Investment Paper 5

1

Hope Company bought 30% of Faith Corporation in 2011. Hope’s purchase price equaled 30% of the book value of Faith’s net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?






2

Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on Jan 1, 2011. On November 1, 2011, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2011 relative to its investment in Hack?






3

Assume that, on 1/1/11, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee’s identifiable net assets were both $4,000,000 at 1/1/11. The following information pertains to Yankee during 2011:
Net income: 200k Dividends declared and paid: 60k Market Price of common stock (12/31/11): 22/share
What amount would Matsui report in its year-end 2011 balance sheet for its investment in Yankee?






4

Gerken Company concluded at the beginning of 2011 that the company’s ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared,






5

On April 1, 2011, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick’s identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2011, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2011, and paid a total of $10,000 of dividends to shareholders. BigBen’s investment in LittleTick will affect BigBen’s 2011 net income by:






6

Cucumber Company concluded at the beginning of 2011 that the company’s ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment as available for sale, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as an available-for-sale investment. At the time of implementing the change to the available-for-sale method, if financial statements were prepared,





7

When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition:






8

On January 1, 2011, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold’s books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2011, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green’s investment in Gold at December 31, 2011?






9

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech’s net assets was $75 million. The fair value of Sky Tech’s depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. The amount of purchased goodwill is:






10

The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:






Result

Total Questions:
Correct Answers:
Wrong Answers:
Percentage: