Question 1

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

Accepted Answer

A)  Dividends paid by the investor. 
B)  Net income of the investee. 
C)  Investor's share of gross profit from intra-entity inventory sales for the current year. 
D)  Investor's share of gross profit from intra-entity inventory sales for the prior year. 
E)  Other Comprehensive Income of the investee. 
A)  Dividends paid by the investor. 
B)  Net income of the investee. 
C)  Investor's share of gross profit from intra-entity inventory sales for the current year. 
D)  Investor's share of gross profit from intra-entity inventory sales for the prior year. 
E)  Other Comprehensive Income of the investee.

Question 2

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 3

Yaro Company owns 30% of the common stock of Dew Co.and uses the equity method to account for the investment.During 2018, Dew reported income of $250,000 and paid dividends of $80,000.There is no amortization associated with the investment.During 2018, how much income should Yaro recognize related to this investment?

Accepted Answer

A)  $24,000. 
B)  $75,000. 
C)  $99,000. 
D)  $51,000. 
E)  $80,000. 
A)  $24,000. 
B)  $75,000. 
C)  $99,000. 
D)  $51,000. 
E)  $80,000.

Question 4

What is the balance in Cayman's Investment in Maya account at December 31, 2019?

Accepted Answer

A)  $488,700. 
B)  $489,600. 
C)  $492,000. 
D)  $494,400. 
E)  $514,500. 
A)  $488,700. 
B)  $489,600. 
C)  $492,000. 
D)  $494,400. 
E)  $514,500.

Question 5

Tinker Co.owns 25% of the common stock of Harbor Co.and uses the equity method to account for the investment.During 2018, Harbor reported income of $120,000 and paid dividends of $40,000.Harbor owns a building with a useful life of twenty years, which was undervalued by $80,000 at the time that Tinker bought its shares of Harbor's common stock.
Required:
Prepare a schedule to show the equity income Tinker should recognize for 2018 related to this investment.

Accepted Answer

The answer of Tinker Co.owns 25% of the common stock...

Question 6

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 7

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?

Accepted Answer

A)  The investor should change to the fair-value method to account for its investment. 
B)  The investor should suspend applying the equity method until the investee reports income. 
C)  The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. 
D)  The cumulative losses should be reported as a prior period adjustment. 
E)  The investor should report these as equity method losses in its income statement. 
A)  The investor should change to the fair-value method to account for its investment. 
B)  The investor should suspend applying the equity method until the investee reports income. 
C)  The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. 
D)  The cumulative losses should be reported as a prior period adjustment. 
E)  The investor should report these as equity method losses in its income statement.

Question 8

On January 1, 2018, Jolley Corp.paid $250,000 for 25% of the voting common stock of Tige Co.On that date, the book value of Tige was $850,000.A building with a carrying value of $160,000 was actually worth $220,000.The building had a remaining life of twenty years.Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years.
During 2018, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost.At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000.Jolly uses a perpetual inventory system.
Tige reported net income of $200,000 during 2018.This amount included a gain of $35,000.Tige paid dividends totaling $40,000.
Required:
Prepare all of Jolley's journal entries for 2018 in relation to Tige Co.Assume the equity method is appropriate for use.

Accepted Answer

Required j

Question 9

What is the Equity in Maya Income that should be reported by Cayman in 2019?

Accepted Answer

A)  $34,200. 
B)  $34,800. 
C)  $34,500. 
D)  $36,000. 
E)  $37,800. 
A)  $34,200. 
B)  $34,800. 
C)  $34,500. 
D)  $36,000. 
E)  $37,800.

Question 10

What argument could be made against the equity method?

Accepted Answer

An argument could be made against the re

Question 11

For each of the following numbered situations below, select the best letter answer concerning accounting for investments:
(A) Increase the investment account.
(B) Decrease the investment account.
(C) Increase dividend revenue.
(D) No adjustment necessary.
(1.) Income reported by 40% owned investee.
(2.) Income reported by 10% owned investee.
(3.) Loss reported by 40% owned investee.
(4.) Loss reported by 10% investee.
(5.) Change from fair-value method to equity method.Prior income exceeded dividends.
(6.) Change from fair-value method to equity method.Prior income was less than dividends.
(7.) Change from equity method to fair-value method.Prior income exceeded dividends.
(8.) Change from equity method to fair-value method.Prior income was less than dividends.
(9.) Dividends received from 40% investee.
(10.) Dividends received from 10% investee.
(11.) Purchase of additional shares of investee.
(12.) Investor's share of gross profit from intra-entity inventory sales when using the equity method.

Accepted Answer

(1) A; (2) D; (3) B;

Question 12

What is the Equity in Maya Income that should be reported by Cayman in 2018?

Accepted Answer

A)  $17,100. 
B)  $18,000. 
C)  $25,500. 
D)  $29,100. 
E)  $30,900. 
A)  $17,100. 
B)  $18,000. 
C)  $25,500. 
D)  $29,100. 
E)  $30,900.

Question 13

When applying the equity method, how is the excess of cost over book value calculated and accounted for?

Accepted Answer

A)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. 
B)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. 
C)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. 
D)  The excess is allocated to goodwill. 
E)  The excess is ignored. 
A)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. 
B)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. 
C)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. 
D)  The excess is allocated to goodwill. 
E)  The excess is ignored.

Question 14

What was the balance in the investment account at December 31, 2018?

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 15

On January 1, 2018, Spark Corp.acquired a 40% interest in Cranston Inc.for $250,000.On that date, Cranston's balance sheet disclosed net assets of $430,000.During 2018, Cranston reported net income of $100,000 and paid cash dividends of $30,000.Spark sold inventory costing $40,000 to Cranston during 2018 for $50,000.Cranston used all of this merchandise in its operations during 2018.Any excess cost over fair value is attributable to an unamortized trademark with a 20-year remaining life.
Required:
Prepare all of Spark's journal entries for 2018 to apply the equity method to this investment.

Accepted Answer

The answer of On January 1, 2018, Spark Corp.acquired a...

Question 16

Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is expected to recover over the next several months.How should Club account for the decline in value?

Accepted Answer

A)  Club should switch to the fair-value method. 
B)  No accounting because the decline in fair value is temporary. 
C)  Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement. 
D)  Club should not record its share of Chip's 2018 earnings until the decline in the fair value of the stock has been recovered. 
E)  Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet. 
A)  Club should switch to the fair-value method. 
B)  No accounting because the decline in fair value is temporary. 
C)  Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement. 
D)  Club should not record its share of Chip's 2018 earnings until the decline in the fair value of the stock has been recovered. 
E)  Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

Question 17

On January 3, 2018, 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, 2018, 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, 2018.

Accepted Answer

The answer of On January 3, 2018, Jenkins Corp.acquired 40%...

Question 18

What is the balance in the Investment in Stanley Corporation on December 31, 2018?

Accepted Answer

A)  $415,000. 
B)  $512,500. 
C)  $523,000. 
D)  $539,500. 
E)  $544,500. 
A)  $415,000. 
B)  $512,500. 
C)  $523,000. 
D)  $539,500. 
E)  $544,500.

Question 19

What amount of equity income would Atlarge have recognized in 2018 from its ownership interest in Ticker?

Accepted Answer

A)  $19,792. 
B)  $27,640. 
C)  $22,672. 
D)  $24,400. 
E)  $21,748. 
A)  $19,792. 
B)  $27,640. 
C)  $22,672. 
D)  $24,400. 
E)  $21,748.

Question 20

How much income did Harley report from Bike for 2017?

Accepted Answer

A)  $120,000. 
B)  $200,000. 
C)  $300,000. 
D)  $320,000. 
E)  $500,000. 
A)  $120,000. 
B)  $200,000. 
C)  $300,000. 
D)  $320,000. 
E)  $500,000.

Exam 1: The Equity Method of Accounting for Investments

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

What is the balance in Cayman's Investment in Maya account at December 31, 2019?

What is the amount of the excess of purchase price over book value?

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?

What is the Equity in Maya Income that should be reported by Cayman in 2019?

What argument could be made against the equity method?

What is the Equity in Maya Income that should be reported by Cayman in 2018?

When applying the equity method, how is the excess of cost over book value calculated and accounted for?

What was the balance in the investment account at December 31, 2018?

Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is expected to recover over the next several months.How should Club account for the decline in value?

What is the balance in the Investment in Stanley Corporation on December 31, 2018?

What amount of equity income would Atlarge have recognized in 2018 from its ownership interest in Ticker?

How much income did Harley report from Bike for 2017?

A: the Equity Method of Accounting for Investments

Consolidation of Financial Information

A: Consolidation of Financial Information

Consolidations - Subsequent to the Date of Acquisition

A: Consolidations - Subsequent to the Date of Acquisition

Consolidated Financial Statements and Outside Ownership

A: Consolidated Financial Statements and Outside Ownership

Consolidated Financial Statements Intra-Entity Asset Transactions

A: Consolidated Financial Statements Intra-Entity Asset Transactions

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

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

Consolidated Financial Statements - Ownership Patterns and Income Taxes

A: Consolidated Financial Statements - Ownership Patterns and Income Taxes

Segment and Interim Reporting

A: Segment and Interim Reporting

Foreign Currency Transactions and Hedging Foreign Exchange Risk

A: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial Statements

A: Translation of Foreign Currency Financial Statements

Worldwide Accounting Diversity and International Accounting Standards

A: Worldwide Accounting Diversity and International Accounting Standards

Financial Reporting and the Securities and Exchange Commission

A: Financial Reporting and the Securities and Exchange Commission

Accounting for Legal Reorganizations and Liquidations

A: Accounting for Legal Reorganizations and Liquidations

Partnerships: Formation and Operation

A: Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

A: Partnerships: Termination and Liquidation

Accounting for State and Local Governments, Part I

A: Accounting for State and Local Governments, Part I

Accounting for State and Local Governments, Part II

A: Accounting for State and Local Governments, Part II

Accounting for Not-For-Profit Entities

A: Accounting for Not-For-Profit Entities

Accounting for Estates and Trusts

A: Accounting for Estates and Trusts

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