O !2#2#$")

b* An amorti.ation tab&e through the end o, ,isca& 216 ,o&&os

.isca# %ear

Interest reven(e

?5@ previo(s

%ear&s investment

+a#ance

A22ition to

investment acco(nt

?interest reven(e )

1/37999

Dear)en2

investment +a#ance

%eginning !2#2#$")

21" !1)6#"" !$1#"" 2#2$1#$1

21$ 1(#12) $$#12) 2#36#)1(

216 1("#$3) $#$3) 2#366#2$$

+nterest re-enue ,or ,isca& 216 is !1("#$3)*The 4une 3# 216 in-estment ba&ance is !2#366#2$$*

c* ASC Topic !2" re9uires that an impairment &oss be reported i, the dec&ine in ,air-a&ue is Eother than temporary*F >-idence might inc&ude a signi,icant reductionin expected re-enues ,or the corporation hich issued the bond# or e-idence that ithas or p&ans to dec&are bankruptcy*

d* The impairment &oss is M!2#366#2$$ !1#$#N O !(66#2$$* The entry is

+mpairment &oss on =T@

securities MincomeN (66#2$$+n-estment in =T@ securities (66#2$$




1$* Topic: Stat(tor% mer$er

O

:erodo +ndustries ac9uires the assets and &iabi&ities o, Jrundig +nc* on 4anuary 2# 213,or !(## cash* At that date# Jrundig’s ba&ance sheet is as ,o&&os

Assets ia+i#ities an2 e'(it%Cash# recei-ab&es ! (# Current &iabi&ities ! 6##

@erchandise in-entory "##<ongterm bonds payab&e 3##

<and# bui&dings# ande9uipment# net 3$## Common stock 3#

Additiona& paidincapita& 6##

etained earnings M2##N

SSSSSSSSS Accumu&ated othercomprehensi-e income M#$#N

Tota& !3$"#(# !3$"#(#

At 4anuary 2# 213# Jrundig’s assets and &iabi&ities ha-e the ,o&&oing ,air -a&ues

.air va#(e7 10/01

Cash# recei-ab&es ! )#

@erchandise in-entory 2#$#

<and# bui&dings# and e9uipment 2##

Current &iabi&ities 6##

<ongterm bonds payab&e 2(##

Jrundig has no unrecorded intangib&es*

Required

a* 8repare the journa& entry made by :erodo to record its ac9uisition o, Jrundig* b* Jrundig’s book -a&ue is !"(#(#* >xp&ain hy :erodo paid !(### or

!31#2# more than book -a&ue# ,or Jrundig*

A'

a*

Cash# recei-ab&es )#

@erchandise in-entory 2#$#<and# bui&dings# ande9uipment 2##

Joodi&& 1(#(#

Current &iabi&ities 6##

<ongterm bonds payab&e 2(##

Cash (##






b* Jrundig’s book -a&ues di,,er ,rom ,air -a&ue as ,o&&os

.air va#(e 8 +oo< va#(e

Cash# recei-ab&es ! M1#N

@erchandise in-entory M1#$#N

<and# bui&dings# and e9uipment M1$##N%onds payab&e 2##

Tota& !M1"#6#N

This ana&ysis indicates that :erodo shou&d pay !1"#6# less than book -a&ue ,orJrundig* :erodo as i&&ing to pay !31#2# #ore than book -a&ue# indicating thatJrundig has unidenti,iab&e intangib&e assets# -a&ued at !1(#(# MO !1"#6# P!31#2#N# hich it records as goodi&&* These assets cou&d inc&ude reputation# ork,orce# and other intangib&es expected to create ,uture re-enues* n the other hand#:erodo cou&d ha-e paid too much ,or Jrundig# perhaps due to pressure ,rom competing potentia& buyers or ,rom Jrundig’s existing shareho&ders*

Use t!e "o##owin$ in"ormation to comp#ete pro+#ems 1 an2 14 +e#ow:

Investment

-ate o"

ac'(isition Cost

.air

va#(e

1/0101*

-ate

so#2

Se##in$

price

Acte& Com pany stock /3/1" !2$# !2# 1/1/1$ !1(#

%e&&a Corporation stock 1/1$/1" 36# 3(# 2/1)/1$ 3$#

Cripton Company stock 12/"/1" 12# 1# 2/2/1$ 16#

Assume the accounting year ends December 31*

16* Topic: Tra2in$ an2 A.S investments

O 1

The Acte& and Cripton in-estments are c&assi,ied as a-ai&ab&e,orsa&e# and the %e&&ain-estment is c&assi,ied as a trading in-estment*

Required Ca&cu&ate the gain or &oss on these in-estments# to be reported on the 21" and 21$income statements*




A'/91* income statement

nrea&i.ed gain on %e&&a stock ! 2#

/913 income statement

ea&i.ed &oss on Acte& stock ! M)#Nea&i.ed &oss on %e&&a stock M3#Nea&i.ed gain on Cripton stock "# 'et &oss ! M6#N

1)* Topic: Tra2in$ an2 A.S investments

O 1

The Acte& and Cripton in-estments are c&assi,ied as trading# and the %e&&a in-estment isc&assi,ied as a-ai&ab&e,orsa&e*

Required

Ca&cu&ate the gain or &oss on these in-estments# to be reported on the 21" and 21$income statements*

A'

/91* income statement

nrea&i.ed &oss on Acte& stock ! M$#Nnrea&i.ed &oss on Cripton stock M2#N 'et &oss ! M)#N

/913 income statement

ea&i.ed &oss on Acte& stock ! M2#Nea&i.ed &oss on %e&&a stock M1#Nea&i.ed gain on Cripton stock 6# 'et gain ! 3#






1(* Topic: E'(it% met!o2 investment

O /

onica Company ac9uires "5 o, the -oting stock o, <exmark Corporation on 4anuary1# 21# ,or !6### and treats it as an e9uity method in-estment* At the date o,onica’s in-estment# the ,air -a&ues o, <exmark’s net assets di,,ered ,rom book -a&ues as

,o&&os

Boo< va#(e .air va#(e

@erchandise M:+:N ! $## ! (##

%ui&dings and e9uipment M2year &i,e# <N 3## "##

+ntangib&e assets M"year &i,e# <N 1##

<exmark reports tota& net income o, !2## ,or the period 21 213# and!$## ,or 21"* <exmark paid no di-idends during the period 21 L 213# but paid !1## in di-idends in 21"* The accounting year ,or both companies endsDecember 31*

<exmark se&&s merchandise to onica at a markup o, 35 on cost* The in-entory ba&ances he&d by onica# purchased ,rom <exmark# are as ,o&&os*

Inventor% !e#2 +%

Konica7 p(rc!ase2

"rom emar<

December 31# 213 !1#$6#

December 31# 21" 2#6#

Required

a* Ca&cu&ate e9uity in net income o, <exmark# reported on onica’s 21" incomestatement*

b* Ca&cu&ate +n-estment in <exmark# reported on onica’s December 31# 21" ba&ance sheet*

A'

a*

"5 21" net income "5 x !$## !2##

Depreciation adjustment "5 x M!1##/2N M2#N

ncon,irmed pro,it on upstream

ending in-entory

"5 x M!2#6#

!2#6#/1*3N M2"#NCon,irmed pro,it on upstream beginning in-entory

"5 x M!1#$6# !1#$6#/1*3N 1""#

>9uity in net income# 21" !1#)"#




b* *

+n-estment# 1/1/1 !6##

hare o, net income# 21213 "5 x !2## (##

@erchandise adjustment "5 x !3## M1#2#N

%ui&dings and e9uipment

adjustment# 21213 "5 x UM!1##/2N x "V M(#N+ntangib&e assets adjustment#21213 "5 x !1## M"##N

ncon,irmed pro,it on upstreamending in-entory# 12/31/13

"5 x M!1#$6# !1#$6#/1*3N M1""#N

+n-estment# 12/31/13 61#($6#

>9uity in net income# 21" 1#)"#

Di-idends# 21" "5 x !1## M"#N

+n-estment# 12/31/1" !63#16#


O Timnor Corporation ac9uires the assets and &iabi&ities o, Kenta& Company on 4anuary 2#21" ,or !1## cash* At that date# Kenta&’s assets and &iabi&ities ha-e the,o&&oing book and ,air -a&ues

.air va#(e7 10/01* Boo< va#(e7 10/01*

Current assets ! 1# ! 1$#

>9uipment 3## $##

8atents and trademarks "$## 2#$#

<iabi&ities ")#$# ")#$#

Required a* Kenta&’s book -a&ue at the date o, ac9uisition is !$#1$#* 7hy did Timnor pay

!1## ,or Kenta&0 %e speci,ic* b* Ca&cu&ate the goodi&& reported on this ac9uisition*c* Criti9ue the accounting ,or this statutory merger* Do you think the amount o,

goodi&& recogni.ed is o-erstated0d* Joodi&& is an inde,inite&i-ed intangib&e asset* +, it turns out that Kenta&’s ,uture

per,ormance is signi,icant&y &oer than predicted at the date o, ac9uisition# hodo you think Timnor i&& re,&ect this in,ormation in its ,inancia& statements0






A'

a* and b*Timnor be&ie-es the ,air -a&ue o, Kenta& is !"#($# MO !1## L !$#1$#Ngreater than its book -a&ue* easons ,or the di,,erence

Current assets !1# !1$# ! M$#N

>9uipment !3## !$## M2##N

8atents and trademarks !"$## !2#$# "2#$#

Tota& ! 22#"$#

Joodi&& !1## !22#"$# ! ))#$$#

c* -er )$5 o, the purchase price is attributed to goodi&&# re,&ecting the amount paid o-er and abo-e the ,air -a&ue o, the identi,iab&e net assets ac9uired*+n,ormation on the actua& ,air -a&ues o, assets and &iabi&ities ac9uired cou&d beincomp&eteR Kenta& cou&d ha-e other assets# probab&y intangib&es# hich ere not

identi,ied* This o-erstates the goodi&&* d* A&though goodi&& is not amorti.ed# inde,inite&i-ed intangib&es are regu&ar&y

tested ,or impairment# and ritten don as appropriate*

2* Topic: U,S, =AAP an2 I.RS "or oint vent(res

O /7 *

n 4anuary 1# 212# >dgecor Corporation and another company created a joint -enture*>ach company contributed !1 mi&&ion and has a $5 interest in the joint -enture* AtDecember 31# 212# the end o, >dgecor’s accounting year# >dgecor and the joint -enturereport the ,o&&oing ba&ance sheets

E2$ecor 6oint Fent(re

Current assets ! 6## ! 2##

<and# bui&dings and e9uipment# net "## 2##

+n-estment in joint -enture 11#$# SSS

Tota& assets !")1#$# !22##

<iabi&ities !1## !1)##

Capita& stock 21$## 2##

etained earnings 1$6#$# 3##

Tota& &iabi&ities ; e9uity !")1#$# !22##

The joint -enture paid !1## in di-idends during 212* >dgecor uses the e9uitymethod to account ,or its joint -enture*




Required

a* 7hat as the joint -enture’s reported net income ,or 2120 b* nti& 213# +: a&&oed companies to use proportionate conso&idation to

account ,or their joint -entures* +, >dgecor used proportionate conso&idation toreport its joint -enture# hat ou&d its December 31# 212 ba&ance sheet &ook

&ike0c* 7hy might >dgecor pre,er to use the e9uity method rather than proportionateconso&idation to account ,or its joint -enture0

A'

a* There are to ays to anser this 9uestion*

The joint -enture’s ending retained earnings is !3## and it paid di-idends o, !1##* There,ore its net income as !"##*

>dgecor’s ending in-estment ba&ance is !11#$## so it added !1#$# tothe in-estment account* +t reduced the in-estment by ha&, the joint -enture’sdi-idends# or !$## so it increased the in-estment by !2### hich isha&, the joint -enture’s net income o, !"##*

b*

Current assets ! )## <iabi&ities !1(#$#

<and# bui&dings# ande9uipment# net $## Capita& stock 21$##

SSSSSSSSSS etained earnings 1$6#$#

Tota& !$)## Tota& !$)##

c* 8roportionate conso&idation inc&udes ha&, the joint -enture’s &iabi&ities on>dgecor’s ba&ance sheet* >dgecor’s tota& &iabi&ities/tota& assets using bothmethods are

Acco(ntin$ met!o2 T0TA

>9uity method !1##/!")1#$# *212

8roportionate conso&idation !1(#$#/!$)## *3"(

>dgecor’s &e-erage ratio is signi,icant&y higher using proportionate conso&idation*To the extent that in-estors and creditors use this ratio to measure >dgecor’s risk#

it cou&d increase >dgecor’s cost o, obtaining ,uture capita&*

test-bank-for-advanced-accounting-2nd-edition-by-hamlen.doc

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