This is “End-of-Chapter Exercises”, section 12.5 from the book Business Accounting (v. 2.0).
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On November 5, Year One, Maxwell Corporation purchased seventy shares of Tyrone Company for $30 per share, planning to hold the investment for a short time and then sell these shares. At the end of Year One, Tyrone is selling for $32 per share on a stock exchange. What unrealized gain will Maxwell report for Year One, and where should that balance be reported?
Which of the following is not a reason investments in trading securities are shown at fair value on the balance sheet?
Hope Corporation buys shares of Lonesome Corporation for $14,000 during Year One. By year-end, the stock has a total market value of $18,000. Which of the following is not true?
An investor spends $23,000 for shares of another company late in Year One. The shares are worth $24,000 at the end of that year. Early in Year Two, a $1,200 dividend is received from this investment. Shortly thereafter, the shares are sold for $26,000. If this asset is an investment in trading securities, what is the impact on net income in Year Two?
The Andre Corporation spends $35,000 for shares of another company late in Year One. The shares are worth $34,000 at the end of that year. Early in Year Two, a $900 dividend is received from this investment. Shortly thereafter, the shares are sold for $38,000. If this asset is viewed as an investment in trading securities, what is the impact on net income in Year Two?
Early in Year One, Jackson Corporation purchased 150 shares of Riley Corporation for $46 per share. The investment is classified as available-for-sale. At the end of Year One, Riley’s stock is selling on a stock exchange for $43 per share. Jackson’s reported net income for the year was $235,000. What should Jackson report as its comprehensive income for Year One?
In Year One, Jeremiah Corporation purchased shares of Lauren Corporation for $9,000. The investment is classified as a trading security. At the end of Year One, Lauren’s stock has a value on a stock exchange equal to $13,000. Jeremiah’s reported net income for the year was $180,000. What should Jeremiah report as its comprehensive income for Year One?
The Monroe Corporation owns the capital stock of several corporations and receives a cash dividend of $7,000 this year. Which of the following statements is true?
Wisconsin Corporation makes an investment in Badger Corporation for $38,000 at the beginning of Year One. At the end of the year, the shares are selling at an amount equal to $34,000. The drop in value is viewed as temporary. During the period, Badger earned $30,000 in income and Wisconsin received a dividend of $1,800. Which of the following is not true?
Anton Company owns shares of Charlotte Corporation. Which of the following is true about the reporting for this investment?
Rocko Corporation acquires 40 percent of Hailey Corporation on January 1, Year One, for $400,000. By this purchase, Rocko has gained the ability to exert significant influence over Hailey. Hailey reports net income of $80,000 in Year One and $100,000 in Year Two. Hailey pays a total dividend of $30,000 each year. These shares have a value of $460,000 at the end of Year One and $500,000 at the end of Year Two. On a December 31, Year Two, balance sheet, what does Rocko report for this investment?
Lancaster Inc. purchases all the outstanding stock of Lucy Company for $4,500,000. The net assets of Lucy have a total fair value of $2,900,000. These assets include a patent with a net book value of $4,700 and a fair value of $159,000. At what amount should the patent and any goodwill from this purchase be shown on consolidated financial statements produced on the date of purchase?
On December 31, Year One, Brenda Corporation purchased 100 percent of Kyle Inc. for $3,400,000. The net assets of Kyle had a net book value of $3 million. Kyle had a trademark with a fair value ($45,000) that exceeded its book value ($15,000) by $30,000. For all other assets and liabilities reported by Kyle, net book value was the same as fair value. At what amounts should the trademark and goodwill be shown on Brenda’s consolidated balance sheet on December 31, Year One?
On December 31, Year One, the Bolger Corporation purchases all of the capital stock of Osbourne Corporation for $200,000 more than the fair value of the subsidiary’s identifiable assets and liability. During Year One, Bolger reported revenues of $900,000 and expenses of $600,000. In the same period, Osbourne reported revenues of $700,000 and expenses of $500,000. On a consolidated income statement for Year One, what is reported for revenues and expenses?
Hydro Company and Aqua Corporation are in the same industry. During Year One, Hydro had average total assets of $35,000 and sales of $47,800. Aqua had average total assets of $49,000 and sales of $56,900. Which of the following is true?
Tried Company began the year with $450,000 in total assets and ended the year with $530,000 in total assets. Sales for the year were $560,000 while net income for the year was $46,000. What was Tried Company’s return on assets (ROA) for the year?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops located throughout Florida. One day, while waiting for a bus to go across campus, your roommate poses this question: “As you can imagine, my parent’s business is very seasonal. They do great during the summer but not nearly as well in the winter. So, the business has to save up enough cash by the end of summer to support operations over the colder months. This year the business bought shares of several well-known companies in September that will be sold in February when cash reserves begin to run low. Unfortunately, the stock market went down, and now my parents are telling me that they have to report a loss at the end of December. I don’t understand. If they are not going to sell this stock until February, why do they have to report a loss in December? The stock market price may well go way up by the time they sell those shares in February. They have plenty of time to recoup the lost value.” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has expanded and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question: “We have some friends who own an office supply service in the next state. They had been having some trouble, so at the beginning of the current year, our company bought 35 percent of their company for a considerable amount of money. We have plans to help them get their operations turned around. We believe, in the long run, that this investment will be very profitable as they begin to make the changes we suggest. This year, that other company only made a profit of $40,000 and paid a total cash dividend of $10,000. However, in the future, we believe that they will do much better. We’ve never owned a portion of a business like this before. How do we go about accounting for our ownership interest in this other company?” How would you respond?
The Kansas Company buys 1,000 shares of Topeka Inc. on August 1, Year One, for $19 per share. Topeka paid a $1 per share cash dividend on December 12, Year One. The shares are worth $23 per share on December 31, Year One. Kansas sells this entire investment on April 7, Year Two, for $25 per share.
Record Investor Corporation’s journal entry for each of the following events.
On September 9, Year One, Johnson Inc. purchased 500 shares of Thomas Company stock when this stock was selling for $20 per share. Johnson plans to hold these shares for a short time and hopefully sell the investment for a gain. Shortly thereafter, Thomas paid a cash dividend of $0.32 per share.
On December 31, Year One, Johnson prepares its financial statements. At that time, this stock is selling for $18 per share.
In Year One, Waterloo Corporation makes an investment in the equity securities of another company for $53,000. The company then collects a cash dividend of $2,000. At the end of Year One, this investment is valued at $58,000. In March of Year Two, the entire investment is sold for cash of $54,000.
Waterloo reported this investment as being in available-for-sale securities. How would Waterloo’s reported net income have been different in each of these two years if the investment had been reported as a trading security?
Record Christopher Corporation’s journal entry for each of the following events. After each entry, indicate the balances that will be reported on Christopher Corporation’s balance sheet at that date.
On April 16, Youngstown Inc. purchased 900 shares of Cool Company stock when Cool’s stock was selling for $15 per share. Youngstown plans to hold this stock indefinitely until the company has a need for cash.
Ordello Company buys 20 percent of the capital stock of Pottsboro Corporation on January 1, Year One, for $370,000. Ordello plans to hold these shares for an indefinite period of time. Pottsboro reports net income of $80,000 in Year One and $100,000 in Year Two. The company pays a total cash dividend of $30,000 in each year. Ordello’s investment is worth $420,000 at the end of Year One and $470,000 at the end of Year Two. Ordello sells this investment on the first day of Year Three for $470,000 in cash.
Oregon Company, a paper products manufacturer, wishes to enter the Canadian market. The company purchased 30 percent of the outstanding stock of Canadian Paper Inc. on January 1, Year One, for $6,000,000. The CEO of Oregon will sit on the board of directors of Canadian, and other evidence of significant influence does exist.
At the beginning of Year One, Current Properties paid $1,000,000 for 25 percent of the shares of Nealy Enterprises. Current immediately begins to exert significant influence over the operating decisions of Nealy.
Teckla Corporation purchases all the outstanding stock of Feather Company on January 1, 20X3 for $5,000,000. Teckla’s balance sheet on that date before the purchase is shown in the following:
Figure 12.18 Assets and Liabilities of Teckla
On January 1, 20X3, Feather has assets and liabilities as shown in the following:
Figure 12.19 Assets and Liabilities of Feather
In several past chapters, we have met Heather Miller, who started her own business, Sew Cool. The following are the financial statements for December. To calculate average total assets, assume that total assets on June 1, 20X8, when Sew Cool first started in business, were zero.
Figure 12.20 Sew Cool Financial Statements
Based on the financial statements determine the following:
This problem will carry through several chapters, building in difficulty. It allows students to continually practice skills and knowledge learned in previous chapters.
In Chapter 11 "In a Set of Financial Statements, What Information Is Conveyed about Intangible Assets?", financial statements for November were prepared for Webworks. They are included here as a starting point for the required recording for December.
Figure 12.23 Webworks Financial Statements
The following events occur during December:
Webworks pays taxes of $1,272 in cash.
Near the end of December, a new flash drive appears on the market that makes the ones Webworks has been selling virtually obsolete. Leon believes that it might be able to sell the rest of its inventory (twenty flash drives) for $5 each.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in Google. The partner is aware that Google holds an enormous amount of marketable securities. The partner is curious as to the actual size of that balance. The partner is also interested in knowing whether these marketable securities are reported as trading securities or as available-for-sale securities. The partner asks you to look at the 2010 financial statements for Google by following this path: