Exam 1: The Equity Method of Accounting for Investments

REFERENCE: Ref.01_08 On January 4,2007,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values. During 2007,Bike reported net income of $500,000.For 2008,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years. -What was the reported balance of Harley's Investment in Bike Co.at December 31,2007?

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

REFERENCE: Ref.01_02 Starge Inc.owns 30% of the outstanding voting common stock of Ticker Co.and has the ability to significantly influence the investee's operations and decision making.On January 1,2008,the balance in the Investment in Ticker Co.account was $402,000.Amortization associated with this acquisition is $8,000 per year.During 2008,Ticker earned an income of $108,000 and paid cash dividends of $36,000.Previously in 2007,Ticker had sold inventory costing $28,800 to Starge for $48,000.All but 25% of this merchandise was consumed by Starge during 2007.The remainder was used during the first few weeks of 2008.Additional sales were made to Starge in 2008;inventory costing $33,600 was transferred at a price of $60,000.Of this total,40% was not consumed until 2009. -What amount of equity income would Starge have recognized in 2008 from its ownership interest in Ticker?

REFERENCE: Ref.01_07 On January 1,2007,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.On January 1,2008 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 1,2007,was $1,000,000.The book value of Cook on January 1,2008,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: On ,April 1,2009,just after its first dividend receipt,Mehan sells 10,000 shares of its investment. -What was the balance in the investment account at April 1,2009 just before the sale of shares?

REFERENCE: Ref.01_12 On January 4,2008,Bailey Corp.purchased 40% of the voting common stock of Emery Co. ,paying $3,000,000.Bailey properly accounts for this investment using the equity method.At the time of the investment,Emery's total stockholders' equity was $5,000,000.Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed: Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Emery Co.reported net income of $400,000 for 2008,and paid dividends of $200,000 during that year. -What is the amount of the excess of purchase price over book value?

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

REFERENCE: Ref.01_05 Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2007,for $105,000 when the book value of Gates was $600,000.During 2007 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2008,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 2007 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2008 Gates reported net income of $200,000 and reported dividends of $75,000. -The income reported by Dodge for 2007 with regard to the Gates investment is

REFERENCE: Ref.01_16 Renfroe,Inc.acquires 10% of Stanley Corporation on January 1,2007,for $90,000 when the book value of Stanley was $ 1,000,000.During 2007,Stanley reported net income of $215,000 and paid dividends of $50,000.On January 1,2008,Renfroe purchased an additional 30% of Stanley for $325,000.Any excess of cost over book value is attributable to goodwill with an indefinite life.During 2008,Renfroe reported net income of $320,000 and paid dividends of $50,000. -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 1,2008?

What was the balance in the Investment in Nicole Corp.account at December 31,2006?

REFERENCE: Ref.01_15 Cayman Inc.bought 30% of Maya Company on January 1,2008 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. -Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

REFERENCE: Ref.01_05 Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2007,for $105,000 when the book value of Gates was $600,000.During 2007 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2008,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 2007 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2008 Gates reported net income of $200,000 and reported dividends of $75,000. -Which adjustment would be made to change from the fair-value method to the equity method?

Which statement is true concerning unrealized profits in inventory transfers using the equity method?

On January 1,2008,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 2008 and a loss of $120,000 in 2009.In each of these two years,Ramp paid a cash dividend of $70,000 to its stockholders. During 2008,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 2008 and the remainder was sold during 2009.In 2009,Ramp sold inventory to Pond for $180,000.This inventory had cost only $108,000.Pond resold $120,000 of the inventory during 2009 and the rest during 2010. Required: For 2008 and then for 2009,calculate the equity income to be reported by Pond for external reporting purposes.

Pursley,Inc.acquires 10% of Ritz Corporation on January 3,2008,for $80,000 when the book value of Ritz was $ 800,000.During 2008 Ritz reported net income of $125,000 and paid dividends of $30,000.On January 1,2009,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 1,2009?

On January 1,2008,Bangle Company purchased 30% of the voting common stock of Sleat Corp.for $1,000,000.Any excess of cost over book value was assigned to goodwill.During 2008,Sleat paid dividends of $24,000 and reported a net loss of $140,000.What is the balance in the investment account on December 31,2008?

REFERENCE: Ref.01_15 Cayman Inc.bought 30% of Maya Company on January 1,2008 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. -Which of the following results in a decrease in the investment account when applying the equity method?

REFERENCE: Ref.01_06 Clancy Incorporated,sold $210,000 of its inventory to Reid Company during 2008 for $350,000.Reid sold $224,000 of this merchandise in 2008 with the remainder to be disposed of during 2009.Assume Clancy owns 30% of Reid and applies the equity method. -What journal entry will be recorded in 2009 to realize the intercompany profit that was deferred in 2008?

REFERENCE: Ref.01_17 Steven Company owns 40% of the outstanding voting common stock of Nicole Corp.and has the ability to significantly influence the investee's operations.On January 3,2009,the balance in the Investment in Nicole Corp.account was $503,000.Amortization associated with this acquisition is $12,000 per year.During 2009,Nicole earned net income of $120,000 and paid cash dividends of $40,000.Previously in 2008,Nicole had sold inventory costing $35,000 to Steven for $50,000.All but 25% of that inventory had been sold to outsiders by Steven during 2008.Additional sales were made to Steven in 2009 at a transfer price of $75,000 that had cost Nicole $54,000.Only 10% of the 2009 purchases had not been sold to outsiders by the end of 2009. -What amount of unrealized intercompany inventory profit should be deferred by Steven at December 31,2008?

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

REFERENCE: Ref.01_07 On January 1,2007,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.On January 1,2008 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 1,2007,was $1,000,000.The book value of Cook on January 1,2008,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: On ,April 1,2009,just after its first dividend receipt,Mehan sells 10,000 shares of its investment. -What was the balance in the investment account at December 31,2008?