Question 1

When an investor sells shares of its investee company, which of the following statements is true?

Accepted Answer

A)  A recognized gain or loss is reported as the difference between selling price and original cost. 
B)  An recognized gain or loss is reported as the difference between selling price and original cost. 
C)  A recognized gain or loss is reported as the difference between selling price and carrying value. 
D)  An unrealized gain or loss is reported as the difference between selling price and carrying value. 
E)  Any gain or loss is reported as part of comprehensive income. 
A)  A recognized gain or loss is reported as the difference between selling price and original cost. 
B)  An recognized gain or loss is reported as the difference between selling price and original cost. 
C)  A recognized gain or loss is reported as the difference between selling price and carrying value. 
D)  An unrealized gain or loss is reported as the difference between selling price and carrying value. 
E)  Any gain or loss is reported as part of comprehensive income.

Question 2

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

Accepted Answer

The objective of the equity method is to

Question 3

What was the reported balance of Harley's Investment in Bike Co.at December 31, 2018?

Accepted Answer

A)  $2,400,000. 
B)  $2,480,000. 
C)  $2,500,000. 
D)  $2,600,000. 
E)  $2,680,000. 
A)  $2,400,000. 
B)  $2,480,000. 
C)  $2,500,000. 
D)  $2,600,000. 
E)  $2,680,000.

Question 4

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

Accepted Answer

According to the equity method, the inve

Question 5

How should an investor account for, and report, an investee's other comprehensive income (or loss)?

Accepted Answer

The investor should account for other co

Question 6

How does the use of the equity method affect the investor's financial statements?

Accepted Answer

The use of the equity method influences

Question 7

Which of the following is true regarding the change from the fair-value method to the equity method?

Accepted Answer

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

Question 8

How are dividends received from Inkblot reflected in Trycker's accounting records for 2017?

Accepted Answer

A)  Reduce investment in Inkblot by $280,000. 
B)  Increase Investment in Inkblot by $280,000. 
C)  Reduce Investment in Inkblot by $120,000. 
D)  Increase Investment in Inkblot by $120,000. 
E)  Increase Dividend Income by $120,000. 
A)  Reduce investment in Inkblot by $280,000. 
B)  Increase Investment in Inkblot by $280,000. 
C)  Reduce Investment in Inkblot by $120,000. 
D)  Increase Investment in Inkblot by $120,000. 
E)  Increase Dividend Income by $120,000.

Question 9

The equity in income of Sacco for 2017, is

Accepted Answer

A)  $ 9,000. 
B)  $13,500. 
C)  $15,000. 
D)  $ 7,500. 
E)  $50,000. 
A)  $ 9,000. 
B)  $13,500. 
C)  $15,000. 
D)  $ 7,500. 
E)  $50,000.

Question 10

What was the balance in the Investment in Ticker Co.account at the end of 2018?

Accepted Answer

A)  $401,136. 
B)  $413,872. 
C)  $418,840. 
D)  $412,432. 
E)  $410,148. 
A)  $401,136. 
B)  $413,872. 
C)  $418,840. 
D)  $412,432. 
E)  $410,148.

Question 11

On January 1, 2017, Pond Co.acquired 40% of the outstanding voting common shares of Ramp Co.for $700,000.On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively.A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000.This building had a 12-year remaining life and no salvage value.It was being depreciated on the straight-line basis.
Ramp generated net income of $300,000 in 2017 and a loss of $120,000 in 2018.In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.
During 2017, Ramp sold inventory to Pond that had an original cost of $60,000.The merchandise was sold to Pond for $96,000.Of this balance, $72,000 was resold to outsiders during 2017 and the remainder was sold during 2018.In 2018, Ramp sold inventory to Pond for $180,000.This inventory had cost only $108,000.Pond resold $120,000 of the inventory during 2018 and the rest during 2019.
Required:
For 2017 and then for 2018, calculate the equity income to be reported by Pond for external reporting purposes.

Accepted Answer

The answer of On January 1, 2017, Pond Co.acquired 40%...

Question 12

All of the following would require use of the equity method for investments except:

Accepted Answer

A)  Material intra-entity transactions. 
B)  Investor participation in the policy-making process of the investee. 
C)  Valuation at fair value. 
D)  Technological dependency. 
E)  Interchange of managerial personnel. 
A)  Material intra-entity transactions. 
B)  Investor participation in the policy-making process of the investee. 
C)  Valuation at fair value. 
D)  Technological dependency. 
E)  Interchange of managerial personnel.

Question 13

On January 2, 2017, 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 2017, the balance in the investment account was $620,000.On January 2, 2018, Hull sold 12,000 shares of Oliver stock for $12 per share.For 2018, 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 2018.

Accepted Answer

The answer of On January 2, 2017, Hull Corp.paid $516,000...

Question 14

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? (I) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
(II. Debit to Cash (for dividends received from the investee), and a Credit to Investment Income account .
(III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable.

Accepted Answer

A)  Entries I and II. 
B)  Entries II and III. 
C)  Entry I only. 
D)  Entry II only. 
E)  Entry III only. 
A)  Entries I and II. 
B)  Entries II and III. 
C)  Entry I only. 
D)  Entry II only. 
E)  Entry III only.

Question 15

What was the balance in the investment account at April 1, 2019 just before the sale of shares?

Accepted Answer

A)  $447,500. 
B)  $468,750. 
C)  $535,875. 
D)  $555,000. 
E)  $624,375. 
A)  $447,500. 
B)  $468,750. 
C)  $535,875. 
D)  $555,000. 
E)  $624,375.

Question 16

What is the balance in the investment account after the sale of the 15,000 shares?

Accepted Answer

A)  $750,000. 
B)  $760,000. 
C)  $780,000. 
D)  $790,000. 
E)  $800,000. 
A)  $750,000. 
B)  $760,000. 
C)  $780,000. 
D)  $790,000. 
E)  $800,000.

Question 17

When should an investor not use the equity method for an investment of 21% in another corporation?

Accepted Answer

When the investor do

Question 18

What is the gain/loss on the sale of the 10,000 shares?

Accepted Answer

A)  $20,000 gain. 
B)  $10,000 gain. 
C)  $1,000 gain. 
D)  $1,000 loss. 
E)  $10,000 loss. 
A)  $20,000 gain. 
B)  $10,000 gain. 
C)  $1,000 gain. 
D)  $1,000 loss. 
E)  $10,000 loss.

Question 19

What is the amount of goodwill associated with the investment?

Accepted Answer

A)  $500,000. 
B)  $200,000. 
C)  $0. 
D)  $300,000. 
E)  $400,000. 
A)  $500,000. 
B)  $200,000. 
C)  $0. 
D)  $300,000. 
E)  $400,000.

Question 20

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

Accepted Answer

A)  A cumulative effect change in accounting principle must occur. 
B)  A prospective change in accounting principle must occur. 
C)  A retrospective change in accounting principle must occur. 
D)  The investor will not receive future dividends from the investee. 
E)  Future dividends will continue to be recorded as revenue. 
A)  A cumulative effect change in accounting principle must occur. 
B)  A prospective change in accounting principle must occur. 
C)  A retrospective change in accounting principle must occur. 
D)  The investor will not receive future dividends from the investee. 
E)  Future dividends will continue to be recorded as revenue.

Exam 1: The Equity Method of Accounting for Investments

When an investor sells shares of its investee company, which of the following statements is true?

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

What was the reported balance of Harley's Investment in Bike Co.at December 31, 2018?

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

How should an investor account for, and report, an investee's other comprehensive income (or loss)?

How does the use of the equity method affect the investor's financial statements?

Which of the following is true regarding the change from the fair-value method to the equity method?

How are dividends received from Inkblot reflected in Trycker's accounting records for 2017?

The equity in income of Sacco for 2017, is

What was the balance in the Investment in Ticker Co.account at the end of 2018?

All of the following would require use of the equity method for investments except:

What was the balance in the investment account at April 1, 2019 just before the sale of shares?

What is the balance in the investment account after the sale of the 15,000 shares?

When should an investor not use the equity method for an investment of 21% in another corporation?

What is the gain/loss on the sale of the 10,000 shares?

What is the amount of goodwill associated with the investment?

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

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

Filters