Question

A firm purchased noninfluential and noncontrolling stock investments for $65,000. The firm does not intend to sell the investments in the near future. During the year, the firm received dividends totaling $4,000 from these stock investments. At year-end, the stock portfolio had a quoted market value of $68,000. The increase in net income for the year from these stock investments is:

a. $1,000.

b. $3,000.

c. $4,000.

d. $7,000.

Artway Company purchased 30 percent of the voting stock of Barton Company for $60,000 on January 1. During the year, Barton Company earned $50,000 net income and paid $15,000 in dividends. At the end of the year, Artway Company’s account, Stock Investment-Influential (Barton) should have a balance of:

a. $110,000.

b. $70,500.

c. $95,000.

d. $60,000.

The proper category to classify an investment in equity securities depends on:

a. Management’s intentions with regard to when to sell the investment.

b. The relative easy to sell the invenstment.

c. The ability of the purchasing company to influence the investee company.

d. All of the above.

Where would the account unrealized gain/loss on investment appear for trading security investment?

a. Income Statement.

b. Equity section of the Balance Sheet.

c. Statement of Cash Flows.

d. It does not appear on any statement.

Controlling securities typically require the investor to acquire what percent of the investee company common stock?

a. Under 20 percent.

b. Between 20 and 50 percent.

c. Over 50 percent.

d. 100 percent.

Answer 1

Answer: Option c. $4,000

The investments since not intended to be sold in the near future, are classified as available for sale investments. The dividends received on such investments will be accounted for as dividend income on the income statement however, changes in fair value will not be reported in income statement but under stockholders’ equity. Hence the increase in net income for the year will only be to the extent of dividends received which is $4000.

Answer: Option b. $70,500

Balance in Stock Investment-Influential (Barton) = Purchase cost + Share in net income – Share in dividends = $60000 + (30% x $50000) – (30% x $15000) = $60000 + $15000 - $4500 = $70500

Answer: Option d. All of the above

All three criteria of management’s intentions regarding the investment, ease of selling the investment, and the ability of the purchasing company to influence the investee company depending upon the percent of stock of investee company held by the purchasing company, determine the classification of investments in equity securities into trading, available for sale, influential, or controlling securities.

Answer: Option a. Income Statement

The unrealized gain/loss on trading security investments due to changes in the fair value of the securities are reported on the income statement.

Answer: Option c. Over 50 percent

When the purchasing company acquires over 50% of the investee company’s stock, it is considered to have a control over the investee company. If the percent of stock acquired is between 20% and 50%, it only has significant influence over the investee.