102. Jeremiah Corporation purchased securities during 2006 and classified them as securities available for sale:

Security	Cost	Fair Value,
		12/31/2006
A	$40,000	$49,000
B	70,000	66,000
C	28,000	39,000

All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation on the December 31, 2006, income statement relative to the portfolio?

A) $0.

B) $16,000.

C) $20,000.

D) None of the above is correct.

Answer: A Learning Objective: 2 Level of Learning: 3

Rationale: Unrealized gains and losses are not included in earnings for securities available for sale.

103. On January 1, 2006, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2003, White reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2006?

A) $295,000.

B) $300,000.

C) $315,000.

D) $320,000.

Answer: C Learning Objective: 6 Level of Learning: 3

Rationale:

Cost	$300,000
Share of NI: 20% x $125,000	$ 25,000
Share of dividends: 20% x $25,000	(5,000	)
Amortization of intangible: ($300,000 – $275,000)/5	(5,000	)
Carrying value, 12/31/06	$315,000

104. Hope Company bought 30% of Faith Corporation in 2006. During 2006, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment using the cost method instead of the equity method. What effect would this error have on the investment account and net income, respectively, for 2006?

A) Overstated by $1,050,000; understated by $1,050,000.

B) Understated by $1,050,000; understated by $1,050,000.

C) Overstated by $1,200,000; overstated by $1,200,000.

D) Understated by $1,200,000; overstated by $1,050,000.

Answer: B Learning Objective: 5 Level of Learning: 3

Rationale:

Net Income:	Cost Method		Equity Method
Investment			1,200,000
Investment revenue				1,200,000
Dividends
Cash	150,000
Investment revenue		150,000
Cash			150,000
Investment				150,000

Net increase in investment of $1,200,000 $150,000 = $1,050,000 was not reported using the cost method.

Also, the reported investment revenue of $150,000 was $1,050,000 less than the $1,200,000 that should have also been reported.

105. Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on Jan 1, 2006. On November 1, 2006, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2006 relative to its investment in Hack?

A) $1,100,000.

B) $2,400,000.

C) $1,500,000.

D) $1,600,000.

Answer: A Learning Objective: 5 Level of Learning: 3

Rationale:

Carrying value before net loss:

($1,500,000 (40% x $1,000,000) = $1,100,000

Sox's share of net loss = $6 million x 40% = $2.4 million. Because the investment account cannot be reduced below zero, the loss reported in 2006 would be only $1,100,000.

106. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2006. Jack can significantly influence Jill. On December 10, 2006, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report on its income statement for 2006 relative to its investment in Jill?

A) $1 000,000.

B) $1,200,000.

C) $1,400,000.

D) $1,500,000.

Answer: B Learning Objective: 4 Level of Learning: 3

Rationale:

Carrying value before net loss:

($1,500,000 (20% x $1,000,000) = $1,300,000

Jack's share of net loss would be recognized in full: 20% x $6,000,000 = $1,200,000.

107. Hawk Corporation purchased ten thousand shares of Diamond Corporation stock in 2003 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2004, and $65 on December 31, 2005. During 2006, Hawk sold all of its Diamond stock at $70 per share. In its 2006 income statement, Hawk would report:

A) A gain of $100,000.

B) A gain of $150,000.

C) A gain of $200,000

D) A gain of $300,000.

Answer: C Learning Objective: 2 Level of Learning: 3

Rationale:

In 2003-2005, Hawk accumulated an unrealized gain and fair value adjustment of ($65 50) x 10,000 = $150,000. An additional increase of $50,000 occurred in 2006, so the total gain realized in the income statement would be $200,000.

108. Dim Corporation purchased one thousand shares of Witt Corporation stock in 2003 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2004, and $300 on December 31, 2005. During 2006, Dim sold all of its Witt stock at $350 per share. For 2006, Dim would report:

A) A realized gain of $50,000.

B) A recognition of unrealized losses of $400,000.

C) A loss on the sale of investments of $450,000.

D) A trading gain of $50,000 and an unrealized loss of $500,000.

Answer: C Learning Objective: 2 Level of Learning: 3

Rationale:

Cash	350,000
Loss on sale of investments	450,000
Unrealized holding loss		500,000
Investment in Witt		300,000

109. Dicker Furriers purchased one thousand shares of Loose Corporation stock on January 10, 2005, for $800 per share and classified the investment as securities available for sale. Loose's market value was $400 per share on December 31, 2005. As of December 31, 2006, Dicker still owned the Loose stock whose market value has declined to $100 per share. The decline is due to a reason that's judged to be other than temporary. Dicker's December 31, 2006, balance sheet and the 2006 income statement would show the following:

	Unrealized loss on investments	Investment in Loose stock	Income statement loss on investments
A)	0	100,000	700,000
B)	700,000	100,000	300,000
C)	400,000	400,000	0
D)	0	100,000	300,000

Answer: A Learning Objective: 2 Level of Learning: 3

Rationale:

12/31/05	Unrealized loss	400,000
	Investment in Loose		400,000
12/31/06	Loss due to impairment	700,000
	Unrealized loss		400,000
	Investment in Loose		300,000

110. In 2004, Osgood Corporation purchased $4 million in ten-year municipal bonds at face value. On December 31, 2006, the bonds had a market value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2006, balance sheet and the 2006 income statement would show the following:

	Unrealized loss on investments	Investment in municipal bonds	Income statement loss on investments
A)	400,000	3,600,000	0
B)	0	3,600,000	400,000
C)	(400,000)	4,000,000	400,000
D)	400,000	4,000,000	0

Answer: B Learning Objective: 1 Level of Learning: 3

Rationale: The unrealized loss ($400,000) on transfer to new category of trading securities is included in income.

Use the following to answer questions 111-112:

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair market value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends.

111. The amount of purchased goodwill is:

A) $18 million.

B) $30 million.

C) $60 million.

D) None of the above is correct.

Answer: A Learning Objective: 6 Level of Learning: 3

Rationale: (in millions)

Cost	$45
FMV: 30% x ($75 + $15)	(27	)
Goodwill	$ 18

112. The total amount of additional depreciation to be recognized over the remaining life of the assets is:

A) $4.5 million.

B) $15 million.

C) $27 million.

D) None of the above is correct.

Answer: A Learning Objective: 6 Level of Learning: 3

Rationale: (in millions)

FMV in excess of book value	$15
Share of ownership	30	%
Additional depreciation, in total	$ 4.5