Exam 1: The Equity Method of Accounting for Investments

On January 1, 2013, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston's balance sheet disclosed net assets of $430,000. During 2013, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2013 for $50,000. Cranston used all of this merchandise in its operations during 2013. Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life. Required: Prepare all of Spark's journal entries for 2013 to apply the equity method to this investment.

How would a change be made from the fair value method to the equity method of accounting for investments?

On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, 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 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold?

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, 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?

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2013 from its ownership interest in Barney?

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

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?

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?

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

During January 2012, 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 2012, Wilton reported net income of $600,000. For 2013, 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, 2013?

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 excess amortization expense for Jackie Corp's investment in Rob Co. for year 2013?

What argument could be made against the equity method?

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?

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2013?

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2012?

On January 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares?

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. What is the amount of excess amortization expense for Bailey's investment in Emery for the first year?

On January 2, 2013, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2013, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2013.

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