tango_gs

Sawbuck Corporation recently acquired a 60% stake in Rawboard Inc. for $70 million in newly issued common stock. Given this information, which of the following methods should be used to account for the acquisition of Rawboard?

A) Acquisition.

B) The purchase method.

C) Proportionate consolidation.

---

When the parent company has at least a 50% ownership stake and control over the subsidiary, the acquisition method is used

tango_gs

Company X owns 15% of company S and exerts significant control over the operations of the company. The book value of the investment on December 31, 2008, is $48,000. In 2009, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is:

A) $3,000.

B) $15,000.

C) $12,000.

---

Because company X exerts significant control over company S, the investment will be treated using the equity method, even though the ownership is less than the 20% guideline. The impact on the income statement is the proportionate income of company S, which is 0.15 × 100,000 = 15,000.

tango_gs

Acme Corporation purchases a 3% interest in Bandy Company to become the single largest shareholder of Bandy. Acme will hold a seat on the Board of Directors of Bandy. Acme will account for its investment in Bandy using the:

A) equity method.

B) lower of cost or market method.

C) acquisition method.

---

Even though Acme’s interest is low at only 3%, they have significant influence by having a seat on Bandy’s Board of Directors. As such, they must use the equity method.

tango_gs

GTH Corporation has just purchased 18% of the common stock of Pittor Corporation, one of their major suppliers, making GTH the largest single shareholder in Pittor. The primary motivation for the purchase is that managerial problems at Pittor have resulted in quality control difficulties, thereby affecting the reliability of several critical component parts for GTH products. At the time of the purchase, GTH management announced they plan to be an active and significant influence on Pittor so the quality problems can be resolved. Given these circumstances, the accounting method used to record the intercorporate investment will most likely be the:

A) acquisition method

B) investment in financial assets method.

C) equity method.

---

Less than 20% ownership of the acquired corporations common stock would ordinarily mean the cost or market method of accounting would be used to record this investment in financial assets. However, percentage ownership rules are guidelines only and the appropriate accounting method is dependant on the degree of influence the acquirer intends to exert. In this case, GTH has announced their desire to exert significant influence, hence, the equity method is the appropriate choice.

tango_gs

Carter Schmitz, Inc. (Schmitz) purchased 200 shares of Intelismart at $21 a share in June 2006 and intends to actively trade 80 shares in the near future and hold the remaining 120 shares as available for sale securities. Intelismart's closing price was $26 on December 31, 2006, and Schmitz did not sell any of its shares.
What amount should Schmitz report on this investment under the income statement?

A) $400.

B) $1,000.

C) $600.

---

The unrealized gain on the 120 shares available for sale is $600 (26 - 21 = 5 × 120 shares). There is also an unrealized gain of $400 (5 × 80) related to the 80 shares that are trading securities which would be reported on the income statement. For trading securities, realized and unrealized gains and losses are reported on the income statement. For available for sale securities, only realized gains and losses are reported on the income statement.

tango_gs

The Anderson Company acquired 100,000 shares of the Birschbach Company on January 1, 2000, at $25 per share. The market price of a share of Birschbach stock on December 31, 2000, was $35 per share. During 2000, Birschbach paid dividends of $1.50 per share and had earnings of $2.50 per share.If the Anderson Company accounts for the Birschbach shares as trading securities, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $3.5 million.

B) $2.6 million.

C) $2.5 million.

---

Trading securities are measured at fair market value.
(100,000)($35) = $3,500,000

---

If Anderson Company accounts for the Birschbach Company shares as securities available-for-sale, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $3.5 million.

B) $2.6 million.

C) $2.5 million.

---

Available-for-sale securities are measured at fair market value.
(100,000)($35) = $3,500,000

tango_gs

Global Life Insurance (GLI) reported the following portfolio information:

	2010 Q1	2010 Q2	2010 Q3	2010 Q4
Shares purchased (sold)	1,000	(200)	700	0
Total shares quarter-end	1,000	800	1,500	1,500
Purchase price	50.00		45.00
Sale price		45.00
Quarter-end market price	52.00	43.00	52.00	60.00
Total dividends	500	400	750	750

For the purpose of this question, assume that stocks can be classified as held to maturity.What is the income from the portfolio if the securities are classified as trading, available-for-sale, and held-to-maturity, respectively?

Trading

Available-for-sale

Held-to-maturity

A) $19,900 $19,900 -$6,600

B) $19,900 $1,400 $1,400

C) -$6,600 $1,400 $1,400

---

Trading income is calculated as dividends plus all gains and losses (realized and unrealized). Total dividends are 2,400. GLI realized a loss on the sale of 200 shares at 45.00 per share for a total realized loss of 1,000. GLI has an unrealized gain of 8,000 (800×(60-50)) on the shares purchased in Q1 and 10,500 (700×(60-45)) the shares purchased in Q3, or total unrealized gains of 18,500. Therefore, total income under the trading classification is 19,900 (2,400 - 1,000 + 18,500). Under the available-for-sale and held-to-maturity classifications income is calculated as dividends plus realized gains and losses. Therefore, total income is 1,400 (2,400 + (-1,000)).
This item set requires a bit of imagination as equity securities cannot really be HTM.

---

What is the balance sheet carrying value of the securities under each of the classifications at year-end?

Trading

Available-for-sale

Held-to-maturity

A) $71,500 $71,500 $71,500

B) $90,000 $71,500 $71,500

C) $90,000 $90,000 $71,500

---

Under the trading and available-for-sale classifications the balance sheet carrying values are the market values of the shares or 90,000 = (1,500 × 60).

For held-to-maturity securities the carrying value is the amortized cost, or 71,500 = ((800 × 50) + (700 × 45)).

---

What is the rate of return (income/year-end carrying value) under each of the three methods?

Trading

Available-for-sale

Held-to-maturity

A) 22.11% 1.56% 1.96%

B) 23.22% 23.22% 29.23%

C) 2.67% 2.67% 3.36%

---

Trading = 22.11% (19,900/90,000)

Available-for-sale = 1.56% (1,400/90,000)

Held-to-maturity = 1.96% (1,400/71,500).

tango_gs

Birtch Corporation acquires 25% of the common stock of TRQ Inc. on January 1, 2002. TRQ subsequently reports net income for the full year of $700,000, and pays a cash dividend equal to 30 percent of the reported income. Assuming the equity method of accounting is used, what will be the reported investment income for Birtch?

A) $60,000.

B) $115,000.

C) $175,000.

Under the equity method, dividends are not included as income to the acquirer. ($700,000 × 0.25) = $175,000 will be the reported investment income for Birtch.

---

Assuming the equity method of accounting is used, What will be the cash flow received by Birtch, due to their investment in TRQ during 2002?

A) $227,500.

B) $52,500.

C) $65,400.

---

The cash flow to Birtch will be ($700,000)(0.30)(0.25) = $52,500.

tango_gs

Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is:

A) $63,000.

B) $60,000.

C) $48,000.

---

Because company X exerts significant influence over company S, the investment will be treated using the equity method, even though the ownership is less than the 20% guideline. The value of the investment account is equal to the beginning balance plus the proportionate income of company S minus the dividends received from company S, which equals 48,000 + (0.15 x 100,000) − (0.15 x 20,000) = 60,000.

tango_gs

Which of the following securities will most likely be characterized as an available-for-sale security?

A) Debt securities that a company has a positive intent and ability to hold to maturity.

B) Equity securities representing 30% ownership in another firm.

C) Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes.

---

Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes are likely to be considered as available-for-sale.