ACCT 5301 Module 7 Review Questions 1
Multiple Choice
1. For which of the following types of intercorporate investments are unrealized gains reflected in the shareholders’ equity section of the investor’s balance sheet?
A) Equity Method
B) Trading Securities
C) Available-for-Sale Securities
D) B and C only
E) A, B and C
2. Following is a portion of the investments footnote from Homer Corp. 2012 10-K.
(in millions) / 2012Amortized cost of available-for-sale securities / $231,312
Gross unrealized gains / 7,635
Gross unrealized losses / $33,123
What amount does Homer report for available-for-sale securities on its 2012 balance sheet?
A) $25,488 million
B) $205,824 million
C) $231,312 million
D) $256,800 million
E) None of the above
3. In footnotes to its 2011 annual report, Bancfirst Corp. reported that held-to-maturity securities with an amortized cost of $22,477 thousand had an estimated fair value of $22,958 thousand. The balance sheet reported:
A) Held-to-maturity assets of $22,477 thousand
B) Held-to-maturity assets of $22,958 thousand
C) Accumulated other comprehensive income of $481 thousand related to held-to-maturity assets
D) Both A and C
E) Both B and C
4. GAAP indentifies several levels of influence / control. If Company A owns 15% of the outstanding voting stock of Company B, which level of influence / control is in evidence?
A) Passive
B) Significant Influence
C) Control
D) Fair-value method
E) None of the above
5. Paris Corporation purchases an investment in Hollywood, Inc. at a purchase price of $6 million cash, representing 45% of the book value of Hollywood, Inc. During the year, Hollywood reports net income of $700,000 and pays $180,000 of cash dividends. At the end of the year, the market value of Paris’s investment is $7.4 million. What is the year-end balance of the equity investment in Hollywood?
A) $6,000,000
B) $6,520,000
C) $6,315,000
D) $6,234,000
E) $7,400,000
6. At the beginning of fiscal 2012, Penny Trust Company acquired 100% of a small savings and loan association for $80 million. The book value of the assets of the acquired company were $200 million, its liabilities $130 million. An appraiser determined that the acquiree’s land had a fair value of $2 million in excess of its net book value. Penny Trust also determined that the acquiree had an unrecorded liability of $6 million relating to a lawsuit. The book value of all other assets and liabilities approximated fair value. What did Penny Trust record as goodwill for this acquisition?
A) $14 million
B) $8 million
C) $10 million
D) $ -0-
E) None of the above
Exercise. On January 1, 2012, Global Corporation made an $8million investment in Morse, Inc. and assumed a 37% ownership of Morse. The investment in Morse is accounted for under the equity method. Morse reported the following financial information for the year ended December 31, 2012 (in thousands):
Year ended December 31, / 2012Revenues / $546,950
Gross margin / $62,584
Net income / $2,184
December 31, / 2012
Current assets / $208,138
Noncurrent assets / 2,006
Current liabilities / 186,184
Noncurrent liabilities / 154
Equity / $ 23,806
Morse paid no dividends during 2012.
a. Calculate the equity earnings that Global reported on its 2012 income statement.
b. Determine the investment balance for Morse on Global’s balance sheet at December 31, 2012.
Exercise. Parent Company bought 100% of Sub Company for $14,000. Use the following table to consolidate the balance sheets of the two companies as of the acquisition date.
Parent / Sub / Consolidating adjustments / ConsolidatedBalance Sheet
Investment in Sub / $ 14,000
Other assets / 27,160,000 / $4,274
Goodwill
Total assets / $27,174,000 / $4,274
Liabilities / $10,764,000 / $2,274
Common stock / 9,852,000 / 1,910
Retained earnings / 6,558,000 / 90
Total liabilities & stockholders’ equity / $27,174,000 / $4,274
SHORT ANSWER
1. When would goodwill be impaired?