Exam 1: The Equity Method of Accounting for Investments

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. -What is the balance in Cayman's Investment in Maya account at December 31,2008?

REFERENCE: Ref 01_01 On January 3,2008,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities: SHAPE \* MERGEFORMAT For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired. -An upstream sale of inventory is a sale

Tinker Co.owns 25% of the common stock of Harbor Co.and uses the equity method to account for the investment.During 2008,Harbor reported income of $120,000 and paid dividends of $40,000.Harbor owns a building with a useful life of twenty years which is undervalued by $80,000. Required: Prepare a schedule to show the equity income Tinker should recognize for 2008 related to this investment.

How should a permanent loss in value of an investment using the equity method be treated?

REFERENCE: Ref.01_14 Acker Inc.bought 40% of Howell Co.on January 1,2008 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. -What is the balance in Acker's Investment in Howell account at December 31,2009?

A company has been using the equity method to account for its investment.The company sells shares and does not continue to have significant control.Which of the following statements is true?

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 profit should be deferred by Steven at December 31,2009?

REFERENCE: Ref.01_09 On January 1,2008,Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000,which approximated book value.During 2008,Barney paid dividends of $30,000 and reported a net loss of $70,000. -What amount of equity income would Anderson recognize in 2008 from its ownership interest in Barney?

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. )Unrealized ending inventory profits using the equity method.

REFERENCE: Ref.01_04 On January 1,2008,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2008,Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco. -The equity in income of Sacco for 2009,is

REFERENCE: Ref 01_01 On January 3,2008,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities: SHAPE \* MERGEFORMAT For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired. -Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2008,Chip's common stock had suffered a significant decline in fair value,which is expected to be recovered over the next several months.How should Club account for the decline in value?

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 31,2008?

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

On January 1,2007,Jordan Inc.acquired 30% of Nico Corp.Jordan used the equity method to account for the investment.On January 1,2008,Jordan sold ²/₃ of its investment in Nico.It no longer had the ability to exercise significant influence over the operations of Nico.How should Jordan have accounted for this change?

REFERENCE: Ref.01_10 On January 3,2008,Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation,paying $1,500,000.There was no goodwill or other cost allocation associated with the investment.Roberts has significant influence over Thomas.During 2008,Thomas reported income of $300,000 and paid dividends of $100,000.On January 4,2009,Roberts sold 15,000 shares for $800,000. -What was the balance in the investment account before the shares were sold?

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

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. -What is the Equity in Maya Income that should be reported by Cayman in 2008?

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.

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? 1)Debit to the Investment account,and a Credit to the Equity in Investee Income account. 2)Debit to Cash (for dividends received from the investee),and a Credit to Dividend Revenue. 3)Debit to Cash (for dividends received from the investee),and a Credit to the Investment account.

REFERENCE: Ref.01_04 On January 1,2008,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2008,Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco. -The equity in income of Sacco for 2008,is