Question 1

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

Accepted Answer

A)  Amortizations of purchase price over book value on date of purchase. 
B)  Amortizations, since date of purchase, of purchase price over book value on date of purchase. 
C)  Extraordinary gain of the investor. 
D)  Unrealized gain on intra-entity inventory transfers for the prior year. 
E)  Sale of a portion of the investment at a loss. 
A)  Amortizations of purchase price over book value on date of purchase. 
B)  Amortizations, since date of purchase, of purchase price over book value on date of purchase. 
C)  Extraordinary gain of the investor. 
D)  Unrealized gain on intra-entity inventory transfers for the prior year. 
E)  Sale of a portion of the investment at a loss.

Question 2

Cayman Inc. bought 30% of Maya Company on January 1, 2013 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 2013 and $120,000 in 2014 while paying $40,000 in dividends each year.
What is the Equity in Maya Income that should be reported by Cayman in 2014?

Accepted Answer

A)  $34,200. 
B)  $34,800. 
C)  $34,500. 
D)  $36,000. 
E)  $37,800. 
A)  $34,200. 
B)  $34,800. 
C)  $34,500. 
D)  $36,000. 
E)  $37,800.

Question 3

On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, 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?

Accepted Answer

A)  It must use the equity method for 2013 but should make no changes in its financial statements for 2012 and 2011. 
B)  It should prepare consolidated financial statements for 2013. 
C)  It must restate the financial statements for 2012 and 2011 as if the equity method had been used for those two years. 
D)  It should record a prior period adjustment at the beginning of 2013 but should not restate the financial statements for 2012 and 2011. 
E)  It must restate the financial statements for 2012 as if the equity method had been used then. 
A)  It must use the equity method for 2013 but should make no changes in its financial statements for 2012 and 2011. 
B)  It should prepare consolidated financial statements for 2013. 
C)  It must restate the financial statements for 2012 and 2011 as if the equity method had been used for those two years. 
D)  It should record a prior period adjustment at the beginning of 2013 but should not restate the financial statements for 2012 and 2011. 
E)  It must restate the financial statements for 2012 as if the equity method had been used then.

Question 4

On January 1, 2013, 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 2013, 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, 2013?

Accepted Answer

A)  $950,800. 
B)  $958,000. 
C)  $836,000. 
D)  $990,100. 
E)  $956,400. 
A)  $950,800. 
B)  $958,000. 
C)  $836,000. 
D)  $990,100. 
E)  $956,400.

Question 5

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

Accepted Answer

The objective of the equity method is to

Question 6

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, 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, 2014, 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 2014?

Accepted Answer

A)  $61,750. 
B)  $81,250. 
C)  $72,500. 
D)  $59,250. 
E)  $75,000. 
A)  $61,750. 
B)  $81,250. 
C)  $72,500. 
D)  $59,250. 
E)  $75,000.

Question 7

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Accepted Answer

A)  Dividends paid by the investor. 
B)  Net income of the investee. 
C)  Unrealized gain on intra-entity inventory transfers for the current year. 
D)  Unrealized gain on intra-entity inventory transfers for the prior year. 
E)  Extraordinary gain of the investee. 
A)  Dividends paid by the investor. 
B)  Net income of the investee. 
C)  Unrealized gain on intra-entity inventory transfers for the current year. 
D)  Unrealized gain on intra-entity inventory transfers for the prior year. 
E)  Extraordinary gain of the investee.

Question 8

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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, 2012?

Accepted Answer

A)  $880,000. 
B)  $2,400,000. 
C)  $2,480,000. 
D)  $2,600,000. 
E)  $2,900,000. 
A)  $880,000. 
B)  $2,400,000. 
C)  $2,480,000. 
D)  $2,600,000. 
E)  $2,900,000.

Question 9

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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, 2012, is

Accepted Answer

A)  $100,000. 
B)  $112,000. 
C)  $106,000. 
D)  $107,500. 
E)  $140,000. 
A)  $100,000. 
B)  $112,000. 
C)  $106,000. 
D)  $107,500. 
E)  $140,000.

Question 10

On January 1, 2013, 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 2013, and paid dividends of $100,000 during that year.
What is the amount of the excess of purchase price over book value?

Accepted Answer

A)  $(1,000,000.) 
B)  $400,000. 
C)  $800,000. 
D)  $1,000,000. 
E)  $1,100,000. 
A)  $(1,000,000.) 
B)  $400,000. 
C)  $800,000. 
D)  $1,000,000. 
E)  $1,100,000.

Question 11

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

Accepted Answer

Idler should discontinue the u

Question 12

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

Accepted Answer

A)  material intra-entity transactions. 
B)  investor participation in the policy-making process of the investee. 
C)  valuation at fair value. 
D)  technological dependency. 
E)  significant control. 
A)  material intra-entity transactions. 
B)  investor participation in the policy-making process of the investee. 
C)  valuation at fair value. 
D)  technological dependency. 
E)  significant control.

Question 13

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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 2013, is

Accepted Answer

A)  $22,500. 
B)  $21,000. 
C)  $12,000. 
D)  $13,500. 
E)  $75,000. 
A)  $22,500. 
B)  $21,000. 
C)  $12,000. 
D)  $13,500. 
E)  $75,000.

Question 14

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, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, 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 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013.
What amount of equity income would Steven have recognized in 2013 from its ownership interest in Nicole?

Accepted Answer

[($120,000 × .4) - $

Question 15

On January 1, 2013, 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 2013, and paid dividends of $100,000 during that year.
What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2013?

Accepted Answer

A)  $2,000,000. 
B)  $2,005,000. 
C)  $2,060,000. 
D)  $2,090,000. 
E)  $2,200,000. 
A)  $2,000,000. 
B)  $2,005,000. 
C)  $2,060,000. 
D)  $2,090,000. 
E)  $2,200,000.

Question 16

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

Accepted Answer

A)  A realized gain or loss is reported as the difference between selling price and original cost. 
B)  An unrealized gain or loss is reported as the difference between selling price and original cost. 
C)  A realized gain or loss is reported as the difference between selling price and carrying value. 
D)  An unrealized gain or loss is reported as the difference between selling price and carrying value. 
E)  Any gain or loss is reported as part as comprehensive income. 
A)  A realized gain or loss is reported as the difference between selling price and original cost. 
B)  An unrealized gain or loss is reported as the difference between selling price and original cost. 
C)  A realized gain or loss is reported as the difference between selling price and carrying value. 
D)  An unrealized gain or loss is reported as the difference between selling price and carrying value. 
E)  Any gain or loss is reported as part as comprehensive income.

Question 17

On January 4, 2013, 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 2013, and paid dividends of $200,000 during that year.
How much goodwill is associated with this investment?

Accepted Answer

A)  $(500,000). 
B)  $0. 
C)  $100,000. 
D)  $200,000. 
E)  $2,000,000. 
A)  $(500,000). 
B)  $0. 
C)  $100,000. 
D)  $200,000. 
E)  $2,000,000.

Question 18

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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, 2012, is

Accepted Answer

A)  $25,000. 
B)  $13,000. 
C)  $9,000. 
D)  $16,000. 
E)  $10,000. 
A)  $25,000. 
B)  $13,000. 
C)  $9,000. 
D)  $16,000. 
E)  $10,000.

Question 19

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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 2013?

Accepted Answer

A)  $120,000. 
B)  $200,000. 
C)  $300,000. 
D)  $320,000. 
E)  $500,000. 
A)  $120,000. 
B)  $200,000. 
C)  $300,000. 
D)  $320,000. 
E)  $500,000.

Question 20

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

Accepted Answer

A)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. 
B)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. 
C)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. 
D)  The excess is allocated to goodwill. 
E)  The excess is ignored. 
A)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. 
B)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. 
C)  The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. 
D)  The excess is allocated to goodwill. 
E)  The excess is ignored.

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, 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?

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

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

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

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

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

Consolidation of Financial Information

Consolidations - Subsequent to the Date of Acquisition

Consolidated Financial Statements and Outside Ownership

Consolidated Financial Statements Intra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Consolidated Financial Statements - Ownership Patterns and Income Taxes

Segment and Interim Reporting

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial Statements

Worldwide Accounting Diversity and International Accounting Standards

Financial Reporting and the Securities and Exchange Commission

Accounting for Legal Reorganizations and Liquidations

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments

Accounting for State and Local Governments

Accounting and Reporting for Private Not-For-Profit Organizations

Accounting for Estates and Trusts

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Exam 1: The Equity Method of Accounting for Investments

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, 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?

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

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

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

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

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

Consolidation of Financial Information

Consolidations - Subsequent to the Date of Acquisition

Consolidated Financial Statements and Outside Ownership

Consolidated Financial Statements Intra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Consolidated Financial Statements - Ownership Patterns and Income Taxes

Segment and Interim Reporting

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial Statements

Worldwide Accounting Diversity and International Accounting Standards

Financial Reporting and the Securities and Exchange Commission

Accounting for Legal Reorganizations and Liquidations

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments

Accounting for State and Local Governments

Accounting and Reporting for Private Not-For-Profit Organizations

Accounting for Estates and Trusts

Filters