Exam 1: The Equity Method of Accounting for Investments

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 Equity in Howell Income that should be reported by Acker in 2009?

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 excess amortization expense for Bailey's investment in Emery for the first year?

Why did the APB and the FASB require an investor to accrue a liability for future income taxes when using the equity method?

Jarmon Company owns twenty-three percent of the voting common stock of Kaleski Corp.Jarmon does not have the ability to exercise significant influence over the operations of Kaleski.What method should Jarmon use to account for its investment in Kaleski?

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 at the end of 2008 to defer the unrealized intercompany profits??

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?

REFERENCE: Ref.01_11 On January 4,2008,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2008,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2009,Mason sold 10,000 shares for $150,000. -What was the balance in the investment account before the shares were sold?

Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment.Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1,2008.How much income should Gaw recognize on this investment in 2008?

On January 4,2006,Watts Co.purchased 40,000 shares (40%)of the common stock of Adams Corp. ,paying $800,000.There was no goodwill or other cost allocation associated with the investment.Watts has significant influence over Adams.During 2006,Adams reported income of $200,000 and paid dividends of $80,000.On January 2,2006,Watts sold 5,000 shares for $125,000.What was the balance in the investment account after the shares had been sold?

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 balance in the investment in Sacco account at December 31,2009,is

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 balance in the investment in Sacco account at December 31,2008,is

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

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. -How much of Cook's net income did Mehan report for the year 2009?

On January 1,2006,Dermot Company purchased 15% of the voting common stock of Horne Corp.On January 1,2008,Dermot purchased 28% of Horne's voting common stock.If Dermot achieves significant influence with this new investment,how must Dermot account for the change to the equity method?

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 equity income would Steven have recognized in 2009 from its ownership interest in Nicole?

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. -How much income did Mehan report from Cook during 2008?

A company should always use the equity method to account for an investment if

After allocating cost in excess of book value,which asset or liability would not be amortized over a useful life?

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

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 Equity in Investee Income account when applying the equity method?