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29 Cards in this Set

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1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?
A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
B
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, how much income should Yaro recognize related to this investment?
A. $24,000.
B. $75,000.
C. $99,000.
D. $51,000.
E. $80,000.
B
3. On January 1, 2011, 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 2011 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, 2011?
A. $2,040,500.
B. $2,212,500.
C. $2,260,500.
D. $2,171,500.
E. $2,071,500.
E
4. A company should always use the equity method to account for an investment if:
A. it has the ability to exercise significant influence over the operating policies of the investee.
B. it owns 30% of another company's stock.
C. it has a controlling interest (more than 50%) of another company's stock.
D. the investment was made primarily to earn a return on excess cash.
E. it does not have the ability to exercise significant influence over the operating policies of the investee.
A
5. 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?
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.
C
6. During January 2010, 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 2010, Wilton reported net income of $600,000. For 2011, 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, 2011?
A. $1,609,000.
B. $1,485,000.
C. $1,685,000.
D. $1,647,000.
E. $1,054,300.
A
7. On January 1, 2011, 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 2011, 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, 2011?
A. $950,800.
B. $958,000.
C. $836,000.
D. $990,100.
E. $956,400.
A
8. On January 1, 2011, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2012, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?
A. Jordan should continue to use the equity method to maintain consistency in its financial statements.
B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2011.
C. Jordan has the option of using either the equity method or the fair-value method for 2011 and future years.
D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.
E. Jordan should use the fair-value method for 2012 and future years but should not make a retrospective adjustment to the investment account.
E
9. 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 intra-entity inventory profit must be deferred by Tower?
A. $6,480.
B. $3,240.
C. $10,800.
D. $16,200.
E. $6,610.
B
10. On January 4, 2011, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2011, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2012, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?
A. $848,000.
B. $742,000.
C. $723,000.
D. $761,000.
E. $925,000.
B
13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2011, 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?
A. Club should switch to the fair-value method.
B. No accounting because the decline in fair value is temporary.
C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
D. Club should not record its share of Chip's 2011 earnings until the decline in the fair value of the stock has been recovered.
E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.
B
14. An upstream sale of inventory is a sale:
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.
E
19. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor?
1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.
A. Entries 1 and 2.
B. Entries 2 and 3.
C. Entry 1 only.
D. Entry 2 only.
E. Entry 3 only.
D
20. All of the following would require use of the equity method for investments except:
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.
C
21. All of the following statements regarding the investment account using the equity method are true except:
A. The investment is recorded at cost.
B. Dividends received are reported as revenue.
C. Net income of investee increases the investment account.
D. Dividends received reduce the investment account.
E. Amortization of fair value over cost reduces the investment account.
B
22. A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true?
A. A cumulative effect change in accounting principle must occur.
B. A prospective change in accounting principle must occur.
C. A retrospective change in accounting principle must occur.
D. The investor will not receive future dividends from the investee.
E. Future dividends will continue to be recorded as revenue.
C
23. 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?
A. A cumulative effect change in accounting principle must occur.
B. A prospective change in accounting principle must occur.
C. A retrospective change in accounting principle must occur.
D. The investor will not receive future dividends from the investee.
E. Future dividends will continue to reduce the investment account.
B
24. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?
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.
B
25. How should a permanent loss in value of an investment using the equity method be treated?
A. The equity in investee income is reduced.
B. A loss is reported the same as a loss in value of other long-term assets.
C. The investor's stockholders' equity is reduced.
D. No adjustment is necessary.
E. An extraordinary loss would be reported.
B
26. 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?
A. The investor should change to the fair-value method to account for its investment.
B. The investor should suspend applying the equity method until the investee reports income.
C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.
D. The cumulative losses should be reported as a prior period adjustment.
E. The investor should report these losses as extraordinary items.
C
27. When an investor sells shares of its investee company, which of the following statements is true?
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.
C
28. When applying the equity method, how is the excess of cost over book value accounted for?
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.
C
29. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?
A. Cost of goods sold.
B. Property, plant, & equipment.
C. Patents.
D. Goodwill.
E. Bonds payable.
D
30. Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?
A. The investee must defer upstream ending inventory profits.
B. The investee must defer upstream beginning inventory profits.
C. The investor must defer downstream ending inventory profits.
D. The investor must defer downstream beginning inventory profits.
E. The investor must defer upstream beginning inventory profits.
C
31. Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?
A. The investor and investee make reciprocal entries to defer and realize inventory profits.
B. The same adjustments are made for upstream and downstream transfers.
C. Different adjustments are made for upstream and downstream transfers.
D. No adjustments are necessary.
E. Adjustments will be made only when profits are known upon sale to outsiders.
B
83. Which of the following results in a decrease in the investment account when applying the equity method?
A. Dividends paid by the investor.
B. Net income of the investee.
C. Net income of the investor.
D. Unrealized gain on intra-entity inventory transfers for the current year.
E. Purchase of additional common stock by the investor during the current year.
D
84. Which of the following results in an increase in the investment account when applying the equity method?
A. Unrealized gain on intra-entity inventory transfers for the prior year.
B. Unrealized gain on intra-entity inventory transfers for the current year.
C. Dividends paid by the investor.
D. Dividends paid by the investee.
E. Sale of a portion of the investment during the current year.
A
85. Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?
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.
C
86. Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?
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.
D