CHAPTER 1
Intercorporate Investments: An Overview
MULTIPLE CHOICE
Date of
acquisition
6/20/13
5/1/13
8/2/13
Cost
$40,000
20,000
16,000
Fair value
12/31/13
$35,000
N/A
16,500
Date
sold
2/10/14
11/15/13
1/17/14
Selling
price
$32,000
26,000
23,000
$1,500 gain
$6,000 gain
no gain or loss
$4,500 loss
ANS: a
2.
$1,000 loss
$4,000 loss
$3,500 gain
$6,000 loss
ANS: c
3.
$1,500 gain
$6,000 gain
no gain or loss
$4,500 loss
ANS: b
4.
$6,000 loss
$4,000 loss
$3,500 gain
$1,000 loss
ANS: d
Use the following information to answer questions 5-7 below:
A company holds a $100,000 face value corporate bond, bought January 1, 2013, paying 4%
annually on December 31, and maturing December 31, 2016. The company paid $93,070 for the
bond, to yield 6%. The company categorizes the bond as a held-to-maturity investment, and its
accounting year ends December 31.
5.
$4,000
$5,584
$5,679
$6,000
ANS: c
6.
Cash
104,000
Interest revenue
Investment in bond
b.
Cash
5,887
98,113
104,000
Interest revenue
Investment in bond
c.
Cash
4,000
100,000
106,000
Interest revenue
Investment in bond
d.
Cash
6,000
100,000
104,000
Interest revenue
Investment in bond
5,584
98,416
ANS: a
7.
$20,000
$13,070
$14,654
$24,000
ANS: c
$6,000,000
$6,150,000
$6,600,000
$6,450,000
ANS: d
9.
$ 270,000
$1,820,000
$ 420,000
$ 600,000
ANS: c
10.
$6,270,000
$6,150,000
$7,670,000
$6,000,000
ANS: a
11.
$ 7,200 lower
$ 6,000 lower
$20,000 lower
none
ANS: b
Use the following information to answer questions 12 and 13 below:
Peregrine Company acquires all of the voting stock of Falcon Corporation for $30,000,000 on
January 1, 2014, in a statutory merger. Falcons January 1, 2014 balance sheet is as follows:
Current assets
Plant & equipment
Current liabilities
Long-term debt
12.
$20,000,000
70,000,000
15,000,000
55,000,000
$10,000,000
$0
$15,000,000
$20,000,000
ANS: a
13.
$25,000,000
$10,000,000
$15,000,000
none
ANS: c
Use the following information to answer questions 14 and 15 below:
At the beginning of the current year, Jalu S.A. enters a joint venture with another company to
develop new technology. Each company invests 1,000,000 for a 50% interest in the joint
venture. During the year, the joint venture reports income of 200,000 and pays dividends of
60,000. At the end of the year the joint ventures balance sheet reports 5,000,000 in assets and
2,860,000 in liabilities. Jalu reports 22,000,000 in assets and 10,000,000 in liabilities from
its own operations.
14.
10,000,000
12,860,000
11,430,000
2,860,000
ANS: a
15.
10,000,000
12,860,000
11,430,000
2,860,000
ANS: c
Cambridge Business Publishers, 2013
1-6
16.
$249,600
$230,400
$216,000
$264,000
ANS: b
Use the following information to answer questions 17 20 below:
On January 1, 2014, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond
yielding 4%, interest paid annually on December 31, and classifies it as held-to-maturity. Olas
reporting year ends December 31.
17.
$12,000
$11,667
$15,556
$16,000
ANS: c
18.
$389,678
$392,965
$400,000
$392,456
ANS: d
19.
$395,981
$397,296
$396,154
$398,231
ANS: c
20.
2 years
4 years
6 years
3 years
ANS: d
21.
ANS: a
22.
ANS: b
23.
$6,000,000
$2,500,000
$3,500,000
$2,000,000
ANS: c
24.
$5,000,000
$6,400,000
$3,600,000
$2,000,000
ANS: b
25.
ANS: d
26.
The acquiring company reports the acquired assets and liabilities at fair value at
the date of acquisition.
The acquiring company does not report acquired intangible assets unless they are
already reported on the acquired companys books.
The acquired company no longer exists as a separate entity.
the acquiring company does not revalue its assets and liabilities to fair value at the
date of acquisition.
ANS: b
27.
ANS: a
28.
fair value, with unrealized gains and losses reported on the income statement.
fair value, with unrealized gains and losses reported in other comprehensive
income.
amortized cost.
cost, with unrealized gains and losses reported on the income statement.
ANS: c
29.
ANS: b
30.
trading securities
Held-to-maturity investments
Equity method investments
Joint ventures
ANS: a
31.
ANS: d
32.
ANS: b
33.
a trading investment.
a held-to-maturity investment.
an equity method investment.
a statutory merger.
ANS: c
34.
goodwill.
brand names with indefinite life.
databases with a 3-year life.
plant assets with a 20-year life.
ANS: d
35.
ANS: d
36.
ANS: b
37.
not reported.
reported in other comprehensive income.
reported as a direct adjustment to beginning retained earnings.
reported on the income statement.
ANS: d
38.
ANS: c
39.
ANS: a
40.
ANS: c
Cambridge Business Publishers, 2013
1-14
41.
statutory consolidation.
variable interest entity.
joint venture.
stock acquisition.
ANS: d
42.
their book value is greater than the present value of the future expected cash
flows.
the company believes the loss is permanent and will not reverse.
their book value is greater than their current market value.
there is a specific loss event, regardless of whether or not it is temporary.
ANS: d
43.
ANS: a
44.
Book value is greater than market value, and there is objective evidence of loss
events.
Book value is greater than market value, and there is an active market for the
investment.
Book value is greater than value-in-use, and the decline is considered to be other
than temporary.
Book value is greater than value-in-use, and the investment no longer pays
dividends or interest.
ANS: a
45.
Trading investments are reported at fair value, with unrealized gains and losses
reported in income.
Available-for-sale investments are reported at fair value, with unrealized gains
and losses reported in equity.
Impairment losses are reported in equity, and cannot be reversed.
Held-to-maturity investments are reported at amortized cost.
ANS: c
46.
IFRS
Book value is greater than the higher of
market value or value-in-use
Other than temporary impairment
If a loss event occurs
Not reported
ANS: a
47.
ANS: a
48.
ANS: b
49.
ANS: a
50.
ANS: a
PROBLEMS
Use the following information to complete problems 1 and 2 below:
Investment
Donar Company stock
Etlak Corporation stock
Fren Company stock
1.
Date of
acquisition
4/20/13
8/1/13
9/2/13
Cost
$45,000
25,000
20,000
Fair value
12/31/13
$30,000
N/A
24,000
Date
sold
2/10/14
9/15/13
1/14/14
Selling
price
$35,000
19,000
21,000
45,000
Cash
45,000
8/1/13
Investment in securities
25,000
Cash
25,000
9/2/13
Investment in securities
20,000
Cash
20,000
9/15/13
Cash
Loss on securities (income)
19,000
6,000
Investment in securities
12/31/13
Loss on securities (income)
11,000
Investment in securities
$(11,000) = ($30,000 - $45,000) + ($24,000 - $20,000)
25,000
11,000
1/14/14
Cash
Loss on securities (income)
21,000
3,000
Investment in securities
2/10/14
Cash
24,000
35,000
Investment in securities
Gain on securities
(income)
2.
30,000
5,000
45,000
Cash
45,000
8/1/13
Investment in securities
25,000
Cash
9/2/13
Investment in securities
25,000
20,000
Cash
9/15/13
Cash
Loss on securities (income)
20,000
19,000
6,000
Investment in securities
12/31/13
Loss on securities (OCI)
Investment in securities
$(11,000) = ($30,000 - $45,000) + ($24,000 - $20,000)
25,000
11,000
11,000
1/14/14
Cash
OCI
21,000
4,000
Investment in securities
Gain on securities (income)
2/10/14
Cash
Loss on securities (income)
24,000
1,000
35,000
10,000
Investment in securities
OCI
3.
30,000
15,000
450,000
Available-for-sale securities
Investment in Daley Company stock
Investment in Egan Corporation stock.
1,000,000
700,000
Held-to-maturity securities
4-year $1,000,000 face value bond issued by Franklin
Company paying 5% interest annually on December 31,
yielding 4% annually, due December 31, 2015..
1,018,861
200,000
100,000
Required
Fill in the amounts reported on Best Beverages 2014 financial statements. Show your
work in the space below each answer.
2014 INCOME STATEMENT
Interest revenue on Franklin bond
$______________
$______________
gain
loss
(circle)
Gain or loss on sale of Daley stock
$______________
gain
loss
(circle)
Other income statement gains or losses (specify stock, amount, and whether it is a gain or
loss)
DECEMBER 31, 2014 BALANCE SHEET
ASSETS
Investment in Gordon Corporation stock
$____________
$____________
$____________
An AFS security with original cost of $100,000 has a $125,000 fair value at the
beginning of 2014. At the end of 2014, its fair value is $70,000, and it is determined
that the security is impaired.
A 2-year bond is purchased at the beginning of 2014, at a price to yield 3%, classified
as HTM. The bond has a face value of $1,000,000, coupon rate 4%, interest paid at
the end of each year. At the end of 2014, the bond has a fair value of $400,000, and it
is determined that the security is impaired.
Prepare the journal entries to record the events of 2014. Show your work clearly. Round
to the nearest dollar if necessary.
ANS:
AFS security:
Loss on securities (income)
OCI
30,000
25,000
Investment in securities
55,000
HTM security:
40,000/(1.03) + 1,040,000/(1.03)2 = 1,019,135 balance, beginning of 2014
Investment in securities
1,019,135
Cash
1,019,135
End of 2014:
Cash
40,000
Interest revenue
Investment in securities
30,574
9,426
609,709
Investment in securities
609,709
5.
35% x $600,000
$ 210,000
$300,000/3 x 35%
(35,000)
($312,000$312,000/1.2) x 35%
b.
Investment in Kingston
4,000,000
Cash
4,000,000
Investment in Kingston
156,800
Equity in net income
156,800
Cash
70,000
Investment in Kingston
OCI
70,000
3,500
Investment in Kingston
(18,200)
$ 156,800
3,500
6.
Coca-Cola
$ 3,000
80,000
10,750
$ 93,750
Jugos
$
500
30,000
_____
$ 30,500
$ 35,750
14,000
44,000
$ 93,750
$ 23,000
2,000
5,500
$ 30,500
Liabilities
Capital stock
Retained earnings
Total liabilities & equity
Required
Present Coca-Colas balance sheet at December 31, 2012, assuming Coca-Cola uses
proportionate consolidation to report its investment in Jugos.
ANS:
(in thousands)
Current assets
P&E, net
Technology
Goodwill
Total
3,250
95,000
2,500
4,500
$105,250
Liabilities
Capital stock
Retained earnings
Total
$ 47,250
14,000
44,000
______
$105,250
7.
$ 1,000,000
10,000,000
________
$11,000,000
900,000
8,000,000
2,100,000
$11,000,000
Elegants current assets are overvalued by $400,000, and its plant and equipment is
overvalued by $4,000,000. Elegant has previously unreported brand names of
$5,000,000.
Required
Prepare the journal entry made by Delicious Delicacies to record its acquisition of
Elegant Eateries.
ANS:
Current assets
Plant & equipment
Brand names
Goodwill
600,000
6,000,000
5,000,000
6,300,000
Current liabilities
Long-term debt
Cash
8.
900,000
8,000,000
9,000,000
400,000
1,500,000
5,400,000
72,000,000
6,500,000
34,000,000
Required
a.
Calculate the goodwill Akron records for this acquisition.
b.
If Daytons notes payable had a market value of $40,000,000, how is goodwill
affected? Calculate the amount and direction of change.
ANS:
a.
Price paid
Fair value of identifiable net assets acquired:
Cash
Receivables
Inventories
Buildings & equipment
Current liabilities
Notes payable
Goodwill
b.
9.
$60,000,000
$
400,000
1,500,000
5,400,000
72,000,000
(6,500,000)
(34,000,000)
38,800,000
$21,200,000
$ 2,000,000
15,000,000
75,000,000
6,000,000
27,000,000
45,000,000
ANS:
a.
Cash & receivables
Inventories
Plant & equipment
Patents & trademarks
Developed technology
Goodwill
2,000,000
15,000,000
75,000,000
6,000,000
20,000,000
154,000,000
Current liabilities
Long-term debt
Cash
b.
Investment in Ecoplastics
27,000,000
45,000,000
200,000,000
200,000,000
Cash
10.
200,000,000
30% x $5,000,000
30% x ($4,000,000/5)
$1,500,000
(240,000)
$1,260,000
Note: Equity in net income is not adjusted for impairment of indefinite life intangibles.
11.
40% x $6,000,000
40% x ($1,950,000 $1,950,000/1.3)
40% x ($1,080,000 $1,080,000/1.2)
$2,400,000
(180,000)
(72,000)
$2,148,000
$40,000,000
2,148,000
(400,000)
$41,748,000
12.
40% x $3,000,000
40% x ($4,000,000/20)
$1,200,000
80,000
$1,280,000
40% x $23,000,000
$80,000 x 5
40% x $10,000,000
40% x $8,000,000
40% x $800,000
$50,000,000
9,200,000
400,000
(4,000,000)
(3,200,000)
52,400,000
1,280,000
(320,000)
$53,360,000
13.
Talgo reports total net income of $3,500,000 for 2012 and 2013, and $1,400,000 for
2014. Talgo pays no dividends during this period.
Required
a.
Calculate equity in net income of Talgo, reported on Solacs 2014 income
statement.
b.
Calculate the Investment in Talgo balance, reported on Solacs December 31,
2014 balance sheet.
ANS:
a.
25% net income
Unconfirmed profit on upstream
ending inventory
Unconfirmed profit on downstream
ending inventory
Confirmed profit on upstream
beginning inventory
Confirmed profit on downstream
beginning inventory
Equity in net income, 2014
25% x $1,400,000
25% x ($3,375,000 $3,375,000/1.35)
25% x ($1,040,000 $1,040,000/1.30)
25% x ($2,700,000 $2,700,000/1.35)
25% x ($975,000 $975,000/1.30)
$350,000
(218,750)
(60,000)
175,000
56,250
$302,500
b. .
Investment, 1/1/12
Share of net income, 2012-2013
Unconfirmed profit on upstream
ending inventory
Unconfirmed profit on downstream
beginning inventory
Investment, 12/31/13
Equity in net income, 2014
Investment, 12/31/14
25% x $3,500,000
25% x ($2,700,000 $2,700,000/1.35)
25% x ($975,000 $975,000/1.30)
$12,000,000
875,000
(175,000)
(56,250)
12,643,750
302,500
$12,946,250
Note: Confirmed and unconfirmed profits on December 31, 2012 inventories cancel out
over time. Only the December 31, 2013 inventory profits affect the December 31, 2013
investment balance.
14.
ANS:
a.
b.
Fiscal year
Beginning
2014
2015
2016
Interest revenue
(8% x previous
years investment
balance)
$176,044
180,127
184,537
Addition to
investment account
(interest revenue $125,000)
Year-end
investment balance
$2,200,547
$51,044
2,251,591
55,127
2,306,718
59,537
2,366,255
ASC Topic 320 requires that an impairment loss be reported if the decline in fair
value is other than temporary. Evidence might include a significant reduction
in expected revenues for the corporation which issued the bond, or evidence that it
has or plans to declare bankruptcy.
d.
866,255
Investment in HTM securities
866,255
15.
Total
6,000,000
300,000,000
300,000
60,000,000
(2,000,000)
(9,500,000)
$354,800,000
At January 2, 2013, Grundigs assets and liabilities have the following fair values:
Cash, receivables
Merchandise inventory
Land, buildings, and equipment
Current liabilities
Long-term bonds payable
700,000
2,500,000
200,000,000
180,800,000
Current liabilities
Long-term bonds payable
Cash
6,000,000
298,000,000
80,000,000
b.
Cash, receivables
Merchandise inventory
Land, buildings, and equipment
Bonds payable
Total
This analysis indicates that Ferodo should pay $149,600,000 less than book value for
Grundig. Ferodo was willing to pay $31,200,000 more than book value, indicating that
Grundig has unidentifiable intangible assets, valued at $180,800,000 (= $149,600,000 +
$31,200,000), which it records as goodwill. These assets could include reputation, work
force, and other intangibles expected to create future revenues. On the other hand,
Ferodo could have paid too much for Grundig, perhaps due to pressure from competing
potential buyers or from Grundigs existing shareholders.
Use the following information to complete problems 16 and 17 below:
Investment
Actel Company stock
Bella Corporation stock
Cripton Company stock
Date of
acquisition
9/3/14
10/15/14
12/4/14
Cost
$25,000
36,000
12,000
Fair
value
Date
12/31/14
sold
$20,000 1/10/15
38,000 2/17/15
10,000 2/20/15
Selling
price
$18,000
35,000
16,000
17.
ANS:
2014 income statement
Unrealized gain on Bella stock
$ 2,000
$ (7,000)
(3,000)
4,000
$ (6,000)
$ (5,000)
(2,000)
$ (7,000)
$ (2,000)
(1,000)
6,000
$ 3,000
18.
Book value
$ 5,000,000
30,000,000
0
Fair value
$ 8,000,000
40,000,000
10,000,000
Lexmark reports total net income of $20,000,000 for the period 2010 - 2013, and
$5,000,000 for 2014. Lexmark paid no dividends during the period 2010 2013, but
paid $1,000,000 in dividends in 2014. The accounting year for both companies ends
December 31.
Lexmark sells merchandise to Konica at a markup of 30% on cost. The inventory
balances held by Konica, purchased from Lexmark, are as follows.
Inventory held by
Konica, purchased
from Lexmark
$1,560,000
2,600,000
Required
a.
Calculate equity in net income of Lexmark, reported on Konicas 2014 income
statement.
b.
Calculate Investment in Lexmark, reported on Konicas December 31, 2014
balance sheet.
ANS:
a.
40% 2014 net income
Depreciation adjustment
Unconfirmed profit on upstream
ending inventory
Confirmed profit on upstream
beginning inventory
Equity in net income, 2014
40% x $5,000,000
40% x ($10,000,000/20)
40% x ($2,600,000 $2,600,000/1.30)
40% x ($1,560,000 $1,560,000/1.30)
$2,000,000
(200,000)
(240,000)
144,000
$1,704,000
b. .
Investment, 1/1/10
Share of net income, 2010-2013
Merchandise adjustment
Buildings and equipment
adjustment, 2010-2013
Intangible assets adjustment,
2010-2013
Unconfirmed profit on upstream
ending inventory, 12/31/13
Investment, 12/31/13
Equity in net income, 2014
Dividends, 2014
Investment, 12/31/14
19.
$60,000,000
8,000,000
(1,200,000)
40% x $20,000,000
40% x $3,000,000
40% x [($10,000,000/20) x 4]
40% x $10,000,000
40% x ($1,560,000 $1,560,000/1.30)
40% x $1,000,000
(800,000)
(4,000,000)
(144,000)
61,856,000
1,704,000
(400,000)
$63,160,000
Required
a.
Ventals book value at the date of acquisition is $5,150,000. Why did Timnor pay
$100,000,000 for Vental? Be specific.
b.
Calculate the goodwill reported on this acquisition.
c.
Critique the accounting for this statutory merger. Do you think the amount of
goodwill recognized is overstated?
d.
Goodwill is an indefinite-lived intangible asset. If it turns out that Ventals future
performance is significantly lower than predicted at the date of acquisition, how
do you think Timnor will reflect this information in its financial statements?
ANS:
a. and b.
Timnor believes the fair value of Vental is $94,850,000 (= $100,000,000 $5,150,000)
greater than its book value. Reasons for the difference:
Current assets
Equipment
Patents and trademarks
Total
Goodwill
20.
$100,000 - $150,000
$30,000,000 - $50,000,000
$45,000,000 - $2,500,000
$100,000,000 - $22,450,000
(50,000)
(20,000,000)
42,500,000
$ 22,450,000
$ 77,550,000
c.
Over 75% of the purchase price is attributed to goodwill, reflecting the amount
paid over and above the fair value of the identifiable net assets acquired.
Information on the actual fair values of assets and liabilities acquired could be
incomplete; Vental could have other assets, probably intangibles, which were not
identified. This overstates the goodwill.
d.
Edgecor
$ 60,000,000
400,000,000
11,500,000
$471,500,000
Joint Venture
$ 20,000,000
200,000,000
___-$220,000,000
Liabilities
Capital stock
Retained earnings
Total liabilities & equity
$100,000,000
215,000,000
156,500,000
$471,500,000
$197,000,000
20,000,000
3,000,000
$220,000,000
The joint venture paid $1,000,000 in dividends during 2012. Edgecor uses the equity
method to account for its joint venture.
Required
a.
What was the joint ventures reported net income for 2012?
b.
Until 2013, IFRS allowed companies to use proportionate consolidation to
account for their joint ventures. If Edgecor used proportionate consolidation to
report its joint venture, what would its December 31, 2012 balance sheet look
like?
c.
Why might Edgecor prefer to use the equity method rather than proportionate
consolidation to account for its joint venture?
ANS:
a.
b.
Current assets
Land, buildings, and
equipment, net
Total
c.
$ 70,000,000 Liabilities
$198,500,000
215,000,000
156,500,000
$570,000,000
$100,000,000/$471,500,000
$198,500,000/$570,000,000
TL/TA
0.212
0.348