To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations True / False Questions The extent of influence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Investments in bonds intended to be sold before they reach maturity should be reported under the market value method TRUE AACSB Tag: Communications Difficulty: Medium L.O.: If a bond is bought at par value, then interest revenue will be equal to the cash revenue TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: An investor who owns more than 50% of the outstanding bonds of another corporation has "significant influence" over that corporation FALSE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 12-1 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations Objectives of a long-term investment in the common stock of another corporation include earning a return on idle cash or obtaining influence or control over the other corporation TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: When we sell an investment in available-for-sale securities, an entry needs to be recorded to offset the allowance to value at market account against the net unrealized gains/losses account prior to recording the removal of the investment account TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Most businesses prefer to treat their investment in stock, when less than 20% of the voting stock is owned, as trading securities since those unrealized gains and losses stay on the balance sheet and not disrupt reported net income FALSE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: The equity method requires the recognition of investment revenue for dividends received FALSE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 12-2 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations When using the term investments in associated or affiliated companies on a balance sheet, it implies a company has significant influence by owning between 20 and 50 percent of the voting stock of that company TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 10 Tiger Corporation owns 30% of Woods Corp for which they paid $5.5 million Woods Corp paid a $100,000 dividend The investment in affiliated companies account will increase by $30,000, which is Tiger's proportionate share of the dividend FALSE AACSB Tag: Analytic Difficulty: Medium L.O.: 11 An investment accounted for under the equity method would record a reduction in the investment account for their proportionate share of the investee's reported net loss TRUE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 12 Any gains or losses on sale of investments as well as any unrealized gains or losses on trading securities would have to be added back to or deducted from net income on the statement of cash flows under the indirect method to remove the effects of investment activities out of the operating activities section TRUE AACSB Tag: Relative Thinking Difficulty: Hard L.O.: 12-3 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 13 In a 100% acquisition, the stockholders of the acquired company receive cash for their shares of stock in the acquired company The stockholders are no longer owners of either the parent or the subsidiary TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 14 Madison Inc acquires 100% of the voting stock of Allison Corp for $10.0 million Allison's total assets at fair market value equaled $12.5 million and Allison had liabilities at fair market value equal to $3.4 million Madison Inc., will report goodwill of $0.9 million TRUE AACSB Tag: Analytic Difficulty: Easy L.O.: 15 When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values FALSE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 16 Subsequent to merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated income statement TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 12-4 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 17 Return on assets (ROA) is computed by dividing net income by total assets at the end of the year FALSE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 18 A low return on assets (ROA) is generally viewed as favorable in terms of effective management of invested capital FALSE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 19 Return on assets (ROA) is comprised of two separate ratios, profit margin and fixed asset turnover FALSE AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 20 One of the important elimination entries when preparing consolidated statements is to remove the investment in subsidiary account so it can be replaced with the investees' acquired asset and liability accounts along with any acquired goodwill TRUE AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Sup A 12-5 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations Multiple Choice Questions 21 Which of the following is the best description of investments in trading securities? A Investments in bonds that management intends to hold to maturity B Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future C Investments in more than fifty percent of the voting stock of another company D Investments that grant the investor significant influence, but not control over the investee company AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 22 Piano Company owns 55% of the voting common stock shares of Keys Corporation Which of the following is true? A The investment would be accounted for using the equity method B The investment would be accounted for by consolidation C The investment would be accounted for under the market value method D The investment would be accounted for under the amortized cost method AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 23 Which of the following is the best description of investments in available-for-sale securities? A Investments in bonds that management intends to hold to maturity B Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future C Investments in more than fifty percent of the voting stock of another company D Investments in securities that are accounted for under the market value method other than trading securities and held-to-maturity debt investments AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 12-6 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 24 Subsequent to acquisition, measurement of a long-term investment in another corporation and the related investment revenue depends upon the extent to which the investing company can exercise A significant control over the operating and financing policies of the other company B significant influence or control over the operating and financing policies of the other company C significant influence or control over the operating policies of the other company D significant influence or control over the financing policies of the other company AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 25 Chang Corp purchased $1,000,000 of bonds at par value on April 1, 2009 The bonds pay dividends of 10% Chang intends to hold these bonds to maturity Which of the following statements is false? A Since the bonds were issued at par value, the cash interest will be the same as interest revenue B The bonds will earn $75,000 of interest by December 31, 2009 C If sold before maturity, any gain or loss would be reported as an extraordinary item D Since they were classified as held to maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime AACSB Tag: Analytic Difficulty: Medium L.O.: 26 Significant influence over the operating and financing policies of another company may be indicated by A participation on its board of directors B participation in its policy-making process C material transactions between the two companies D All of the answers are correct AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 12-7 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 27 Global Company owns 30% of the outstanding voting stock of Local Corporation Global should use the following method to account for the investment A market value method B equity method C consolidated financial statement method D Either the market value or equity method is acceptable AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 28 If a company purchased 15% of the outstanding voting shares of stock of another company as a long-term investment in available-for-sale securities, the investor company should use the following method: A consolidation B equity C market value D payout AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 29 Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is A 20% or more B less than 20% C between 20% and 50% D more than 50% AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 12-8 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 30 The equity method causes the investment account to approximate A original cost of the investment B market value of the investment C original cost of the investment minus any dividends received D original cost of the investment plus a proportionate share of subsequent undistributed earnings of the investee AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 31 Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment Which of the following methods should be used by Idaho Company in accounting for the investment? A Market value method B Equity method C Purchase method D Because the stock is nonvoting, either the market value or the equity method is acceptable AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 12-9 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 32 Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2009, at $40 per share as a long-term investment The records of Burke Corporation showed the following on December 31, 2009 Gilman Company should report the following on the December 31, 2009, balance sheet for its investment in Burke Corporation A $4,218,000 B $4,000,000 C $4,124,000 D $3,800,000 AACSB Tag: Analytic Difficulty: Hard L.O.: 33 On January 1, 2009, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities On December 31, 2009, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000 For the year ended December 31, 2009, Entertainment Company should report "Investment income" amounting to A $225,000 B $ 37,500 C $187,500 D zero AACSB Tag: Analytic Difficulty: Medium L.O.: 12-10 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations AACSB Tag: Analytic Difficulty: Medium L.O.: 12-37 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 86 On March 1, 2011, Young Company purchased the following stock as long-term investments in available-for-sale securities: Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares) ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares) XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares) The market prices per share at December 31, end of the accounting period, were as follows: Give the required journal entries at the following dates: Match 1, 2011, December 31, 2011 and December 31, 2012 12-38 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations AACSB Tag: Analytic Difficulty: Medium L.O.: 12-39 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 87 On January 1, 2009, Presto Corporation purchased, as a long-term investment, 5,000 shares of the outstanding common stock of Shazam Corporation at $30 per share During the year ended December 31, 2009, the following events occurred at Shazam Corporation: A Give the journal entry for Presto Corporation to record the investment B Assume two independent situations, Case A – 10% ownership and Case B – 40% ownership For each case, make the following entries: To recognize net income for 2009 To record cash dividend declared and received To record market price of stock at year-end AACSB Tag: Analytic Difficulty: Medium L.O.: 12-40 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 88 On January 1, 2010, Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment at a cost of $225,000 Maxim reported a 2010 net income of $35,000 On January 2, 2011, Maxim declared and paid a $10,000 cash dividend The market value of the Maxim stock held by Alden on December 31, 2010, was $224,000 Alden Company has recorded only the following journal entries: Based on the above information, answer the following questions: A What method did Alden use to account for the investment? B Did Alden fail to make an adjusting entry on December 31, 2010? C What condition, if changed, would require that the equity method be used? D Assuming the market value method is used; calculate the valuation of the net investment on January 3, 2011 A Market value method, as is indicated by the revenue entry on January 2, 2011 B No adjusting entry should be made for dividends Alden should have made an adjusting entry of $1,000 on December 31, 2010 to adjust the investment to market price C Equity method would be used if Alden owned between 20% and 50% D The balance in the investment account at January 3, 2011 would be $224,000 = $225,000 $1,000 AACSB Tag: Analytic Difficulty: Hard L.O.: 12-41 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 89 Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock which constitutes 10% of Creole's voting stock on June 30, 2009 for $42 per share Orleans Corporation's intent is to keep these shares beyond the current year On December 20, 2009, Creole Corporation declared and paid a previously declared $4,000,000 cash dividend On December 31, Creole's stock was trading at $45 per share and their reported 2009 net income was $52 million A Record the transaction to record the acquisition of Creole Corporation on June 30, 2009 B Record the transaction for the dividend received by Orleans on December 20, 2009 C Record any year-end entries needed by Orleans Corporation AACSB Tag: Analytic Difficulty: Medium L.O.: 90 On December 31, 2010, Jean World Corporation recorded the following journal entry relating to its investment in 9,000 shares of common stock of Soda Corporation At December 31, 2010, Soda Corporation reported net income of $120,000 Earlier in the year, Soda Corporation declared and paid dividends of $18,000 A What method is being used to account for this investment? B What is the total number of shares outstanding of Soda's common stock? A Equity method B $120,000 Percentage of Soda stock held by Jean World = $54,000 Percentage of Soda stock held by Jean World = 45% Total number of Soda shares outstanding 45% = 9,000 shares Total number of Soda shares outstanding = 20,000 AACSB Tag: Analytic Difficulty: Medium L.O.: 12-42 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 91 As a long-term investment, Martha Company purchased 5,000 of the 12,500 outstanding voting shares of Stewart Corporation at $20 per share on January 1, 2009 At December 31, 2009, Stewart Corporation reported net income of $100,000 and declared and paid dividends of $10,000 The market price of the Stewart Corporation stock at December 31, 2009 was $18 per share Calculate the net balance in Martha Company's investment account at December 31, 2009 5,000/12,500 = 40% ownership; must use the equity method (5,000 $20) + ($100,000 40%) ($10,000 40%) = $136,000 AACSB Tag: Analytic Difficulty: Medium L.O.: 92 Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2, 2009, for $80 per share At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock (par $50) On December 31, 2009, Apprentice Corporation reported net income of $60,000 -and paid a $5,000 cash dividend The December 31, 2009, market value of Apprentice Corporation's stock was $79 Give the journal entries required for Donald Corporation on January 2, 2009 and December 31, 2009 AACSB Tag: Analytic Difficulty: Medium L.O.: 12-43 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 93 A Discuss the criteria for applying the equity method of accounting for long-term investments B Discuss the rationale for the equity method procedures of accounting for longterm investments A The criteria for applying the equity method of accounting for long-term investments are based on the ownership level of the investor in the voting stock of the investee The presumption is that if the investor owns at least 20% of the investee's voting stock but not more than 50% of such stock, the investor has significant influence over the investee This means that the investor has an important impact on the operating and financing policies of the investee Significant influence is typically achieved by the investor being on the investee's board of directors, management personnel is interchanged between the two companies, and other such evidence of influence B The rational for the equity method of accounting is rather like an "accrual" system That is, the relationship of the investee and investor is typically expected to be a long-term association As such, the investor recognizes income on an accrual rather than a cash basis The proportionate share of income in the investee is recognized on the income statement and the investment (asset) account is increased When actual dividends are received by the investor, they reduce the investment account since some of the previously recognized income is being distributed AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 12-44 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 94 Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2009 On December 12, 2009, Nutribar paid a $1 million cash dividend and reported net income for the year ended December 31, 2009 of $10 million On December 31, 2009, Nutribar's stock was trading at $11.50 per share A Record the journal entry on Kudos Corporation's book for the acquisition of Nutribar Corporation on March 31, 2009 B Record the cash dividend received by Kudos Corporation on December 12, 2009 C Record any end of year entries needed on Kudos Corporation's books AACSB Tag: Analytic Difficulty: Medium L.O.: 12-45 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 95 In 2009, the following items were reported on ShoeCo's statement of cash flows in millions of dollars For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows statement (added or deducted) AACSB Tag: Analytic Difficulty: Hard L.O.: 12-46 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 96 In 2009, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows (added or deducted) AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 97 Discuss how the equity method prevents managers of the investor corporation from manipulating income related to dividends from the investee When one corporation exerts significant influence over another (such influence results from ownership of 20 to 50 percent of the common shares), it is unreasonable to assume that transactions between those corporations are made at "arm's length" as assumed in financial accounting Without the equity method, managers of the investor company could manipulate income by influencing the investee's dividend policy Large dividend payments could be used to bolster income in bad years The equity method prevents this type of manipulation by requiring dividends received to be offset against the investment account rather than recognized as income AACSB Tag: Relative Thinking Difficulty: Hard L.O.: 12-47 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 98 On January 1, 2009, Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000 The book and market values of Foliage Corporation's assets and liabilities are listed below: Calculate the amount of goodwill that should be recognized AACSB Tag: Analytic Difficulty: Medium L.O.: 12-48 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 99 On January 2, 2009, Parent Company purchased 100% of Sub Company's stock for $900,000 cash At this date, the book value of Sub Company's net assets (i.e., assets less liabilities) was $800,000 which included property, plant and equipment that have a book value of $400,000 and a market value of $440,000 A Give the journal entry that would appear on the books of each company at the acquisition date B How much goodwill should Parent Company recognize on the consolidated financial statements at the date of acquisition? A Sub Company: No entry is made by the subsidiary because only the subsidiary stockholders are affected B Parent Company should recognize goodwill of: $900,000 – ($800,000 + $40,000) = $60,000 AACSB Tag: Analytic Difficulty: Medium L.O.: 12-49 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations 100 The following information was taken from the financial statements of Tommy's Toys for the years 2007 through 2010 in millions of dollars A Calculate the return on assets (ROA) for the years 2008 through 2010 Decompose ROA into its two components, asset turnover and profit margin B Evaluate Tommy's Toys return on assets (ROA) A B Their ROA was lower in 2009 as a result of a significant reduction in net income In 2009, the profit margin was also lower Over the three years, their asset turnover ratio stayed steady which means any changes in the ROA were caused by the erratic profit margin AACSB Tag: Analytic Difficulty: Medium L.O.: 12-50 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 012: Reporting and Interpreting Investments in Other Corporations Matching Questions 101 Match the methods with the situations for long-term investors Owns 20% of the common stock (voting) of another corporation Equity method Owns 100% of the preferred stock (nonvoting) of another corporation Owns 5% of the common stock (voting) of another corporation Owns 51% of the common stock (voting) of another corporation Owns 20% of the common stock (voting) of another corporation Owns 30% of the common stock (voting) of another corporation Owns 25% of the outstanding bonds payable of another corporation Owns 25% of the preferred stock (nonvoting) Equity method Market value method Market value method Market value method None of the methods are correct Consolidated financial statement method Equity method AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 102 For each item below, indicate the best description Purchase method acquisition Market value method Equity method Consolidated financial statements Goodwill Amount paid by parent in excess of the market value of the net assets of the subsidiary Investor has control Parent consolidates subsidiary at market values instead of book values None of the answers is correct Investor has significant influence but not control AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 12-51 ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e ... ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com... ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com... ©2009 McGraw-Hill Inc Test Bank to accompany Libby Financial Accounting 6/e To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com