Question 1

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 2

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 3

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 4

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 5

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?

Accepted Answer

A)  $ 6,480. 
B)  $ 3,240. 
C)  $10,800. 
D)  $16,200. 
E)  $ 6,610. 
A)  $ 6,480. 
B)  $ 3,240. 
C)  $10,800. 
D)  $16,200. 
E)  $ 6,610.

Question 6

How much goodwill is associated with this investment?

Accepted Answer

A)  $(500,000). 
B)  $ 0. 
C)  $ 100,000. 
D)  $ 200,000. 
E)  $2,000,000. 
A)  $(500,000). 
B)  $ 0. 
C)  $ 100,000. 
D)  $ 200,000. 
E)  $2,000,000.

Question 7

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 8

What is the balance in Acker's Investment in Howell account at December 31, 2017?

Accepted Answer

A)  $576,000. 
B)  $598,400. 
C)  $614,400. 
D)  $606,000. 
E)  $616,000. 
A)  $576,000. 
B)  $598,400. 
C)  $614,400. 
D)  $606,000. 
E)  $616,000.

Question 9

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

Accepted Answer

A)  Amortizations of purchase price over book value on date of purchase. 
B)  Amortizations, since date of purchase, of purchase price over book value on date of purchase. 
C)  Sale of a portion of the investment at a gain to the investor. 
D)  Investor's share of gross profit from intra-entity inventory sales for the prior year. 
E)  Sale of a portion of the investment at a loss. 
A)  Amortizations of purchase price over book value on date of purchase. 
B)  Amortizations, since date of purchase, of purchase price over book value on date of purchase. 
C)  Sale of a portion of the investment at a gain to the investor. 
D)  Investor's share of gross profit from intra-entity inventory sales for the prior year. 
E)  Sale of a portion of the investment at a loss.

Question 10

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 11

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 12

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 13

What amount of equity income would Steven have recognized in 2018 from its ownership interest in Nicole?

Accepted Answer

[($120,000 × .4) - $

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

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

Accepted Answer

A)  The investor and investee make reciprocal entries to defer and recognize inventory profits. 
B)  The same adjustments are made for upstream and downstream sales. 
C)  Different adjustments are made for upstream and downstream sales. 
D)  No adjustments are necessary. 
E)  Adjustments will be made only when profits are known upon sale to outsiders. 
A)  The investor and investee make reciprocal entries to defer and recognize inventory profits. 
B)  The same adjustments are made for upstream and downstream sales. 
C)  Different adjustments are made for upstream and downstream sales. 
D)  No adjustments are necessary. 
E)  Adjustments will be made only when profits are known upon sale to outsiders.

Question 16

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 17

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 18

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

Accepted Answer

A)  The investee must defer upstream ending inventory profits. 
B)  The investee must defer upstream beginning inventory profits. 
C)  The investor must defer downstream ending inventory profits. 
D)  The investor must defer downstream beginning inventory profits. 
E)  The investor must defer upstream beginning inventory profits. 
A)  The investee must defer upstream ending inventory profits. 
B)  The investee must defer upstream beginning inventory profits. 
C)  The investor must defer downstream ending inventory profits. 
D)  The investor must defer downstream beginning inventory profits. 
E)  The investor must defer upstream beginning inventory profits.

Question 19

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 20

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

Accepted Answer

A)  The investment is recorded at cost. 
B)  Dividends received are reported as revenue. 
C)  Net income of investee increases the investment account. 
D)  Dividends received reduce the investment account. 
E)  Amortization of fair value over cost reduces the investment account. 
A)  The investment is recorded at cost. 
B)  Dividends received are reported as revenue. 
C)  Net income of investee increases the investment account. 
D)  Dividends received reduce the investment account. 
E)  Amortization of fair value over cost reduces the investment account.

Exam 1: A: the Equity Method of Accounting for Investments

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

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?

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

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

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?

How much goodwill is associated with this investment?

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

What is the balance in Acker's Investment in Howell account at December 31, 2017?

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

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

What amount of equity income would Steven have recognized in 2018 from its ownership interest in Nicole?

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

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

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

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

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

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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