Appendix A Handout #3 With Solutions

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The University of Texas at Austin McCombs School of Business Fundamentals of Financial Accounting ACC 311 Appendix A Handout #3- Review Problems 1) On January 1, 2016, as a long-term investment, Root Company purchased 2,700 of the 18,000 outstanding common stock shares of Stiller Inc. for $30 per share. The 2016 records of Stiller Inc. reflect the following.  2016 Net Income: $60,000  Dividends declared and paid during 2016: $50,000  Ending December 31, 2016 market price: $33 Root Company’s 2016 Net Income will be impacted as follows for this investment (ignore taxes)? A. $ 8,100 B. $ 24,600 C. $ 7,500 D. $15,600 E. None of the above 2) Vaughan Inc. purchased 12% of Dodgeball Inc. common stock during 2018 for $200,000. The 12% investment in Dodgeball Inc. had a fair value of $180,000 at the end of 2018 and a fair value of $210,000 at the end of 2019. Which of the following statements is correct if Vaughan Inc. sold the Dodgeball stock on March 10 th , 2020 for $204,000? A. The 2020 unrealized loss reported on the income statement is $6,000. B. The 2020 unrealized gain reported on the income statement is $4,000. C. The 2020 unrealized gain reported on the balance sheet is $4,000. D. The 2020 unrealized loss reported on the balance sheet is $6,000. E. The ending balance of the investment at 12/31/2020 would be $204,000

3) Wilson Corp. purchased $1,000,000 of bonds at par value on April 1, 2014. The bonds pay interest at the rate of 10%. Wilson 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, 2014. C. The bond investment must be accounted for using the fair value method. D. Since the bonds were classified as held-to-maturity, the company would not recognize unrealized gains or losses on the bonds during the period held by Wilson. E. The bond investment must be accounted for using the amortized cost method. 4) Mugatu Company purchased 15% of Hansel Company's common stock during 2018 for $150,000.  The Investment in Hansel had a $160,000 fair value at the end of 2018 and a $140,000 fair value at the end of 2019. Which of the following statements is correct if Mugatu sold the Hansel stock at the beginning of 2020 for $148,000? A. The 2020 unrealized loss is $2,000 and is included in Mugatu’s 2020 income statement. B. The 2020 unrealized gain is $8,000 and is included in Mugatu’s 2020 income statement. C. The 2020 unrealized gain is $8,000 and is included in Mugatu’s 2020 balance sheet. D. The 2020 unrealized loss is $2,000 and is included in Mugatu's 2020 balance sheet. E. None of the above 5) On January 1, 2018, as a long-term investment, Zoolander Company purchased 1,000 of the 10,000 outstanding voting common shares of Ferrell Corporation at $9 per share. Ferrell reported 2018 net income of $30,000 and declared and paid cash dividends of $20,000. The market price of the Ferrell stock at the end of 2018 was $10 per share. Calculate the carrying value of Zoolander's investment at the end of 2018. $10/sh FMV * 1,000 sh = $10,000

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