Exam 1: The Equity Method of Accounting for Investments

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

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 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. -What is the amount of unrealized intercompany inventory profit to be deferred on December 31,2008?

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

REFERENCE: Ref.01_03 On January 1,2007,Deuce Inc.acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security.Wiz earned net income of $96,000 in 2007 and paid dividends of $36,000.On January 1,2008,Deuce bought an additional 10% of Wiz for $54,000.This second purchase gave Deuce the ability to significantly influence the decision making of Wiz.During 2008,Wiz earned $120,000 and paid $48,000 in dividends.As of December 31,2008,Wiz reported a net book value of $468,000.For both purchases,Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. -What amount of equity income should Deuce have reported for 2008?

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 31,2008?

On January 2,2008,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 2008,the balance in the investment account was $620,000.On January 2,2009,Hull sold 12,000 shares of Oliver stock for $12 per share.For 2009,Oliver reported 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 2009.

Wathan Inc.sold $180,000 in inventory to Miller Co.during 2008,for $270,000.Miller resold $108,000 of this merchandise in 2008 with the remainder to be disposed of during 2009. Required: Assuming Wathan owns 25% of Miller and applies the equity method,prepare the journal entry Walthan should have recorded at the end of 2008 to defer the unrealized intercompany inventory profit?

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 2008?

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 is the balance in the investment account at December 31,2007?

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

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 31,2009?

During January 2007,Wells,Inc.acquired 30% of the outstanding common stock of Wilton Co.for $1,400,000.This investment gave Wells the ability to exercise significant influence over Wilton.Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000.Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2007,Wilton reported net income of $600,000.For 2008,Wilton reported net income of $750,000.Dividends of $200,000 were paid in each of these two years.What was the reported balance of Wells' Investment in Wilson Co.at December 31,2008?

Which types of transactions,exchanges,or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

On January 3,2008,Jenkins Corp.acquired 40% of the outstanding common stock of Bolivar Co.for $1,200,000.This acquisition gave Jenkins the ability to exercise significant influence over the investee.The book value of the acquired shares was $950,000.Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet.This patent has a remaining useful life of ten years.For the year ended December 31,2008,Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins ashould report as its Investment in Bolivar Co.at 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 an increase in the investment account when applying 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 2009?

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. -How much income did Harley report from Bike for 2007?

Yaro Company owns 30% of the common stock of Dew Co.and uses the equity method to account for the investment.During 2008,Dew reported income of $250,000 and paid dividends of $80,000.There is no amortization associated with the investment.During 2008,how much income should Yaro recognize related to this investment?

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 is the gain/loss on the sale of the 15,000 shares?