On September 15, 2011, Hill-Nielson Corporation purchased 7,000 shares of Community Communications Company for $32 per share. The following information applies to the stock price of Community Communications:

$$\begin{array} {|lcc|} \hline &\text{Price}\\ \hline \text{12/31/2011}& \text{\$34}&\\ \text{12/31/2012}& \text{25}&\\ \text{12/31/2013}&\text{21}&\\ \hline \end{array}$$

Required:

1. Prepare journal entries to record the facts in the case, assuming that Hill-Nielson purchased the shares for the trading securities portfolio.

2. Prepare journal entries to record the facts in the case, assuming that Hill-Nielson purchased the shares for the available-for-sale securities portfolio.

Verizon Communications Inc. was formed by the merger of Bell Atlantic Corporation and GTE Corporation in 2000. It is the largest provider of wireline and wireless communication services in the United States, with a presence in over 150 other countries. The following information was reported in the company’s 2008 annual report for available-for-sale securities:

Required:

1. Compute the economic return from investing ratio for 2008.

2. What do the results in requirement (1) suggest about Verizon?

Lamichael Company purchased 100 percent of the outstanding voting shares of Darrell Corporation in the open market for $200,000 cash and Darrell was merged into Lamichael Company. On the date of acquisition, the fair value of Darrell Corporation’s property and equipment was$310,000 and the fair value of its long-term debt was $150,000. Darrell has no other assets or liabilities. What amount of goodwill would Lamichael record related to the purchase of Darrell Corporation?

a. No goodwill should be recorded by Lamichael.

b.$260,000

c. $110,000

d.$40,000

Kukenberger, Inc., reported the following in its portfolio of securities available for sale:

Required:

1. Determine the economic return from investing ratio for the years 2011, 2012, and 2013.

2. What do your results suggest about Kukenberger’s investment portfolio?

On January 4, 2011, D’Angelo Company acquired all of the net assets (assets and liabilities) of Barato Company for $124,000 cash. The two companies merged, with D’Angelo Company surviving. On the date of acquisition, Barato’s balance sheet included the following.

$$\begin{array} {|lrrrrr|} \hline & \textbf { Barato } \hspace{5pt}\\ \textbf { Balance Sheet at January 4, 2011 } & \textbf { Company } \\ \hline \text { Cash } & \$23,000 \\ \text { Property and equipment (net) } & \underline{\hspace{10pt}65,000} \\ \hspace{10pt}\text { Total assets } & \underline{\underline{\hspace{5pt}\$88,000}} \\\\ \text { Liabilities } & 12,000\\ \text { Common stock (par \$5) }& 40,000\\ \text { Retained earnings } & \underline{\hspace{10pt}36,000} \\ \hspace{10pt}\text { Total liabilities and stockholders’ equity } & \underline{\underline{\hspace{5pt}\$88,000}} \\\\ \hline \end{array}$$

The property and equipment had a fair value of $72,000. Barato also owned an internally developed patent with a fair value of$4,000. The book values of the cash and liabilities were equal to their fair values.

Required:

1. How much goodwill was involved in this merger? Show computations.

2. Give the journal entry that D’Angelo would make to record the merger on January 4, 2011.

N.M.S. Company held securities available for sale and reported the following information at the end of each year:

Compute the economic return from investing ratio for 2012, 2013, and 2014. What do the results suggest about N.M.S. Company?

Sonic Corp. operates and franchises a chain of quick-service drive-in restaurants in most of the United States and in Mexico. Customers drive up to a canopied parking space and order food through an intercom speaker system. A carhop then delivers the food to the customer. Assume that Sonic has $15 million in cash to support future expansion and has decided to invest the funds in corporate bonds until the money is needed. Sonic purchases bonds with$15 million face value for $15.7 million cash on January 1, 2011. The bonds pay 9 percent interest annually with payments each June 30 and December 31 and mature in four years. Sonic plans to hold the bonds until maturity.

Required:

1. What accounts were affected when the bonds were purchased on January 1, 2011?

2. What accounts were affected when interest was received on June 30, 2011?

3. Should Sonic prepare a journal entry if the fair value of the bonds increased to$16,300,000 on December 31, 2011? Explain.

Company X owns 40 percent of Company Y and exercises significant influence over the management of Company Y. Therefore, Company X uses what method of accounting for reporting its ownership of stock in Company Y?

a. The amortized cost method.

b. The equity method.

c. The fair value method.

d. Consolidation of the financial statements of companies X and Y.

Match the following. Answers may be used more than once:

Macy’s, Inc., operates over 850 Macy’s and Bloomingdale’s department stores nationwide. The company does more than $24 billion in sales each year. Assume that as part of its cash management strategy, Macy’s purchased$10 million in bonds at par for cash on July 1, 2012. The bonds pay 9 percent interest annually with payments June 30 and December 31 and mature in 10 years. Macy’s plans to hold the bonds until maturity.

Required:

1. Record the purchase of the bonds on July 1, 2012.

2. Record the receipt of interest on December 31, 2012.

Refer to the financial statements of American Eagle Outfitters in Appendix B at the end of this book.

Required:

1. What types of securities are included in the short-term investments and the long-term investments reported on the company’s balance sheet as of the end of fiscal 2008 (statement dated January 31, 2009)? (Hint: The notes to the financial statements may be helpful for this question.)

2. What is the balance of goodwill reported by the company at January 31, 2009? What does the change in goodwill from February 2, 2008, imply about corporate acquisition activities in the 2008 fiscal year? Do the notes to the financial statements indicate any acquisition or disposition activity in either fiscal 2007 or 2008? If so, what were the activities?

Explain the difference between a short-term investment and a long-term investment.

Starbucks is a global company that provides high-quality coffee products. Assume that as part of its expansion strategy, Starbucks plans to open numerous new stores in Mexico in three years. The company has $7 million to support the expansion and has decided to invest the funds in corporate bonds until the money is needed. Assume that Starbucks purchased bonds with$7 million face value at par for cash on July 1, 2012. The bonds pay 7 percent interest each June 30 and December 31 and mature in three years. Starbucks plans to hold the bonds until maturity.

Required:

1. What accounts are affected when the bonds are purchased on July 1, 2012?

2. What accounts are affected when interest is received on December 31, 2012?

3. Should Starbucks prepare a journal entry if the fair value of the bonds decreased to $6,000,000 on December 31, 2012? Explain.

Sonic Corp. operates and franchises a chain of quick-service drive-in restaurants in most of the United States and in Mexico. Customers drive up to a canopied parking space and order food through an intercom speaker system. A carhop then delivers the food to the customer. Assume that Sonic has $15 million in cash to support future expansion and has decided to invest the funds in corporate bonds until the money is needed. Sonic purchases bonds with$15 million face value for $15.7 million cash on January 1, 2011. The bonds pay 9 percent interest annually with payments each June 30 and December 31 and mature in four years. Sonic plans to hold the bonds until maturity.

Required:

1. What accounts were affected when the bonds were purchased on January 1, 2011?

2. What accounts were affected when interest was received on June 30, 2011?

3. Should Sonic prepare a journal entry if the fair value of the bonds increased to$16,300,000 on December 31, 2011? Explain.