Exam 1: The Equity Method of Accounting for Investments

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true?

Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true?

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold?

On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville'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. What is the amount of goodwill associated with the investment?

All of the following statements regarding the investment account using the equity method are true except:

On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville'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 2013, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The equity in income of Sacco for 2013, is

What argument could be made against the equity method?

Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2012, for $80,000 when the book value of Ritz was $800,000. During 2012 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2013, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2013?

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for $350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed of during 2014. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded in 2014 to realize the intra-entity profit that was deferred in 2013?

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?

What is the justification for the timing of recognition of income under the equity method?

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends 2012 \ 200,000 \ 50,000 2013 225,000 50,000 2014 250,000 60,000 On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much of Cook's net income did Mehan report for the year 2014?

During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2013?

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2014 with regard to the Gates investment is

On January 3, 2013, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2013, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2013.