Question

In: Accounting

A firm purchased noninfluential and noncontrolling stock investments for $65,000. The firm does not intend to...

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.

Solutions

Expert Solution

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.


Related Solutions

Stephen Hawkins, Inc., currently has a common stock $65,000 and retained earnings of $175,000. The firm...
Stephen Hawkins, Inc., currently has a common stock $65,000 and retained earnings of $175,000. The firm is expecting the following net income and dividends for the next five years. Year 1 2 3 4 5 Net Income $70,000 $85,000 $110,000 ($30,000) $30,000 Dividends distribution (% of Net income) 40% 35% 50% 0 20% Required: Determine the Return on Equity for each year and average return on equity for the 5-year period.
A firm purchased available-for-sale security investments for $130,000. During the year, the firm received dividends totaling...
A firm purchased available-for-sale security investments for $130,000. During the year, the firm received dividends totaling $10,000 from these stock investments. At year end, the stock portfolio had a quoted market value of $136,000.
How does the cost of capital affect capital investments that the firm makes?
  How does the cost of capital affect capital investments that the firm makes? Cost of Capital refers to the amount of money a company spends to get its operations underway and in order to earn profit they must surpass this cost. This cost of capital is determined by and makes up its overall capital structure. A company adjusts its debts and equities within the capital structure to minimize the cost of capital. This balance is important because as a...
A new machine will be purchased today for $65,000, used for 4 years and sold. The...
A new machine will be purchased today for $65,000, used for 4 years and sold. The machine will be straight line depreciated for 8 years. The anticipated market value of the alpha machine in 4 years is $24,000. The tax rate is 31%. a) Calculate the book value of the machine after 4 years. b) Calculate the gain or loss on sale of the alpha machine. Calculate the tax effect of the gain or loss. c) What is the termination...
Preparing a consolidated income statement—Equity method with noncontrolling interest and AAP A parent company purchased a...
Preparing a consolidated income statement—Equity method with noncontrolling interest and AAP A parent company purchased a 65% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $750,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $450,000 and to an unrecorded patent valued at $300,000. The building asset is being depreciated over a 20-year...
Preparing a consolidated income statement—Cost method with noncontrolling interest and AAP A parent company purchased a...
Preparing a consolidated income statement—Cost method with noncontrolling interest and AAP A parent company purchased a 90% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $280,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $200,000 and to an unrecorded Customer List valued at $80,000. The building asset is being depreciated over a...
What guidance does APB No. 18, “The Equity Method of Accounting for Investments in Common Stock,”...
What guidance does APB No. 18, “The Equity Method of Accounting for Investments in Common Stock,” provide for equity method investment losses in market value?
Anindividual has $25,000 invested in a stock with a beta of 0.5 andanother $65,000...
An individual has $25,000 invested in a stock with a beta of 0.5 and another $65,000 invested in a stock with a beta of 1.2. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.Assume that the risk-free rate is 3.5% and the required return on the market is 13%. What is the required rate of return on a stock with a beta...
You are the owner of a 65,000 square foot office building. You purchased the building five...
You are the owner of a 65,000 square foot office building. You purchased the building five years ago for $11,500,000. During that entire time the building was triple net leased to a tenant who was also responsible for all maitenance and capital upkeep. The net rent the tenant paid was flat at $12.50 per square foot per year. You have just negotiated a lease extension which will raise the rent to $14.00 per square foot for the next 10 years....
TWA made the following investments during 2012 : 1/15/2012 – Purchased 1,000 shs of IBM stock...
TWA made the following investments during 2012 : 1/15/2012 – Purchased 1,000 shs of IBM stock for $ 2,410 2/01/2012 – Purchased 50,000 IBM bonds , 10%, for 52,100 5/15/2012 – Sold 600 shs of IBM stock for $ 3/ share 8/1/2012 – Received semi-annual interest on the IBM Bonds 8/1/2012 – Sold 30,000 IBM Bonds for 30,800. 12/31/2012 – Accrued interest on the remaining IBM Bonds; to journal entries and to record the various transactions
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT