Appendix A Smartbook

On January 1, Up-a-Creek, Inc. purchased 40% of the 100,000, $1 par value outstanding shares of Down Stream, Inc. for $1,000,000. During the year, Down Stream reported Net income of $50,000 and declared and paid $10,000 in cash dividends. At year-end, the fair value of Down Stream's stock was $27 per share. The entry to record the original purchase of Down Stream's stocks includes a ______.

$1,000,000 credit to Cash $1,000,000 debit to Investments

Manny, Inc.'s Investments balance at the beginning of the year was $10,000 using the equity method. During the year, Manny's portion of the affiliates' net income was $1,000 and dividends were $200. At year-end, the fair value of the Manny's Investments was estimated to be $14,000. The Investments in Affiliates balance on the balance sheet at year-end equals ______.

$10,800

On December 3, 2018, Up-a-Creek, Inc. purchased 1,000 shares of Scores of Oars, Inc.'s 100,000, $1 par value common shares outstanding for $20 per share with its excess cash. Up-a-Creek intended to hold the securities until the cash is needed for anticipated expansion in 2 years. At Up-a-Creek's year-end, December 31, 2018, the stock was trading at $23 per share. At December 31, 2019, the stock was trading at $22 per share. The balance in the Net Unrealized Gains (Losses) equals ______ and is reported as ______ at December 31, 2019.

$2,000; Net income

Up-a-Creek, Inc. purchased 40% of the 100,000 outstanding shares of Down Stream, Inc. for $1,000,000. During the year, Down Stream reported Net income of $50,000 and declared $10,000 in cash dividends. At year-end, the fair value of Down Stream's stock was $27 per share. The entry to record the cash dividend declared by the affiliate includes a ______.

$4,000 credit to Dividends receivable $4,000 debit to Cash

Dive In, Inc. purchased 100,000 shares of Stock-up, Inc.'s 1,000,000 shares outstanding, $1 par value common stock for $8 per share. The entry to record Dive In's receipt of $0.50 per share cash dividend includes a ______.

$50,000 credit to Dividend revenue

Dive In, Inc. purchased 10,000 shares of Stock-up, Inc.'s 100,000 shares outstanding, $1 par value common stock for $8 per share. Dive In intends to trade the shares within the year. The entry to record Dive In's purchase includes a(n) ______.

$80,000 debit to Investments

A company may purchase greater than 50% of another company's stock to achieve___ integration by acquiring the company's supplier, ___ growth by purchasing similar companies in foreign countries, and by increasing profitability through ___>

Blank 1: vertical Blank 2: horizontal Blank 3: synergy or synergies

Which of the following will result in the recording of goodwill?

Company A purchases Company B and pays more than the fair value of Company B's assets and liabilities.

Which of the following are the financial statement effects investments in equity securities?

Dividend revenue is reported on the income statement Changes in fair values are reported as Unrealized gains (losses) on the income statement Investments are reported on the balance sheet at fair value

The purchase price allocation requires which of the following steps?

Estimating the fair value of the acquired company's identifiable assets and liabilities Computing goodwill as the excess of the purchase price over the fair value of the acquired company's assets minus the liabilities

True or false: Investments reported under the equity method are adjusted to fair value at the end of the accounting period.

False

True or false: The word consolidated in the title of financial statements means that many of company's accounts are combined and reported as one line item.

False

The fair value method is used to report which of the following investments?

Investments in securities available-for-sale

Which of the following investments are considered passive investments?

Less than 20% investment in equity securities Debt securities

Which of the following will affect the balance sheet amount of investments reported using the equity method?

Net income of affiliates Dividends paid by affiliates

Which of the following are reasons a company may purchase greater than 50% of another company's stock?

To increase profitability through synergy To achieve horizontal growth by purchasing similar companies in foreign countries To achieve vertical integration by acquiring the company's supplier

In assessing whether an investment is an investment in stock for control, which of the following should be considered?

Whether ownership is greater than 50% of outstanding voting stock Whether the investor has significant voting rights

When recording the sale of equity securities, the securities are ______.

adjusted to fair value and then the sale is recorded by crediting the Investments for the fair value

A company that has purchased 25% of the outstanding stock of a supplier would report this investment as ______.

an Investment in affiliate

Passive equity investments differ from investments in affiliates in that passive investments ______.

are reported at fair value

The financial statement line item, Investments in affiliates using the equity method, is reported on the ______.

balance sheet as a long-term asset

The initial purchase of 40% of another company's is recorded at ______.

cost

When a company purchases less than 20 percent of the outstanding voting stock of another company, the purchase is recorded at ______.

cost

The entry to record a company's share of income from an affiliate using the equity method includes a ______.

credit to Equity in investee earnings debit to Investments

On December 3, 2018, Up-a-Creek, Inc. purchased 1,000 shares of Scores of Oars, Inc.'s 100,000, $1 par value common shares outstanding for $20 per share with its excess cash. At Up-a-Creek's year-end, December 31, 2018, the stock was trading at $23 per share. The stock was sold on March 31, 2019 when it was trading at $22 per share. The entry to record the sale after adjustment to fair value includes ______.

credit to Investments for $22,000 debit to Cash for $22,000

The entry to record the dividend declared from an affiliate includes a ______.

debit to Dividends Receivable credit to Investments

The investor company's entry to record the investor's portion of the affiliates' net income includes a ______.

debit to Investments credit to Equity in Affiliate Earnings

If less than 20% of outstanding voting shares are owned, dividends earned are reported as ______.

dividend revenue included in net income on the income statement

Byme, Inc. was purchased by Botem, Inc. When Botem allocates the purchase price, Botem should record the acquired assets and liabilities at the ______.

fair market values

Up-a-Creek, Inc. purchased 40% of the 100,000 outstanding shares of Down Stream, Inc. for $1,000,000. During the year, Down Stream reported net income of $50,000 and declared and paid $10,000 in cash dividends. At year-end, the fair value of Down Stream's stock was $27 per share. The effect of owning Down Stream's stocks will cause the investment account to ______.

increase by $16,000

Up-a-Creek, Inc. purchased 40% of the 100,000 outstanding shares of Down Stream, Inc. for $1,000,000. During the year, Down Stream reported Net income of $50,000 and declared $10,000 in cash dividends. At year-end, the fair value of Down Stream's stock was $27 per share. The Equity in affiliated earnings will ______.

increase by $20,000

Balloon Tycoon, Inc. frequently trades securities. It purchased 1% of Inflatables, Inc.'s outstanding stock for $10,000. During the year, the stock paid a $200 dividend, and at year-end, the stock's fair value was $10,400. The effect of these securities on Balloon Tycoon's net income is to ______.

increase it by $600

Lox, Stock and Bagel, Inc. buys Cream Cheesery, Inc. for $1,000,000 cash. Cream Cheesery's net assets are valued at $800,000 at the time of the sale. Lox, Stock and Bagel, Inc. should record a(n) ______.

increase to Goodwill of $200,000 decrease to Cash of $1,000,000

Ima Vestor, Inc., owns 60% of the outstanding voting shares of Big Seats Furniture, Inc. Ima Vestor, Inc., does not transact with Big Seats, nor does its management assist Big Seats' management team. Ima Vestor's investment in Big Seats should be categorized as a(n) ______.

investment in stock for control

Barry Rich, Inc., owns 40% of the outstanding voting shares of Berry Farms, Inc.. Barry's investment is considered a(n) ______.

investment in stock for significant influence

Ima Vestor, Inc., owns 45% of the outstanding voting shares of Big Seats Furniture, Inc. Ima Vestor, Inc.'s investment In Big Seats Furniture should be categorized as a(n) ______.

investment in stock for significant influence

The equity method is used to record ______.

investments in affiliates

Passive investments are ______.

investments in which the investors do not have significant influence

The purchase of all the assets and liabilities of another company causing the acquired company to go out of existence is referred to as a ___.

merger

The acquisition method is used to record the ______.

merger with or acquisition of more than 50% of the outstanding shares of another company

Investments in affiliates are reported at the sum of each investment's ______.

original cost plus the portion of the affiliates' net income earned minus the dividends paid since purchased

The balance in Goodwill is ______.

periodically reviewed for impairment

A merger occurs when one company ______.

purchases all of the assets and liabilities of another, and the acquired company goes out of existence

Passive investments in equity securities held at year end are ______.

reported at fair value on the balance sheet and changes in fair value are reported in net income on the income statement

At year end, changes in the fair value of investments in trading debt securities are ______.

reported in net income on the income statement

Investments in affiliates on the balance sheet indicates that the company has ______.

significant influence over the affiliate, but owns less than 50% of the affiliates outstanding stock

The adjusting entry to record the amount of Unrealized Gains (Losses) recorded on equity securities equals ______.

the difference between the fair value and the book value

Both Company A and Company B purchased shares of X Company at $50 per share on November 1, 2018. Company A recorded the purchase using the equity method because it purchased more than 20% of outstanding shares and Company B recorded the purchase as a passive investment because it purchased less than 20%. The debit to Investments will be _____ for Company A compared to Company B.

the same

Passive investments may be categorized as ______ investments.

trading held-to-maturity available-for-sale