Question 1

An upstream sale of inventory is a sale:

Accepted Answer

A)  between subsidiaries owned by a common parent. 
B)  with the transfer of goods scheduled by contract to occur on a specified future date. 
C)  in which the goods are physically transported by boat from a subsidiary to its parent. 
D)  made by the investor to the investee. 
E)  made by the investee to the investor. 
A)  between subsidiaries owned by a common parent. 
B)  with the transfer of goods scheduled by contract to occur on a specified future date. 
C)  in which the goods are physically transported by boat from a subsidiary to its parent. 
D)  made by the investor to the investee. 
E)  made by the investee to the investor.

Question 2

Figure:
On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, 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: $\begin{array}{rrr}& \text { Net Income } & \text { Dividends } \
2010 & \$ 200,000 & \$ 50,000 \
2011 & 225,000 & 50,000 \
2012 & 250,000 & 60,000
\end{array}$ On April 1, 2012, 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, 2010?

Accepted Answer

A)  $150,000. 
B)  $172,500. 
C)  $180,000. 
D)  $157,500. 
E)  $170,000 
A)  $150,000. 
B)  $172,500. 
C)  $180,000. 
D)  $157,500. 
E)  $170,000

Question 3

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?

Accepted Answer

When an investor has the ability to exer

Question 4

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 5

On January 3, 2011, 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 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000.
-What is the gain/loss on the sale of the 15,000 shares?

Accepted Answer

A)  $0. 
B)  $10,000 gain. 
C)  $12,000 loss. 
D)  $15,000 loss. 
E)  $20,000 gain. 
A)  $0. 
B)  $10,000 gain. 
C)  $12,000 loss. 
D)  $15,000 loss. 
E)  $20,000 gain.

Question 6

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

Accepted Answer

A)  Under the equity method, the investor only recognizes its share of investee's income from continuing operations. 
B)  The extraordinary loss would reduce the value of the investment. 
C)  The extraordinary loss should increase equity in investee income. 
D)  The extraordinary loss would not appear on the income statement but would be a component of comprehensive income. 
E)  The loss would be ignored but shown in the investor's notes to the financial statements. 
A)  Under the equity method, the investor only recognizes its share of investee's income from continuing operations. 
B)  The extraordinary loss would reduce the value of the investment. 
C)  The extraordinary loss should increase equity in investee income. 
D)  The extraordinary loss would not appear on the income statement but would be a component of comprehensive income. 
E)  The loss would be ignored but shown in the investor's notes to the financial statements.

Question 7

When the fair value option is elected for application to an investment in which the investor has significant influence over the investee, how would the investor reflect the use of the fair value option in its balance sheet and in its income statement?

Accepted Answer

In the balance sheet, the Investment in

Question 8

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 2012 with regard to the Gates investment is

Accepted Answer

A)  $80,000. 
B)  $30,000. 
C)  $50,000. 
D)  $15,000. 
E)  $75,000. 
A)  $80,000. 
B)  $30,000. 
C)  $50,000. 
D)  $15,000. 
E)  $75,000.

Question 9

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 balance in the investment in Sacco account at December 31, 2010, 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, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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 2011 but should make no changes in its financial statements for 2010 and 2009. 
B)  It should prepare consolidated financial statements for 2011. 
C)  It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years. 
D)  It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009. 
E)  It must restate the financial statements for 2010 as if the equity method had been used then. 
A)  It must use the equity method for 2011 but should make no changes in its financial statements for 2010 and 2009. 
B)  It should prepare consolidated financial statements for 2011. 
C)  It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years. 
D)  It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009. 
E)  It must restate the financial statements for 2010 as if the equity method had been used then.

Question 11

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.

Question 12

Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2011, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2011, Ticker earned an income of $108,000 and paid cash dividends of $36,000. Previously in 2010, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2010. The remainder was used during the first few weeks of 2011. Additional sales were made to Atlarge in 2011; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2012.
-What was the balance in the Investment in Ticker Co. account at the end of 2011?

Accepted Answer

A)  $401,136. 
B)  $413,872. 
C)  $418,840. 
D)  $412,432. 
E)  $410,148. 
A)  $401,136. 
B)  $413,872. 
C)  $418,840. 
D)  $412,432. 
E)  $410,148.

Question 13

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, 2011?

Accepted Answer

A)  $463,500. 
B)  $467,100. 
C)  $468,000. 
D)  $468,900. 
E)  $480,000. 
A)  $463,500. 
B)  $467,100. 
C)  $468,000. 
D)  $468,900. 
E)  $480,000.

Question 14

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 amount of equity income would Anderson recognize in 2011 from its ownership interest in Barney?

Accepted Answer

A)  $12,000 income. 
B)  $12,000 loss. 
C)  $16,000 loss. 
D)  $28,000 income. 
E)  $28,000 loss. 
A)  $12,000 income. 
B)  $12,000 loss. 
C)  $16,000 loss. 
D)  $28,000 income. 
E)  $28,000 loss.

Question 15

Figure:
On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, 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: $\begin{array}{rrr}& \text { Net Income } & \text { Dividends } \
2010 & \$ 200,000 & \$ 50,000 \
2011 & 225,000 & 50,000 \
2012 & 250,000 & 60,000
\end{array}$ On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.
-What was the balance in the investment account at April 1, 2012 just before the sale of shares?

Accepted Answer

A)  $468,281. 
B)  $468,750. 
C)  $558,375. 
D)  $616,000. 
E)  $624,375. 
A)  $468,281. 
B)  $468,750. 
C)  $558,375. 
D)  $616,000. 
E)  $624,375.

Question 16

On January 1, 2011, 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 2011, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2011 for $50,000. Cranston used all of this merchandise in its operations during 2011. 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 2011 to apply the equity method to this investment.

Accepted Answer

The answer of On January 1, 2011, Spark Corp. acquired...

Question 17

On January 1, 2011, 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 2011, 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 2011. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000.
Required:
Prepare all of Jolley's journal entries for 2011 in relation to Tige Co. Assume the equity method is appropriate for use.   
 Required journal entries:

Accepted Answer

The answer of On January 1, 2011, Jolley Corp. paid...

Question 18

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 balance in the investment in Sacco account at December 31, 2011, is

Accepted Answer

A)  $119,500. 
B)  $125,500. 
C)  $116,500. 
D)  $118,000. 
E)  $100,000. 
A)  $119,500. 
B)  $125,500. 
C)  $116,500. 
D)  $118,000. 
E)  $100,000.

Question 19

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

Accepted Answer

A)  $20,000 gain. 
B)  $10,000 gain. 
C)  $1,000 gain. 
D)  $1,000 loss. 
E)  $10,000 loss. 
A)  $20,000 gain. 
B)  $10,000 gain. 
C)  $1,000 gain. 
D)  $1,000 loss. 
E)  $10,000 loss.

Question 20

Figure:
On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, 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: $\begin{array}{rrr}& \text { Net Income } & \text { Dividends } \
2010 & \$ 200,000 & \$ 50,000 \
2011 & 225,000 & 50,000 \
2012 & 250,000 & 60,000
\end{array}$ On April 1, 2012, 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 2012?

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.

An upstream sale of inventory is a sale:

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?

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

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

When the fair value option is elected for application to an investment in which the investor has significant influence over the investee, how would the investor reflect the use of the fair value option in its balance sheet and in its income statement?

On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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?

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 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

Filters

Exam 1: The Equity Method of Accounting for Investments

An upstream sale of inventory is a sale:

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?

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

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

When the fair value option is elected for application to an investment in which the investor has significant influence over the investee, how would the investor reflect the use of the fair value option in its balance sheet and in its income statement?

On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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?

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 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

Filters