Figure: On January 3, 2011, 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: $\begin{array}{lrrr}&\text { Book Value }&\text { Fair Value }\\ \text { Buildings (10-year life) } & \$ 400,000 & \$ 500,000 \\ \text { Equipment (5 -year life) } & 1,000,000 & 1,300,000 \\ \text { Franchises ( } 8 \text { - year life) } & 0 & 400,000 \end{array}$ 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 2011, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

A) $27,500. B) $20,000. C) $30,000. D) $120,000. E) $70,000. A) $27,500. B) $20,000. C) $30,000. D) $120,000. E) $70,000.

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: $\begin{array}{cccc} \text { Year } & \begin{array}{c} \text { Cost to } \\ \text { Acker } \end{array} & \begin{array}{c} \text { Transfer } \\ \text { Price } \end{array} & \begin{array}{c} \text { Amount Held by } \\ \text { Howell at Year-End } \end{array} \\ 2010 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\ 2011 & \$ 70,000 & \$ 110,000 & \$ 55,000 \end{array}$ Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the Equity in Howell Income that should be reported by Acker in 2010?

A) $10,000. B) $24,000. C) $36,000. D) $38,400. E) $40,000. A) $10,000. B) $24,000. C) $36,000. D) $38,400. E) $40,000.

Figure: Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: $\begin{array}{llcc} \text { Year } & \begin{array}{c} \text { Cost to } \\ \text { Maya } \end{array} & \begin{array}{c} \text { Transfer } \\ \text { Price } \end{array} & \begin{array}{c} \text { Amount Held by } \\ \text { Cayman at Year-End } \end{array} \\ 2011 & \$ 30,000 & \$ 45,000 & \$ 9,000 \\ 2012 & \$ 48,000 & \$ 80,000 & \$ 20,000 \end{array}$ Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. -What is the balance in Cayman's Investment in Maya account at December 31, 2012?

A) $488,700. B) $489,600. C) $492,000. D) $494,400. E) $514,500. A) $488,700. B) $489,600. C) $492,000. D) $494,400. E) $514,500.

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: $\begin{array}{cccc} \text { Year } & \begin{array}{c} \text { Cost to } \\ \text { Acker } \end{array} & \begin{array}{c} \text { Transfer } \\ \text { Price } \end{array} & \begin{array}{c} \text { Amount Held by } \\ \text { Howell at Year-End } \end{array} \\ 2010 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\ 2011 & \$ 70,000 & \$ 110,000 & \$ 55,000 \end{array}$ Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the Equity in Howell Income that should be reported by Acker in 2011?

A) $32,000. B) $41,600. C) $48,000. D) $49,600. E) $50,600. A) $32,000. B) $41,600. C) $48,000. D) $49,600. E) $50,600.

Figure: On January 4, 2011, 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: $\begin{array}{lrr} & \text { Book Value } & \text { Fair Value } \\ \text { Buildings (20-year life) } & \$ 1,000,000 & \$ 1,800,000 \\ \text { Equipment }(5 \text {-year life) } & 1,500,000 & 2,000,000 \\ \text { Franchises (10-year life) } & 0 & 700,000 \end{array}$ 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 2011, and paid dividends of $200,000 during that year. -What is the amount of the excess of purchase price over book value?

A) $(2,000,000). B) $800,000. C) $1,000,000. D) $2,000,000. E) $3,000,000. A) $(2,000,000). B) $800,000. C) $1,000,000. D) $2,000,000. E) $3,000,000.

Figure: On January 1, 2011, 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: $\begin{array}{lrr} & \underline{\text { Book Value }} & \underline{\text { Fair Value }} \\ \text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\ \text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\ \text { Franchises (10-year life) } & 0 & 500,000 \end{array}$ 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 2011, 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 2011?

A) $0. B) $30,000. C) $40,000. D) $55,000. E) $60,000. A) $0. B) $30,000. C) $40,000. D) $55,000. E) $60,000.

Figure: On January 1, 2011, 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: $\begin{array}{lrr} & \underline{\text { Book Value }} & \underline{\text { Fair Value }} \\ \text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\ \text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\ \text { Franchises (10-year life) } & 0 & 500,000 \end{array}$ 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 2011, and paid dividends of $100,000 during that year. -What is the amount of the excess of purchase price over book value?

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.

Exam 1: The Equity Method of Accounting for Investments

Figure: On January 3, 2011, 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: Book Value Fair Value Buildings (10-year life) \ 400,000 \ 500,000 Equipment (5 -year life) 1,000,000 1,300,000 Franchises ( 8 - year life) 0 400,000 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 2011, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

(Multiple Choice)

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Question 21

Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua's investment.

(Essay)

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Question 22

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Year Cost to Acker Transfer Price Amount Held by Howell at Year-End 2010 \ 55,000 \ 75,000 \ 15,000 2011 \ 70,000 \ 110,000 \ 55,000 Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the Equity in Howell Income that should be reported by Acker in 2010?

(Multiple Choice)

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Question 23

Figure: Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Year Cost to Maya Transfer Price Amount Held by Cayman at Year-End 2011 \ 30,000 \ 45,000 \ 9,000 2012 \ 48,000 \ 80,000 \ 20,000 Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. -What is the balance in Cayman's Investment in Maya account at December 31, 2012?

(Multiple Choice)

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Question 24

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 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 2011, is

(Multiple Choice)

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Question 25

The balance in the investment account at December 31, 2012, is

(Multiple Choice)

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Question 26

On January 1, 2011, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2011, 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, 2011?

(Multiple Choice)

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Question 27

Figure: Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Year Cost to Acker Transfer Price Amount Held by Howell at Year-End 2010 \ 55,000 \ 75,000 \ 15,000 2011 \ 70,000 \ 110,000 \ 55,000 Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. -What is the Equity in Howell Income that should be reported by Acker in 2011?

(Multiple Choice)

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Question 28

How does the use of the equity method affect the investor's financial statements?

(Essay)

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Question 29

Figure: On January 4, 2011, 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: Book Value Fair Value Buildings (20-year life) \ 1,000,000 \ 1,800,000 Equipment (5 -year life) 1,500,000 2,000,000 Franchises (10-year life) 0 700,000 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 2011, and paid dividends of $200,000 during that year. -What is the amount of the excess of purchase price over book value?

(Multiple Choice)

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Question 30

Figure: On January 1, 2011, 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: Buildings (15-year life) \ 1,000,000 \ 1,500,000 Equipment (5-year life) 2,500,000 3,000,000 Franchises (10-year life) 0 500,000 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 2011, 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 2011?

(Multiple Choice)

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Question 31

For each of the following numbered situations below, select the best letter answer concerning accounting for investments:

(Essay)

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Question 32

On January 4, 2010, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2010, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2010 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. -How are dividends received from Inkblot reflected in Trycker's accounting records for 2010?

(Multiple Choice)

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Question 33

What argument could be made against the equity method?

(Essay)

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Question 34

On January 4, 2011, 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 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000. -What is the appropriate journal entry to record the sale of the 10,000 shares?

(Multiple Choice)

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Question 35

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

(Multiple Choice)

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Question 36

How should an investor account for, and report, an investee's extraordinary income or loss?

(Essay)

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Question 37

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. -The income reported by Dodge for 2011 with regard to the Gates investment is

(Multiple Choice)

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Question 38

Figure: On January 1, 2011, 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: Buildings (15-year life) \ 1,000,000 \ 1,500,000 Equipment (5-year life) 2,500,000 3,000,000 Franchises (10-year life) 0 500,000 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 2011, and paid dividends of $100,000 during that year. -What is the amount of the excess of purchase price over book value?

(Multiple Choice)

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Question 39

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

(Essay)

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Question 40

Showing 21 - 40 of 119

Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua's investment.

The balance in the investment account at December 31, 2012, is

On January 1, 2011, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2011, 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, 2011?

How does the use of the equity method affect the investor's financial statements?

For each of the following numbered situations below, select the best letter answer concerning accounting for investments:

What argument could be made against the equity method?

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

How should an investor account for, and report, an investee's extraordinary income or loss?

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

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 Flo

Consolidated Financial Statements - Ownership Patterns and Income

Segment and Interim Reporting

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial Statements

Worldwide Accounting Diversity and International Standards

Financial Reporting and the Securities and Exchange Commission

Accounting for Legal Reorganizations and Liquidations

Partnerships: Formation and Operations

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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