Question 1

Investor C has $160,000 in assets (including the investment in Investee N), $30,000 in liabilities, and $130,000 in equity. Investor C purchased 100% of Investee N, which has $60,000 in assets, $16,000 in liabilities, and $44,000 in equity on the date of acquisition.
What will the assets, liabilities, and equity be on the consolidated balance sheet immediately following the acquisition?

Accepted Answer

The answer of Investor C has $160,000 in assets (including...

Question 2

Investor P has $160,000 in assets (including the investment account at $22,000) and $36,000 in equity. Investor P purchased (at book value) 100% of Investee G, which has $30,000 in assets and $8,000 in liabilities.
What will the assets, liabilities, and equity be on the consolidated balance sheet?

Accepted Answer

The answer of Investor P has $160,000 in assets (including...

Question 3

On December 31, 2015, East Company acquired 45% of Yellow Company's common stock for $3.0 million. In 2016, the fair value of East's investment in Yellow Company increased to $3.7 million. On December 31, 2016, Yellow declared net income of $800,000. It also paid its stockholders a dividend of 20% of its 2016 income.
A. How would you classify East Company's investment in Yellow Company? Explain.
B. What will East report on its income statement for the investment in Yellow for 2016?
C. What will be the ending balance of East's Investment account on December 31, 2016?

Accepted Answer

The answer of On December 31, 2015, East Company acquired...

Question 4

Consider companies with the pre-acquisition balance sheets presented below. Macro Investor Company purchases 100% of Micro Investee Company's stock at book value by exchanging newly issued common stock. Complete the columns for Investor's post-acquisition balance sheet and the Consolidated Company post-acquisition balance sheet.

Accepted Answer

The answer of Consider companies with the pre-acquisition balance sheets...

Question 5

Raymundo Corp. owns 100% of Indiana Group, Inc.'s stock. Raymundo Corp. prepares consolidated financial statements. Data from the annual reports of the two companies are:
  A. How much of the $3,000,000 consolidated sales reported by Raymundo Corp. is from operations of Indiana Group?
B. How much of the $800,000 consolidated net income reported by Raymundo Corp. is from operations of Indiana Group?

Accepted Answer

The answer of Raymundo Corp. owns 100% of Indiana Group,...

Question 6

Brick Company had the following transactions and adjustment related to a stock investment.
  Prepare the journal entries to record these transactions.

Accepted Answer

The answer of Brick Company had the following transactions and...

Question 7

The 2016 annual report of Major Bank Corp includes the following footnote related to its available-for-sale securities:
  A. What amount will Major Bank report for available-for-sale equity securities on the balance sheet? Explain.
B. How do unrealized gains arise on these available-for-sale equity securities?
C. How do these unrealized gains affect Major Bank's 2016 income statement?
D. How do these unrealized gains affect Major Bank's' 2016 balance sheet?

Accepted Answer

The answer of The 2016 annual report of Major Bank...

Question 8

Following is a portion of the investments footnote from Red Barron Life Insurance's 2016 annual report. Investment earnings are a crucial component of the financial performance of insurance companies such as Red Barron Life Insurance, and investments comprise a large part of Red Barron's assets. Red Barron accounts for its bond investments as available-for-sale securities.
  A. What amount does Red Barron report for bond investments on its balance sheets for 2016?
B. What are the net unrealized gains (losses) for 2016? How did these unrealized gains (losses) affect the company's reported income in 2016?
C. What is the difference between realized and unrealized gains and losses? Are realized gains and losses treated differently in the income statement than unrealized gains and losses?

Accepted Answer

The answer of Following is a portion of the investments...

Question 9

Following is a portion of the investments footnote from Athletic Supply's 2016 annual report.
  A. At what amount does Athletic Supply report its available-for-sale securities on its balance sheets for 2016 and 2015?
B. How does Athletic Supply account for its trading securities? How does the accounting differ from their accounting method for available-for-sale?
C. What are the net unrealized gains (losses) for 2016 and 2015? How did these unrealized gains (losses) affect the company's reported income in 2016 and 2015?
D. What is the difference between realized and unrealized gains and losses? Are realized gains and losses treated differently in the income statement than unrealized gains and losses for the available-for-sale securities?

Accepted Answer

The answer of Following is a portion of the investments...

Question 10

See the Future Corporation reported the following in its 2016 annual report regarding acquisition of Mountain Microchips:
Acquisition of Mountain Microchips, Inc.
On January31, 2016 we completed our acquisition of Mountain Microchips, Inc., a provider of hardware systems, software and services, by means of a merger of one of our wholly owned subsidiaries with and into Mountain such that Mountain became a wholly owned subsidiary of See the Future. We acquired Mountain to, among other things, expand our product offerings by adding Mountain's existing hardware systems business and broadening our software and services offerings. We have included the financial results of Mountain in our consolidated financial statements from the date of acquisition.
  A. Of the total assets acquired, what portion is allocated to tangible assets and what portion to intangible assets?
B. Are Mountain's assets (both tangible and intangible) reported on the consolidated balance sheet at the book value or at the fair market value on the date of the acquisition? Explain.
C. Explain how the intangible assets are valued at the time of the acquisition.
D. How are the tangible and intangible assets accounted for subsequent to the acquisition?

Accepted Answer

The answer of See the Future Corporation reported the following...

Question 11

The following is from footnotes from the Mega Power, Inc. 2016 annual report (in millions):
The following table summarizes the changes in the carrying amount of goodwill for 2016 and 2015:
  Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:
  Amortization expense for software and other intangibles totaled $128 million, $114 million and $138 million for the years ended December 31, 2016, 2015, and 2014, respectively. Internal and external software costs (excluding those related to research, re-engineering and training), trademarks and patents are amortized generally over a three to 12 year period. The following table represents the projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions.
  
Under GAAP for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual two-step goodwill impairment test. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, carrying value of goodwill must be tested for impairment on an interim basis in certain circumstances where impairment may be indicated. When we are required or opt to perform the two-step impairment test, the fair value of each reporting unit is estimated by discounting the after tax future cash flows less requirements for working capital and fixed asset additions. Our reporting units are generally defined as one level below an operating segment. However, there were two situations where we have aggregated two or more components which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These two situations are described further below. This analysis has resulted in the following reporting units for our goodwill testing:
●Within our Components segment, emission solutions and filtration have been aggregated into a single reporting unit.
●Also within our Components segment, our turbo technologies business is considered a separate reporting unit.
●Within our Power Generation segment, our generator technologies business is considered a separate reporting unit.
●Within our Engine segment, our new and recon parts business is considered a separate reporting unit. This reporting unit is in the business of selling new parts and remanufacturing and reconditioning engines and certain engine components.
●Our Distribution segment is considered a single reporting unit as it is managed geographically and all regions share similar economic characteristics and provide similar products and services.
No other reporting units have goodwill. Our valuation method requires us to make projections of revenue, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, a separate valuation of the goodwill is required to determine if an impairment loss has occurred. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We performed the required procedures as of the end of our fiscal third quarter and determined that our goodwill was not impaired. At December 31, 2016, our recorded goodwill was $890 million, approximately 90 percent of which resided in the emission solutions plus filtration reporting unit. For this reporting unit, the fair value of the reporting unit exceeded its carrying value by a substantial margin. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill.
A. How much goodwill did Mega Power, Inc. report on its 2016 balance sheet? How much accumulated amortization was included in that amount? Explain.
B. How much impairment charge relating to goodwill did Mega Power, Inc. report in 2016 and what was the reason for this?
C. What was the value of intangible assets on Mega Power, Inc.'s 2016 balance sheet? How much accumulated amortization was included in that amount?

Accepted Answer

The answer of The following is from footnotes from the...

Question 12

Why do corporations undertake intercorporate investments? How might our understanding of these reasons influence our analysis of such investments?

Accepted Answer

The answer of Why do corporations undertake intercorporate investments? How...

Question 13

Companies are required to disclose both qualitative and quantitative information about the potential risks underlying derivatives.
A. In general, what types of qualitative information must be disclosed?
B. Explain the reporting of quantitative information in financial statements that relates to derivatives.

Accepted Answer

The answer of Companies are required to disclose both qualitative...

Question 14

Refuse Disposal Inc. reports the following in the 2016 Form 10-K (in millions):
  A. Why does Refuse Disposal's income statement deduct its share of net losses of the unconsolidated entities?
B. Explain the reconciling item on Refuse Disposal's statement of cash flow that adds back equity in net losses of unconsolidated entities.

Accepted Answer

The answer of Refuse Disposal Inc. reports the following in...

Question 15

Explain the standards which determine if an investor company will report its investment in an investee company using the equity method vs. consolidation. Why might the investor company prefer the equity method?

Accepted Answer

The answer of Explain the standards which determine if an...

Question 16

What is meant by significant influence? Describe situations in which you believe a company has significant influence over the operations of another company. How is significant influence in investments accounted for?

Accepted Answer

The answer of What is meant by significant influence? Describe...

Quiz 12: Reporting and Analyzing Financial Investments

Investor P has $160,000 in assets (including the investment account at $22,000) and $36,000 in equity. Investor P purchased (at book value) 100% of Investee G, which has $30,000 in assets and $8,000 in liabilities. What will the assets, liabilities, and equity be on the consolidated balance sheet?

Brick Company had the following transactions and adjustment related to a stock investment. Prepare the journal entries to record these transactions.

Why do corporations undertake intercorporate investments? How might our understanding of these reasons influence our analysis of such investments?

Explain the standards which determine if an investor company will report its investment in an investee company using the equity method vs. consolidation. Why might the investor company prefer the equity method?

What is meant by significant influence? Describe situations in which you believe a company has significant influence over the operations of another company. How is significant influence in investments accounted for?