Question 1

What argument could be made against the equity method?

Accepted Answer

An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee's income even when it is unlikely that the investor will ever receive the entire amount in cash dividends.

Question 2

On January 3, 2020, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values.During 2020, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2020 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot.At what amount will Inkblot be reflected in Trycker's December 31, 2020 balance sheet?

Accepted Answer

A)  $2,400,000. 
B)  $2,280,000. 
C)  $2,480,000. 
D)  $2,800,000. 
E)  $7,000,000. 
A)  $2,400,000. 
B)  $2,280,000. 
C)  $2,480,000. 
D)  $2,800,000. 
E)  $7,000,000. D

Question 3

Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

Accepted Answer

When an investor has the ability to exercise significant influence over the operations of an investee, the investor should use the equity method to account for the investment. GAAP suggests several events or conditions which would indicate such influence: (1) investor representation on the investee's board of directors; (2) material transactions between investor and investee; (3) interchange of managerial personnel; (4) technological dependency between investor and investee; (5) the extent of investor ownership and the concentration of other ownership interests in the investee; and (6) investor participation in the policy-making process of the investee. All of these conditions should be examined to determine whether the investor has the ability to exercise significant influence over the investee.

Question 4

On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000.What is the balance in the investment account on December 31, 2021?

Accepted Answer

A)  $1,900,000. 
B)  $1,960,000. 
C)  $2,000,000. 
D)  $2,016,000. 
E)  $2,028,000. 
A)  $1,900,000. 
B)  $1,960,000. 
C)  $2,000,000. 
D)  $2,016,000. 
E)  $2,028,000.

Question 5

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:   On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.What was the balance in the investment account at December 31, 2021?

Accepted Answer

A)  $517,500. 
B)  $537,500. 
C)  $520,000. 
D)  $540,000. 
E)  $211,250. 
A)  $517,500. 
B)  $537,500. 
C)  $520,000. 
D)  $540,000. 
E)  $211,250.

Question 6

On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:   Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year.What is the amount of the excess of purchase price over book value?

Accepted Answer

A)  $(1,000,000.) 
B)  $400,000. 
C)  $800,000. 
D)  $1,000,000. 
E)  $1,100,000. 
A)  $(1,000,000.) 
B)  $400,000. 
C)  $800,000. 
D)  $1,000,000. 
E)  $1,100,000.

Question 7

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.Which of the following is true regarding the change from the fair-value method to the equity method?

Accepted Answer

A)  Jones must record a debit to additional paid-in capital for $200,000. 
B)  Jones must record a debit to additional paid-in capital for $15,000. 
C)  Jones must retrospectively apply the equity method to interests reported under the fair-value method. 
D)  Jones must record a debit of $200,000 to the Investment in Anderson Account. 
E)  Jones must record a credit of $15,000 to the Investment in Anderson Account. 
A)  Jones must record a debit to additional paid-in capital for $200,000. 
B)  Jones must record a debit to additional paid-in capital for $15,000. 
C)  Jones must retrospectively apply the equity method to interests reported under the fair-value method. 
D)  Jones must record a debit of $200,000 to the Investment in Anderson Account. 
E)  Jones must record a credit of $15,000 to the Investment in Anderson Account.

Question 8

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:   Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2020?

Accepted Answer

A)  $1,600. 
B)  $4,000. 
C)  $8,000. 
D)  $15,000. 
E)  $20,000. 
A)  $1,600. 
B)  $4,000. 
C)  $8,000. 
D)  $15,000. 
E)  $20,000.

Question 9

Kane Inc. owns 30% of Woodhouse Co. and applies the equity method. During the current year, Kane bought inventory costing $71,500 and then sold it to Woodhouse for $130,000. At year-end, only $30,000 of merchandise was still being held by Woodhouse. What amount of intra-entity gross profit must be deferred by Kane?

Accepted Answer

A)  $9,000. 
B)  $4,050. 
C)  $13,500. 
D)  $17,550. 
E)  $5,600. 
A)  $9,000. 
B)  $4,050. 
C)  $13,500. 
D)  $17,550. 
E)  $5,600.

Question 10

On January 4, 2021, Colton Corp. acquired 30% of the outstanding common stock of Hicks Co. for $1,300,000. This acquisition gave Colton the ability to exercise significant influence over the investee. The book value of the acquired shares was $1,175,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on Hicks's balance sheet. This copyright has a remaining useful life of ten years. For the year ended December 31, 2021, Hicks reported net income of $368,000 and paid cash dividends of $107,000.Required:Prepare a schedule to show the balance Colton should report as its Investment in Hicks Co. at December 31, 2021.

Accepted Answer

The answer of On January 4, 2021, Colton Corp. acquired...

Question 11

Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee's operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What amount of gross profit on 2020 intra-entity sales should Steven defer at December 31, 2020?

Accepted Answer

[($50,000

Question 12

On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat's total stockholders' equity was $5,000,000. Barley gathered the following information about Wheat's assets and liabilities whose book values and fair values differed:   Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year.What is the amount of the excess of purchase price over book value?

Accepted Answer

A)  $(2,000,000). 
B)  $800,000. 
C)  $1,000,000. 
D)  $2,000,000. 
E)  $3,000,000. 
A)  $(2,000,000). 
B)  $800,000. 
C)  $1,000,000. 
D)  $2,000,000. 
E)  $3,000,000.

Question 13

On January 4, 2020, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2020, the balance in the investment account was $620,000. On January 3, 2021, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2021, Oliver reported net income of $118,000 and paid dividends of $30,000.Required:(A) Prepare the journal entry to record the sale of the 12,000 shares.(B) After the sale has been recorded, what is the balance in the investment account?(C) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares?(D) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment?(E) Prepare Hull's journal entries related to the investment for the rest of 2021.

Accepted Answer

@#IMG-DLM&
C)-Before sale, Hull owns 48,000 shares

Question 14

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of gross profit on intra-entity sales must be deferred by Luffman?

Accepted Answer

A)  $0. 
B)  $8,400. 
C)  $28,000. 
D)  $52,000. 
E)  $80,000. 
A)  $0. 
B)  $8,400. 
C)  $28,000. 
D)  $52,000. 
E)  $80,000.

Question 15

On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.'s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine's investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.'s book values approximated fair values and attributed any excess cost to goodwill.What amount of equity income should Corzine have reported for 2022?

Accepted Answer

A)  $30,000. 
B)  $16,420. 
C)  $38,340. 
D)  $18,000. 
E)  $32,840. 
A)  $30,000. 
B)  $16,420. 
C)  $38,340. 
D)  $18,000. 
E)  $32,840.

Question 16

On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What is the appropriate journal entry to record the sale of the 15,000 shares?

Accepted Answer

A)  A Above. 
B)  B Above. 
C)  C Above. 
D)  D Above. 
E)  E Above. 
A)  A Above. 
B)  B Above. 
C)  C Above. 
D)  D Above. 
E)  E Above.

Question 17

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

Accepted Answer

Idler should discontinue the u

Question 18

On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville's total stockholders' equity was $8,000,000. Madison gathered the following information about Huntsville's assets and liabilities:   For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.For 2021, what is the total amount of excess amortization for Madison's 30% investment in Huntsville?

Accepted Answer

A)  $36,000. 
B)  $20,000. 
C)  $40,000. 
D)  $120,000. 
E)  $60,000. 
A)  $36,000. 
B)  $20,000. 
C)  $40,000. 
D)  $120,000. 
E)  $60,000.

Question 19

An investor should always use the equity method to account for an investment if:

Accepted Answer

A)  It has the ability to exercise significant influence over the operating policies of the investee. 
B)  It owns 30% of an investee's stock. 
C)  It has a controlling interest (more than 50%) of an investee's stock. 
D)  The investment was made primarily to earn a return on excess cash. 
E)  It does not have the ability to exercise significant influence over the operating policies of the investee. 
A)  It has the ability to exercise significant influence over the operating policies of the investee. 
B)  It owns 30% of an investee's stock. 
C)  It has a controlling interest (more than 50%) of an investee's stock. 
D)  The investment was made primarily to earn a return on excess cash. 
E)  It does not have the ability to exercise significant influence over the operating policies of the investee.

Question 20

What is the primary objective of the fair value method of accounting for an investment?

Accepted Answer

The investor possesses only a small perc

What argument could be made against the equity method?

Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000.What is the balance in the investment account on December 31, 2021?

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

An investor should always use the equity method to account for an investment if:

What is the primary objective of the fair value method of accounting for an investment?

Accounting for Estates and Trusts

Accounting and Reporting for Private Not-For-Profit Organizations

Accounting for State and Local Governments, Part II

Accounting for State and Local Governments, Part I

Partnerships: Termination and Liquidation

Partnerships: Formation and Operation

Accounting for Legal Reorganizations and Liquidations

Financial Reporting and the Securities and Exchange Commission

Worldwide Accounting Diversity and International Accounting Standards

Translation of Foreign Currency Financial Statements

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Segment and Interim Reporting

Consolidated Financial Statements - Ownership Patterns and Income Taxes

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Consolidated Financial Statements Intra-Entity Asset Transactions

Consolidated Financial Statements and Outside Ownership

Consolidations - Subsequent to the Date of Acquisition

Consolidation of Financial Information

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Exam 1: The Equity Method of Accounting for Investments

What argument could be made against the equity method?

Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000.What is the balance in the investment account on December 31, 2021?

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

An investor should always use the equity method to account for an investment if:

What is the primary objective of the fair value method of accounting for an investment?

Accounting for Estates and Trusts

Accounting and Reporting for Private Not-For-Profit Organizations

Accounting for State and Local Governments, Part II

Accounting for State and Local Governments, Part I

Partnerships: Termination and Liquidation

Partnerships: Formation and Operation

Accounting for Legal Reorganizations and Liquidations

Financial Reporting and the Securities and Exchange Commission

Worldwide Accounting Diversity and International Accounting Standards

Translation of Foreign Currency Financial Statements

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Segment and Interim Reporting

Consolidated Financial Statements - Ownership Patterns and Income Taxes

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Consolidated Financial Statements Intra-Entity Asset Transactions

Consolidated Financial Statements and Outside Ownership

Consolidations - Subsequent to the Date of Acquisition

Consolidation of Financial Information

Filters