Exam 1: The Equity Method of Accounting for Investments

Tower Inc.owns 30% of Yale Co.and applies the equity method.During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000.At year-end, only $24,000 of merchandise was still being held by Yale.What amount of intra-entity gross profit must be deferred by Tower?

Pursley, Inc.acquires 10% of Ritz Corporation on January 3, 2017, for $80,000 when the book value of Ritz was $800,000.Pursley adjusted the investment to its fair value of $162,500 at December 31, 2017.During 2017 Ritz reported net income of $125,000 and paid dividends of $30,000.On January 10, 2018, 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, 2018?

What is the balance in the investment account after the sale of the 10,000 shares?

On January 4, 2018, Watts Co.purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000.There was no goodwill or other cost allocation associated with the investment.Watts has significant influence over Adams.During 2018, Adams reported income of $200,000 and paid dividends of $80,000.On January 2, 2019, Watts sold 5,000 shares for $125,000.What was the balance in the investment account after the shares had been sold?

At what amount will Inkblot be reflected in Trycker's December 31, 2017 balance sheet?

Aqua Corp.purchased 30% of the common stock of Marcus Co.by paying $500,000.Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua's investment.

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

What was the reported balance of Harley's Investment in Bike Co.at December 31, 2017?

What amount of gross profit on 2017 intra-entity sales should Steven defer at December 31, 2017?

Which of the following results in an increase in the investment account when applying the equity method?

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?

On January 1, 2018, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment.No allocation to goodwill or other specific account was necessary.Significant influence over Lennon was achieved by this acquisition.Lennon distributed a dividend of $2.50 per share during 2018 and reported net income of $670,000.What was the balance in the Investment in Lennon Co.account found in the financial records of Pacer as of December 31, 2018?

You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment.How would you verify that the equity method is appropriate in this case?

What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2018?

What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2018?

What amount of gross profit on 2018 intra-entity sales should Steven defer at December 31, 2018?

What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2017?

What amount of equity income would Anderson recognize in 2018 from its ownership interest in Barney?

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

How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2018?