Exam 1: The Equity Method of Accounting for Investments

REFERENCE: Ref.01_13 On January 1,2008,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob'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.Rob Co.reported net income of $300,000 for 2008,and paid dividends of $100,000 during that year. -How much goodwill is associated with this investment?

REFERENCE: Ref.01_13 On January 1,2008,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob'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.Rob Co.reported net income of $300,000 for 2008,and paid dividends of $100,000 during that year. -What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co.for the first year?

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 intercompany inventory profit must be deferred by Tower?

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. -On Deuce's December 31,2008 balance sheet,what balance was reported for the Investment in Wiz Co.account?

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 2008 with regard to the Gates investment is

REFERENCE: Ref.01_13 On January 1,2008,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob'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.Rob Co.reported net income of $300,000 for 2008,and paid dividends of $100,000 during that year. -What is the amount of the excess of purchase price over book value?

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 is the balance in the investment account after the sale of the 10,000 shares?

How would a change be made from the equity method to the fair value method?

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 is the gain/loss on the sale of the 10,000 shares?

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 amount allocated to goodwill at January 1,2008,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. -For 2008,what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

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 appropriate journal entry to record the sale of the 15,000 shares?

When should an investor not use the equity method for an investment of 21% in another corporation?

On January 1,2008,Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment.No allocation to goodwill or other specific account was made.Significant influence over Lennon was achieved by this acquisition.Lennon distributed a dividend of $2.50 per share during 2008 and reported net income of $670,000.What was the balance in the Investment in Lennon Co.account found in the financial records of Pacer as of December 31,2008?

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 balance in the investment account after the sale of the 15,000 shares?

On January 1,2008,Jolley Corp.paid $250,000 for 25% of the voting common stock of Tige Co.On that date,the book value of Tige was $850,000.A building with a carrying value of $160,000 was actually worth $220,000.The building had a remaining life of twenty years.Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2008,Tige sold to Jolley inventory costing $60,000,at a markup of 50% on cost.At the end of the year,Jolley still owned some of these goods with a transfer price of $33,000.Jolly uses a perpetual inventory system. Tige reported net income of $200,000 during 2008.This amount included an extraordinary gain of $35,000.Tige paid dividends totaling $40,000. Required: Prepare all of Jolley's journal entries for 2008 in relation to Tige Co. ,Assume the equity method is appropriate for use..

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

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 amount of unrealized intercompany inventory profit to be deferred on December 31,2008?