Chapter 01 - The Equity Method of Accounting for Investments

Chapter 01 The Equity Method of Accounting for Investments

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Chapter 01 - The Equity Method of Accounting for Investments

1. Ga Company o ns 1!" of the common stoc# of Trace Corporation and used the fairva$ue method to account for this investment. Trace reported net income of %110&000 for '00( and paid dividends of %)0&000 on *cto+er 1& '00(. ,o much income shou$d Ga recogni-e on this investment in '00(. A. %1)&!00 B %/&000 0ividends paid1 non-significant inf$uence1 %)0&000 2 .1! C. %'!&!00 0. %3&!00 E. %!0&000
Difficulty: Easy

'. 4aro Company o ns 50" of the common stoc# of 0e Co. and uses the equity method to account for the investment. 0uring '00(& 0e reported income of %'!0&000 and paid dividends of %(0&000. There is no amorti-ation associated ith the investment. 0uring '00(& ho much income shou$d 4aro recogni-e re$ated to this investment. A. %'6&000 B %3!&000 7ignificant inf$uence e8ercised1 %'!0&000 2 3!" 9 %3!&000 C. %//&000 0. %!1&000 E. %(0&000
Difficulty: Easy

5. *n :anuary 1& '00(& ;acer Company paid %1&/'0&000 for )0&000 shares of <ennon Co.=s voting common stoc# hich represents a 6!" investment. >o a$$ocation to good i$$ or other specific account as made. 7ignificant inf$uence over <ennon as achieved +y this acquisition. <ennon distri+uted a dividend of %'.!0 per share during '00( and reported net income of %)30&000. ?hat as the +a$ance in the Investment in Lennon Co. account found in the financia$ records of ;acer as of 0ecem+er 51& '00(. A. %'&060&!00 @. %'&'1'&!00 C. %'&')0&!00 0. %'&131&!00 E %'&031&!00 1&/'0&000 A B)30&000 2 6!"C D B)0&000 2 6!"C 9 '&03'&!00

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

6. A company shou$d a$ ays use the equity method to account for an investment if A It has the a+i$ity to e8ercise significant inf$uence over the operating po$icies of the investee @. It o ns 50" of another company=s stoc# C. It has a contro$$ing interest Bmore than !0"C of another company=s stoc# 0. The investment as made primari$y to earn a return on e8cess cash E. It does not have the a+i$ity to e8ercise significant inf$uence over the operating po$icies of the investee

Difficulty: Easy

!. *n :anuary 1& '00)& 0ermot Company purchased 1!" of the voting common stoc# of ,orne Corp. *n :anuary 1& '00(& 0ermot purchased '(" of ,orne=s voting common stoc#. If 0ermot achieves significant inf$uence ith this ne investment& ho must 0ermot account for the change to the equity method. A. It must use the equity method for '00( +ut shou$d ma#e no changes in its financia$ statements for '003 and '00) @. It shou$d prepare conso$idated financia$ statements for '00( C It must restate the financia$ statements for '003 and '00) as if the equity method had +een used for those t o years 0. It shou$d record a prior period adEustment at the +eginning of '00( +ut shou$d not restate the financia$ statements for '003 and '00) E. It must restate the financia$ statements for '003 as if the equity method had +een used then

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

). 0uring :anuary '003& ?e$$s& Inc. acquired 50" of the outstanding common stoc# of ?i$ton Co. for %1&600&000. This investment gave ?e$$s the a+i$ity to e8ercise significant inf$uence over ?i$ton. ?i$ton=s assets on that date ere recorded at %)&600&000 ith $ia+i$ities of %5&000&000. Any e8cess of cost over +oo# va$ue of ?e$$s= investment as attri+uted to unrecorded patents having a remaining usefu$ $ife of ten years. In '003& ?i$ton reported net income of %)00&000. For '00(& ?i$ton reported net income of %3!0&000. 0ividends of %'00&000 ere paid in each of these t o years. ?hat as the reported +a$ance of ?e$$s= Investment in Wilson Co. at 0ecem+er 51& '00(. A %1&)0/&000 @. %1&6(!&000 C. %1&)(!&000 0. %1&)63&000 E. %1&0!6&500

Difficulty: Hard

3. *n :anuary 1& '00(& @ang$e Company purchased 50" of the voting common stoc# of 7$eat Corp. for %1&000&000. Any e8cess of cost over +oo# va$ue as assigned to good i$$. 0uring '00(& 7$eat paid dividends of %'6&000 and reported a net $oss of %160&000. ?hat is the +a$ance in the investment account on 0ecem+er 51& '00(. A %/!0&(00 @. %/!(&000 C. %(5)&000 0. %//0&100 E. %/!)&600

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

(. *n :anuary 1& '003& :ordan Inc. acquired 50" of >ico Corp. :ordan used the equity method to account for the investment. *n :anuary 1& '00(& :ordan so$d 'G5 of its investment in >ico. It no $onger had the a+i$ity to e8ercise significant inf$uence over the operations of >ico. ,o shou$d :ordan have accounted for this change. A. :ordan shou$d continue to use the equity method to maintain consistency in its financia$ statements @. :ordan shou$d restate the prior years= financia$ statements and change the +a$ance in the investment account as if the fair-va$ue method had +een used since '003 C. :ordan has the option of using either the equity method or the fair-va$ue method for '003 and future years 0. :ordan shou$d report the effect of the change from the equity to the fair-va$ue method as a retrospective change in accounting princip$e E :ordan shou$d use the fair-va$ue method for '00( and future years +ut shou$d not ma#e a retrospective adEustment to the investment account

Difficulty: Medium

/. To er Inc. o ns 50" of 4a$e Co. and app$ies the equity method. 0uring the current year& To er +ought inventory costing %))&000 and then so$d it to 4a$e for %1'0&000. At year-end& on$y %'6&000 of merchandise as sti$$ +eing he$d +y 4a$e. ?hat amount of inter-company inventory profit must +e deferred +y To er. A. %)&6(0 B %5&'60 C. %10&(00 0. %1)&'00 E. %)&)10

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

10. *n :anuary 6& '00)& ?atts Co. purchased 60&000 shares B60"C of the common stoc# of Adams Corp.& paying %(00&000. There as no good i$$ or other cost a$$ocation associated ith the investment. ?atts has significant inf$uence over Adams. 0uring '00)& Adams reported income of %'00&000 and paid dividends of %(0&000. *n :anuary '& '00)& ?atts so$d !&000 shares for %1'!&000. ?hat as the +a$ance in the investment account after the shares had +een so$d. A. %(6(&000 B %36'&000 C. %3'5&000 0. %3)1&000 E. %/'!&000

Difficulty: Hard

*n :anuary 5& '00(& Austin Corp. purchased '!" of the voting common stoc# of Gainsvi$$e Co.& paying %'&!00&000. Austin decided to use the equity method to account for this investment. At the time of the investment& Gainsvi$$e=s tota$ stoc#ho$ders= equity as %(&000&000. Austin gathered the fo$$o ing information a+out Gainsvi$$e=s assets and $ia+i$ities1

For a$$ other assets and $ia+i$ities& +oo# va$ue and fair va$ue ere equa$. Any e8cess of cost over fair va$ue as attri+uted to good i$$& hich has not +een impaired.

11. ?hat is the amount of good i$$ associated ith the investment. A. %!00&000 @. %'00&000 C. %0 ! %500&000 E. %600&000

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

1'. For '00(& hat is the tota$ amount of e8cess amorti-ation for Austin=s '!" investment in Gainsvi$$e. A. %'3&!00 @. %'0&000 C %50&000 0. %1'0&000 E. %30&000

Difficulty: Hard

15. C$u+ Co. appropriate$y uses the equity method to account for its investment in Chip Corp. As of the end of '00(& Chip=s common stoc# had suffered a significant dec$ine in fair va$ue& hich is e8pected to +e recovered over the ne8t severa$ months. ,o shou$d C$u+ account for the dec$ine in va$ue. A. C$u+ shou$d s itch to the fair-va$ue method B >o accounting +ecause the dec$ine in fair va$ue is temporary C. C$u+ shou$d decrease the +a$ance in the investment account to the current va$ue and recogni-e a $oss on the income statement 0. C$u+ shou$d not record its share of Chip=s '00( earnings unti$ the dec$ine in the fair va$ue of the stoc# has +een recovered E. C$u+ shou$d decrease the +a$ance in the investment account to the current va$ue and recogni-e an unrea$i-ed $oss on the +a$ance sheet

Difficulty: Easy

16. An upstream sa$e of inventory is a sa$e A. @et een su+sidiaries o ned +y a common parent @. ?ith the transfer of goods schedu$ed +y contract to occur on a specified future date C. In hich the goods are physica$$y transported +y +oat from a su+sidiary to its parent 0. Made +y the investor to the investee E Made +y the investee to the investor

Difficulty: Easy

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Chapter 01 - The Equity Method of Accounting for Investments

7targe Inc. o ns 50" of the outstanding voting common stoc# of Tic#er Co. and has the a+i$ity to significant$y inf$uence the investee=s operations and decision ma#ing. *n :anuary 1& '00(& the +a$ance in the Investment in Ticker Co. account as %60'&000. Amorti-ation associated ith this acquisition is %(&000 per year. 0uring '00(& Tic#er earned an income of %10(&000 and paid cash dividends of %5)&000. ;revious$y in '003& Tic#er had so$d inventory costing %'(&(00 to 7targe for %6(&000. A$$ +ut '!" of this merchandise as consumed +y 7targe during '003. The remainder as used during the first fe ee#s of '00(. Additiona$ sa$es ere made to 7targe in '00(H inventory costing %55&)00 as transferred at a price of %)0&000. *f this tota$& 60" as not consumed unti$ '00/.

1!. ?hat amount of equity income ou$d 7targe have recogni-ed in '00( from its o nership interest in Tic#er. A. %1/&3/' @. %'3&)60 C %''&)3' 0. %'6&600 E. %'1&36(

Difficulty: Hard

1). ?hat as the +a$ance in the Investment in Ticker Co. account at the end of '00(. A. %601&15) B %615&(3' C. %61(&(60 0. %61'&65' E. %610&16(

Difficulty: Hard

*n :anuary 1& '003& 0euce Inc. acquired 1!" of ?i- Co.=s outstanding common stoc# for %)'&600 and categori-ed the investment as an avai$a+$e-for-sa$e security. ?i- earned net income of %/)&000 in '003 and paid dividends of %5)&000. *n :anuary 1& '00(& 0euce +ought an additiona$ 10" of ?i- for %!6&000. This second purchase gave 0euce the a+i$ity to significant$y inf$uence the decision ma#ing of ?i-. 0uring '00(& ?i- earned %1'0&000 and paid %6(&000 in dividends. As of 0ecem+er 51& '00(& ?i- reported a net +oo# va$ue of %6)(&000. For +oth purchases& 0euce conc$uded that ?i- Co.=s +oo# va$ues appro8imated fair va$ues and attri+uted any e8cess cost to good i$$.

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Chapter 01 - The Equity Method of Accounting for Investments

13. *n 0euce=s 0ecem+er 51& '00( +a$ance sheet& hat +a$ance as reported for the Investment in Wi Co. account. A. %15/&!)0 B %165&600 C. %510&150 0. %1()&0(0 E. %1('&'!0

Difficulty: Hard

1(. ?hat amount of equity income shou$d 0euce have reported for '00(. A %50&000 @. %1)&6'0 C. %5(&560 0. %1(&000 E. %5'&(60

Difficulty: Medium

1/. In a situation here the investor e8ercises significant inf$uence over the investee& hich of the fo$$o ing entries is not actua$$y posted to the +oo#s of the investor. 1C 0e+it to the Investment account and a Credit to the Equity in Investee Income account. 'C 0e+it to Cash Bfor dividends received from the investeeC and a Credit to 0ividend Ievenue. 5C 0e+it to Cash Bfor dividends received from the investeeC and a Credit to the Investment account. A. Entries 1 and ' @. Entries ' and 5 C. Entry 1 on$y ! Entry ' on$y E. Entry 5 on$y

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

'0. A$$ of the fo$$o ing ou$d require use of the equity method for investments e8cept A. Materia$ inter-company transactions @. Investor participation in the po$icy-ma#ing process of the investee C Ja$uation at fair va$ue 0. Techno$ogica$ dependency E. 7ignificant contro$

Difficulty: Easy

'1. A$$ of the fo$$o ing statements regarding the investment account using the equity method are true e!cept A. The investment is recorded at cost B 0ividends received are reported as revenue C. >et income of investee increases the investment account 0. 0ividends received reduce the investment account E. Amorti-ation of fair va$ue over cost reduces the investment account

Difficulty: Easy

''. A company has +een using the fair-va$ue method to account for its investment. The company no has the a+i$ity to significant$y contro$ the investee and the equity method has +een deemed appropriate. ?hich of the fo$$o ing statements is true. A. A cumu$ative effect change in accounting princip$e must occur @. A prospective change in accounting princip$e must occur C A retrospective change in accounting princip$e must occur 0. The investor i$$ not receive future dividends from the investee E. Future dividends i$$ continue to +e recorded as revenue

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

'5. A company has +een using the equity method to account for its investment. The company se$$s shares and does not continue to have significant contro$. ?hich of the fo$$o ing statements is true. A. A cumu$ative effect change in accounting princip$e must occur B A prospective change in accounting princip$e must occur C. A retrospective change in accounting princip$e must occur 0. The investor i$$ not receive future dividends from the investee E. Future dividends i$$ continue to reduce the investment account

Difficulty: Medium

'6. An investee company incurs an e8traordinary $oss during the period. The investor appropriate$y app$ies the equity method. ?hich of the fo$$o ing statements is true. A. Knder the equity method& the investor on$y recogni-es its share of investee=s income from continuing operations B The e8traordinary $oss ou$d reduce the va$ue of the investment C. The e8traordinary $oss shou$d increase equity in investee income 0. The e8traordinary $oss ou$d not appear on the income statement +ut ou$d +e a component of comprehensive income E. The $oss ou$d +e ignored +ut sho n in the investor=s notes to the financia$ statements

Difficulty: Medium

'!. ,o shou$d a permanent $oss in va$ue of an investment using the equity method +e treated. A. The equity in investee income is reduced B A $oss is reported the same as a $oss in va$ue of other $ong-term assets C. The investor=s stoc#ho$ders= equity is reduced 0. >o adEustment is necessary E. An e8traordinary $oss ou$d +e reported

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

'). Knder the equity method& hen the company=s share of cumu$ative $osses equa$s its investment and the company has no o+$igation or intention to fund such additiona$ $osses& hich of the fo$$o ing statements is true. A. The investor shou$d change to the fair-va$ue method to account for its investment @. The investor shou$d suspend app$ying the equity method unti$ the investee reports income C The investor shou$d suspend app$ying the equity method and not record any equity in income of investee unti$ its share of future profits is sufficient to recover $osses that have not previous$y +een recorded 0. The cumu$ative $osses shou$d +e reported as a prior period adEustment E. The investor shou$d report these $osses as e8traordinary items

Difficulty: Hard

'3. ?hen an investor se$$s shares of its investee company& hich of the fo$$o ing statements is true. A. A rea$i-ed gain or $oss is reported as the difference +et een se$$ing price and origina$ cost @. An unrea$i-ed gain or $oss is reported as the difference +et een se$$ing price and origina$ cost C A rea$i-ed gain or $oss is reported as the difference +et een se$$ing price and carrying va$ue 0. An unrea$i-ed gain or $oss is reported as the difference +et een se$$ing price and carrying va$ue E. Any gain or $oss is reported as part as comprehensive income

Difficulty: Medium

'(. ?hen app$ying the equity method& ho is the e8cess of cost over +oo# va$ue accounted for. A. The e8cess is a$$ocated to the difference +et een fair va$ue and +oo# va$ue mu$tip$ied +y the percent o nership of current assets @. The e8cess is a$$ocated to the difference +et een fair va$ue and +oo# va$ue mu$tip$ied +y the percent o nership of tota$ assets C The e8cess is a$$ocated to the difference +et een fair va$ue and +oo# va$ue mu$tip$ied +y the percent o nership of net assets 0. The e8cess is a$$ocated to good i$$ E. The e8cess is ignored

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

'/. After a$$ocating cost in e8cess of +oo# va$ue& hich asset or $ia+i$ity ou$d not +e amorti-ed over a usefu$ $ife. A. Cost of goods so$d @. ;roperty& p$ant& L equipment C. ;atents ! Good i$$ E. @onds paya+$e

Difficulty: Easy

50. ?hich statement is true concerning unrea$i-ed profits in inventory transfers using the equity method. A. The investee must defer upstream ending inventory profits @. The investee must defer upstream +eginning inventory profits C The investor must defer do nstream ending inventory profits 0. The investor must defer do nstream +eginning inventory profits E. The investor must defer upstream +eginning inventory profits

Difficulty: Medium

51. ?hich statement is true concerning unrea$i-ed profits in inventory transfers using the equity method. A. The investor and investee ma#e reciproca$ entries to defer and rea$i-e inventory profits B The same adEustments are made for upstream and do nstream transfers C. 0ifferent adEustments are made for upstream and do nstream transfers 0. >o adEustments are necessary E. AdEustments i$$ +e made on$y hen profits are #no n upon sa$e to outsiders

Difficulty: Medium

*n :anuary 1& '00(& 0a son& Incorporated& paid %100&000 for a 50" interest in 7acco Corporation. This investee had assets ith a +oo# va$ue of %!!0&000 and $ia+i$ities of %500&000. A patent he$d +y 7acco having a +oo# va$ue of %10&000 as actua$$y orth %60&000 ith a si8 year remaining $ife. Any good i$$ associated ith this acquisition is considered to have an indefinite $ife. 0uring '00(& 7acco reported income of %!0&000 and paid dividends of %'0&000 hi$e in '00/ it reported income of %3!&000 and dividends of %50&000. Assume 0a son has the a+i$ity to significant$y inf$uence the operations of 7acco.

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Chapter 01 - The Equity Method of Accounting for Investments

5'. The amount a$$ocated to good i$$ at :anuary 1& '00( is A. %'!&000 @. %15&000 C. %/&000 ! %1)&000 E. %10&000

Difficulty: Medium

55. The equity in income of 7acco for '00( is A. %/&000 B %15&!00 C. %1!&000 0. %3&!00 E. %!0&000

Difficulty: Medium

56. The equity in income of 7acco for '00/ is A. %''&!00 B %'1&000 C. %1'&000 0. %15&!00 E. %3!&000

Difficulty: Medium

5!. The +a$ance in the investment in 7acco account at 0ecem+er 51& '00( is A. %100&000 @. %11'&000 C. %10)&000 ! %103&!00 E. 160&000

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

5). The +a$ance in the investment in 7acco account at 0ecem+er 51& '00/ is A %11/&!00 @. %1'!&!00 C. %11)&!00 0. %11(&000 E. %100&000

Difficulty: Hard

0odge& Incorporated acquires 1!" of Gates Corporation on :anuary 1& '003& for %10!&000 hen the +oo# va$ue of Gates as %)00&000. 0uring '003 Gates reported net income of %1!0&000 and paid dividends of %!0&000. *n :anuary 1& '00(& 0odge purchased an additiona$ '!" of Gates for %'00&000. Any e8cess cost over +oo# va$ue is attri+uta+$e to good i$$ ith an indefinite $ife. The fair-va$ue method as used during '003 +ut 0odge has deemed it necessary to change to the equity method after the second purchase. 0uring '00( Gates reported net income of %'00&000 and reported dividends of %3!&000.

53. The income reported +y 0odge for '003 ith regard to the Gates investment is A %3&!00 @. %''&!00 C. %1!&000 0. %100&000 E. %1!0&000

Difficulty: Medium

5(. The income reported +y 0odge for '00( ith regard to the Gates investment is A %(0&000 @. %50&000 C. %!0&000 0. %1!&000 E. %3!&000

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

5/. ?hich adEustment ou$d +e made to change from the fair-va$ue method to the equity method. A. A de+it to additiona$ paid-in capita$ for %1!&000 @. A credit to additiona$ paid-in capita$ for %1!&000 C. A de+it to retained earnings for %1!&000 ! A credit to retained earnings for %1!&000 E. A credit to a gain on investment

Difficulty: Hard

60. The +a$ance in the investment account at 0ecem+er 51& '00( is A %530&000 @. %5!!&000 C. %50!&000 0. %600&000 E. %10!&000

Difficulty: Medium

C$ancy Incorporated& so$d %'10&000 of its inventory to Ieid Company during '00( for %5!0&000. Ieid so$d %''6&000 of this merchandise in '00( ith the remainder to +e disposed of during '00/. Assume C$ancy o ns 50" of Ieid and app$ies the equity method.

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Chapter 01 - The Equity Method of Accounting for Investments

61. ?hat Eourna$ entry i$$ +e recorded at the end of '00( to defer the unrea$i-ed intercompany profits.

A. Entry A @. Entry @ C Entry C 0. Entry 0 E. >o entry is necessary

Difficulty: Hard

6'. ?hat Eourna$ entry i$$ +e recorded in '00/ to rea$i-e the inter-company profit that as deferred in '00(.

A. Entry A @. Entry @ C. Entry C ! Entry 0 E. >o entry is necessary

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

*n :anuary 1& '003& Mehan& Incorporated purchased 1!&000 shares of Coo# Company for %1!0&000 giving Mehan a 1!" o nership of Coo#. *n :anuary 1& '00( Mehan purchased an additiona$ '!&000 shares B'!"C of Coo# for %500&000. This $ast purchase gave Mehan the a+i$ity to app$y significant inf$uence over Coo#. The +oo# va$ue of Coo# on :anuary 1& '003& as %1&000&000. The +oo# va$ue of Coo# on :anuary 1& '00(& as %1&1!0&000. Any e8cess of cost over +oo# va$ue for this second transaction is assigned to a data+ase and amorti-ed over five years. Coo# reports net income and dividends as fo$$o s. These amounts are assumed to have occurred even$y throughout the years1

*n& Apri$ 1& '00/& Eust after its first dividend receipt& Mehan se$$s 10&000 shares of its investment.

65. ?hat is the +a$ance in the investment account at 0ecem+er 51& '003. A %1!0&000 @. %13'&!00 C. %1(0&000 0. %1!3&!00 E. %130&000

Difficulty: Easy

66. ,o much income did Mehan report from Coo# during '003. A. %50&000 @. %''&!00 C %3&!00 0. %0 E. %!0&000

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

6!. ,o much income did Mehan report from Coo# during '00(. A. %/0&000 @. %110&000 C. %)3&!00 ! %(3&!00 E. %3(&3!0

Difficulty: Medium

6). ?hat as the +a$ance in the investment account at 0ecem+er 51& '00(. A. %!13&!00 @. %!53&!00 C. %!'0&000 ! %!60&000 E. %'11&'!0

Difficulty: Hard

63. ?hat as the +a$ance in the investment account at Apri$ 1& '00/ Eust +efore the sa$e of shares. A. %6)(&'(1 @. %6)(&3!0 C %!!(&53! 0. %)1)&000 E. %)'6&53!

Difficulty: Hard

6(. ,o much of Coo#=s net income did Mehan report for the year '00/. A. %)1&3!0 B %(1&'!0 C. %3'&!00 0. %!/&'!0 E. %3!&000

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

*n :anuary 6& '003& ,ar$ey& Inc. acquired 60" of the outstanding common stoc# of @i#e Co. for %'&600&000. This investment gave ,ar$ey the a+i$ity to e8ercise significant inf$uence over @i#e. @i#e=s assets on that date ere recorded at %10&!00&000 ith $ia+i$ities of %6&!00&000. There ere no other differences +et een +oo# and fair va$ues. 0uring '003& @i#e reported net income of %!00&000. For '00(& @i#e reported net income of %(00&000. 0ividends of %500&000 ere paid in each of these t o years.

6/. ,o much income did ,ar$ey report from @i#e for '003. A. %1'0&000 B %'00&000 C. %500&000 0. %5'0&000 E. %!00&000

Difficulty: Medium

!0. ,o much income did ,ar$ey report from @i#e for '00(. A. %1'0&000 @. %'00&000 C. %500&000 ! %5'0&000 E. %!00&000

Difficulty: Medium

!1. ?hat as the reported +a$ance of ,ar$ey=s Investment in @i#e Co. at 0ecem+er 51& '003. A. %((0&000 @. %'&600&000 C %'&6(0&000 0. %'&)00&000 E. %'&/00&000

Difficulty: Medium

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Chapter 01 - The Equity Method of Accounting for Investments

!'. ?hat as the reported +a$ance of ,ar$ey=s Investment in @i#e Co. at 0ecem+er 51& '00(. A. %'&600&000 @. %'&6(0&000 C. %'&!00&000 0. %'&)00&000 E %'&)(0&000

Difficulty: Medium

*n :anuary 1& '00(& Anderson Company purchased 60" of the voting common stoc# of @arney Company for %'&000&000& hich appro8imated +oo# va$ue. 0uring '00(& @arney paid dividends of %50&000 and reported a net $oss of %30&000.

!5. ?hat is the +a$ance in the investment account on 0ecem+er 51& '00(. A. %1&/00&000 B %1&/)0&000 C. %'&000&000 0. %'&01)&000 E. %'&0'(&000

Difficulty: Medium

!6. ?hat amount of equity income ou$d Anderson recogni-e in '00( from its o nership interest in @arney. A. %1'&000 income @. %1'&000 $oss C. %1)&000 $oss 0. %'(&000 income E %'(&000 $oss

Difficulty: Medium

1-'1

Chapter 01 - The Equity Method of Accounting for Investments

!!. <uffman Inc. o ns 50" of @ruce Inc. and appropriate$y app$ies the equity method. 0uring the current year& @ruce +ought inventory costing %!'&000 and then so$d it to <uffman for %(0&000. At year-end& a$$ of the merchandise had +een so$d +y <uffman to other customers. ?hat amount of unrea$i-ed inter-company profit must +e deferred +y <uffman. A %0 @. %(&600 C. %'(&000 0. %!'&000 E. %(0&000

Difficulty: Easy

*n :anuary 5& '00(& Io+erts Company purchased 50" of the 100&000 shares of common stoc# of Thomas Corporation& paying %1&!00&000. There as no good i$$ or other cost a$$ocation associated ith the investment. Io+erts has significant inf$uence over Thomas. 0uring '00(& Thomas reported income of %500&000 and paid dividends of %100&000. *n :anuary 6& '00/& Io+erts so$d 1!&000 shares for %(00&000.

!). ?hat as the +a$ance in the investment account +efore the shares ere so$d. A %1&!)0&000 @. %1&)00&000 C. %1&300&000 0. %1&(00&000 E. %1&()0&000

Difficulty: Medium

!3. ?hat is the gainG$oss on the sa$e of the 1!&000 shares. A. %0 @. %10&000 gain C. %1'&000 $oss 0. %1!&000 $oss E %'0&000 gain

Difficulty: Medium

1-''

Chapter 01 - The Equity Method of Accounting for Investments

!(. ?hat is the +a$ance in the investment account after the sa$e of the 1!&000 shares. A. %3!0&000 @. %3)0&000 C %3(0&000 0. %3/0&000 E. %(00&000

Difficulty: Medium

!/. ?hat is the appropriate Eourna$ entry to record the sa$e of the 1!&000 shares.

A. A A+ove B @ A+ove C. C A+ove 0. 0 A+ove E. E A+ove

Difficulty: Hard

*n :anuary 6& '00(& Mason Co. purchased 60&000 shares B60"C of the common stoc# of ,ef$y Corp.& paying %!)0&000. At that time& the +oo# va$ue and fair va$ue of ,ef$y=s net assets as %1&600&000. The investment gave Mason the a+i$ity to e8ercise significant inf$uence over the operations of ,ef$y. 0uring '00(& ,ef$y reported income of %1!0&000 and paid dividends of %60&000. *n :anuary '& '00/& Mason so$d 10&000 shares for %1!0&000.

1-'5

Chapter 01 - The Equity Method of Accounting for Investments

)0. ?hat as the +a$ance in the investment account +efore the shares ere so$d. A. %!'0&000 @. %!66&000 C. %!)0&000 ! %)06&000 E. %)'0&000

Difficulty: Medium

)1. ?hat is the gainG$oss on the sa$e of the 10&000 shares. A. %'0&000 gain @. %10&000 gain C. %1&000 gain ! %1&000 $oss E. %10&000 $oss

Difficulty: Hard

)'. ?hat is the +a$ance in the investment account after the sa$e of the 10&000 shares. A. %5/0&000 @. %6'0&000 C %6!5&000 0. %6!6&000 E. %6)!&000

Difficulty: Hard

1-'6

Chapter 01 - The Equity Method of Accounting for Investments

)5. ?hat is the appropriate Eourna$ entry to record the sa$e of the 10&000 shares.

A. A A+ove @. @ A+ove C C A+ove 0. 0 A+ove E. E A+ove

Difficulty: Hard

*n :anuary 6& '00(& @ai$ey Corp. purchased 60" of the voting common stoc# of Emery Co.& paying %5&000&000. @ai$ey proper$y accounts for this investment using the equity method. At the time of the investment& Emery=s tota$ stoc#ho$ders= equity as %!&000&000. @ai$ey gathered the fo$$o ing information a+out Emery=s assets and $ia+i$ities hose +oo# va$ues and fair va$ues differed1

Any e8cess of cost over fair va$ue as attri+uted to good i$$& hich has not +een impaired. Emery Co. reported net income of %600&000 for '00( and paid dividends of %'00&000 during that year.

1-'!

Chapter 01 - The Equity Method of Accounting for Investments

)6. ?hat is the amount of the e8cess of purchase price over +oo# va$ue. A. %'&000&000 @. %(00&000 C %1&000&000 0. %'&000&000 E. %5&000&000

Difficulty: Medium

)!. ,o much good i$$ is associated ith this investment. A. %!00&000 @. %0 C. %100&000 ! %'00&000 E. %'&000&000

Difficulty: Medium

)). ?hat is the amount of e8cess amorti-ation e8pense for @ai$ey=s investment in Emery for the first year. A. %0 B %(6&000 C. %100&000 0. %1)0&000 E. %600&000

Difficulty: Hard

1-')

Chapter 01 - The Equity Method of Accounting for Investments

*n :anuary 1& '00(& :ac#ie Corp. purchased 50" of the voting common stoc# of Io+ Co.& paying %'&000&000. :ac#ie proper$y accounts for this investment using the equity method. At the time of the investment& Io+=s tota$ stoc#ho$ders= equity as %5&000&000. :ac#ie gathered the fo$$o ing information a+out Io+=s assets and $ia+i$ities hose +oo# va$ues and fair va$ues differed1

Any e8cess of cost over fair va$ue as attri+uted to good i$$& hich has not +een impaired. Io+ Co. reported net income of %500&000 for '00( and paid dividends of %100&000 during that year.

)3. ?hat is the amount of the e8cess of purchase price over +oo# va$ue. A. %1&000&000 @. %600&000 C. %(00&000 0. %1&000&000 E %1&100&000

Difficulty: Medium

)(. ,o much good i$$ is associated ith this investment. A. %!00&000 @. %0 C %)!0&000 0. %1&000&000 E. %'&000&000

Difficulty: Medium

1-'3

Chapter 01 - The Equity Method of Accounting for Investments

)/. ?hat is the amount of e8cess amorti-ation e8pense for :ac#ie Corp=s investment in Io+ Co. for the first year. A. %0 @. %50&000 C. %60&000 ! %!!&000 E. %)0&000

Difficulty: Hard

30. ?hat is the +a$ance in :ac#ie Corp=s Investment in "o# Co. account at 0ecem+er 51& '00(. A. %'&000&000 B %'&00!&000 C. %'&0)0&000 0. %'&0/0&000 E. %'&'00&000

Difficulty: Hard

Ac#er Inc. +ought 60" of ,o e$$ Co. on :anuary 1& '00( for %!3)&000. The equity method of accounting as used. The +oo# va$ue and fair va$ue of the net assets of ,o e$$ on that date ere %1&660&000. Ac#er +egan supp$ying inventory to ,o e$$ as fo$$o s1

,o e$$ reported net income of %100&000 in '00( and %1'0&000 in '00/ hi$e paying %60&000 in dividends each year. Iefer To1 01-31

1-'(

Chapter 01 - The Equity Method of Accounting for Investments

31. ?hat is the amount of unrea$i-ed inter-company inventory profit to +e deferred on 0ecem+er 51& '00(. A %1&)00 @. %6&000 C. %(&000 0. %1!&000 E. %'0&000

Difficulty: Medium

3'. ?hat is the amount of unrea$i-ed inter-company inventory profit to +e deferred on 0ecem+er 51& '00/. A. %1&)00 B %(&000 C. %1!&000 0. %'0&000 E. %60&000

Difficulty: Medium

35. ?hat is the Equity in ,o e$$ Income that shou$d +e reported +y Ac#er in '00(. A. %10&000 @. %'6&000 C. %5)&000 ! %5(&600 E. %60&000

Difficulty: Medium

36. ?hat is the +a$ance in Ac#er=s Investment in ,o e$$ account at 0ecem+er 51& '00(. A. %!3)&000 B %!/(&600 C. %)06&600 0. %)0)&000 E. %)1)&000

Difficulty: Medium

1-'/

Chapter 01 - The Equity Method of Accounting for Investments

3!. ?hat is the Equity in ,o e$$ Income that shou$d +e reported +y Ac#er in '00/. A. %5'&000 B %61&)00 C. %6(&000 0. %6/&)00 E. %!0&)00

Difficulty: Hard

3). ?hat is the +a$ance in Ac#er=s Investment in ,o e$$ account at 0ecem+er 51& '00/. A %)'6&000 @. %)5)&000 C. %)6)&000 0. %)!)&000 E. %)))&000

Difficulty: Hard

Cayman Inc. +ought 50" of Maya Company on :anuary 1& '00( for %6!0&000. The equity method of accounting as used. The +oo# va$ue and fair va$ue of the net assets of Maya on that date ere %1&!00&000. Maya +egan supp$ying inventory to Cayman as fo$$o s1

Maya reported net income of %100&000 in '00( and %1'0&000 in '00/ hi$e paying %60&000 in dividends each year.

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Chapter 01 - The Equity Method of Accounting for Investments

33. ?hat is the amount of unrea$i-ed inter-company inventory profit to +e deferred on 0ecem+er 51& '00(. A %/00 @. %5&000 C. %6&!00 0. %)&000 E. %/&000

Difficulty: Medium

3(. ?hat is the amount of unrea$i-ed inventory gain to +e deferred on 0ecem+er 51& '00/. A. %1&!00 B %'&600 C. %5&)00 0. %6&000 E. %(&000

Difficulty: Medium

3/. ?hat is the Equity in Maya Income that shou$d +e reported +y Cayman in '00(. A. %13&100 @. %1(&000 C. %'!&!00 ! %'/&100 E. %50&/00

Difficulty: Medium

(0. ?hat is the +a$ance in Cayman=s Investment in Maya account at 0ecem+er 51& '00(. A. %6)5&!00 B %6)3&100 C. %6)(&000 0. %6)(&/00 E. %6(0&000

Difficulty: Medium

1-51

Chapter 01 - The Equity Method of Accounting for Investments

(1. ?hat is the Equity in Maya Income that shou$d +e reported +y Cayman in '00/. A. %56&'00 @. %56&(00 C %56&!00 0. %5)&000 E. %53&(00

Difficulty: Hard

('. ?hat is the +a$ance in Cayman=s Investment in Maya account at 0ecem+er 51& '00/. A. %6((&300 B %6(/&)00 C. %6/'&000 0. %6/6&600 E. %!16&!00

Difficulty: Hard

(5. ?hich of the fo$$o ing resu$ts in a decrease in the investment account hen app$ying the equity method. A. 0ividends paid +y the investor @. >et income of the investee C. >et income of the investor ! Knrea$i-ed gain on inter-company inventory transfers for the current year E. ;urchase of additiona$ common stoc# +y the investor during the current year

Difficulty: Medium

(6. ?hich of the fo$$o ing resu$ts in an increase in the investment account hen app$ying the equity method. A Knrea$i-ed gain on inter-company inventory transfers for the prior year @. Knrea$i-ed gain on inter-company inventory transfers for the current year C. 0ividends paid +y the investor 0. 0ividends paid +y the investee E. 7a$e of a portion of the investment during the current year

Difficulty: Easy

1-5'

Chapter 01 - The Equity Method of Accounting for Investments

(!. ?hich of the fo$$o ing resu$ts in a decrease in the Equity in Investee Income account hen app$ying the equity method. A. 0ividends paid +y the investor @. >et income of the investee C Knrea$i-ed gain on inter-company inventory transfers for the current year 0. Knrea$i-ed gain on inter-company inventory transfers for the prior year E. E8traordinary gain of the investee

Difficulty: Easy

(). ?hich of the fo$$o ing resu$ts in an increase in the Equity in Investee Income account hen app$ying the equity method. A. Amorti-ations of purchase price over +oo# va$ue on date of purchase @. Amorti-ations of purchase price over +oo# va$ue on date of purchase for the prior year C. E8traordinary gain of the investor ! Knrea$i-ed gain on inter-company inventory transfers for the prior year E. 7a$e of a portion of the investment at a $oss

Difficulty: Medium

Ienfroe& Inc. acquires 10" of 7tan$ey Corporation on :anuary 1& '003& for %/0&000 hen the +oo# va$ue of 7tan$ey as %1&000&000. 0uring '003& 7tan$ey reported net income of %'1!&000 and paid dividends of %!0&000. *n :anuary 1& '00(& Ienfroe purchased an additiona$ 50" of 7tan$ey for %5'!&000. Any e8cess of cost over +oo# va$ue is attri+uta+$e to good i$$ ith an indefinite $ife. 0uring '00(& Ienfroe reported net income of %5'0&000 and paid dividends of %!0&000.

(3. ,o much is the adEustment to the Investment in 7tan$ey Corporation for the change from the fair-va$ue method to the equity method on :anuary 1& '00(. A A de+it of %1)&!00 @. A de+it of %'1&!00 C. A de+it of %/0&000 0. A de+it of %1)!&000 E. There is no adEustment

Difficulty: Easy

1-55

Chapter 01 - The Equity Method of Accounting for Investments

((. ?hat is the +a$ance in the Investment in 7tan$ey Corporation on 0ecem+er 51& '00(. A. %61!&000 @. %!1'&!00 C. %!'5&000 ! %!5/&!00 E. %!66&!00

Difficulty: Medium

Essay Questions (/. For each of the fo$$o ing num+ered situations +e$o & se$ect the +est $etter ans er concerning accounting for investments1 BA.C Increase the investment account. [email protected] 0ecrease the investment account. BC.C Increase dividend revenue. B0.C >o adEustment necessary. B1.C Income reported +y 60" o ned investee. B'.C Income reported +y 10" o ned investee. B5.C <oss reported +y 60" o ned investee. B6.C <oss reported +y 10" investee. B!.C Change from fair-va$ue method to equity method. ;rior income e8ceeded dividends. B).C Change from fair-va$ue method to equity method. ;rior income as $ess than dividends. B3.C Change from equity method to fair-va$ue method. ;rior income e8ceeded dividends. B(.C Change from equity method to fair-va$ue method. ;rior income as $ess than dividends. B/.C 0ividends received from 60" investee. B10.C 0ividends received from 10" investee. B11.C ;urchase of additiona$ shares of investee. B1'.C Knrea$i-ed ending inventory profits using the equity method. B1C AH B'C 0H B5C @H B6C 0H B!C AH B)C @H B3C 0H B(C 0H B/C @H B10C CH B11C AH B1'C @

Difficulty: Medium

1-56

Chapter 01 - The Equity Method of Accounting for Investments

/0. :armon Company o ns t enty-three percent of the voting common stoc# of Ma$es#i Corp. :armon does not have the a+i$ity to e8ercise significant inf$uence over the operations of Ma$es#i. ?hat method shou$d :armon use to account for its investment in Ma$es#i. The fair-va$ue method shou$d +e used. Genera$$y& o nership of more than t enty percent of the voting common stoc# ou$d +e presumed to carry significant inf$uence and ou$d require use of the equity method. The equity method is not appropriate in this case +ecause of the $ac# of the a+i$ity to e8ercise significant inf$uence.

Difficulty: Easy

/1. Id$er Co. has an investment in Co $ Corp. for hich it uses the equity method. Co $ has suffered $arge $osses for severa$ years and the +a$ance in the investment account has +een reduced to -ero. ,o shou$d Id$er account for this investment. Id$er shou$d discontinue the use of the equity met$od. The investment ou$d have a ero #alance unti$ investee profits e$iminate unrea$i-ed $osses.

Difficulty: Medium

/'. ?hich types of transactions& e8changes or events ou$d indicate that an investor has the a+i$ity to e8ercise significant inf$uence over the operations of an investee. ?hen an investor has the a+i$ity to e8ercise significant inf$uence over the operations of an investee& the investor shou$d use the equity method to account for the investment. The Accounting ;rincip$es @oard suggested severa$ events or conditions hich ou$d indicate such inf$uence1 B1C investor representation on the investee=s +oard of directorsH B'C materia$ transactions +et een the companiesH B5C interchange of manageria$ personne$H B6C techno$ogica$ dependency +et een the companiesH and B!C the e8tent of investor o nership and the concentration of other o nership interests in the investeeH B)C investor participation in the po$icy-ma#ing process of the investee. A$$ of these conditions shou$d +e e8amined to determine hether the investor has the a+i$ity to e8ercise significant inf$uence over the investee.

Difficulty: Medium

1-5!

Chapter 01 - The Equity Method of Accounting for Investments

/5. 4ou are auditing a company that o ns t enty percent of the voting common stoc# of another corporation and uses the equity method to account for the investment. ,o ou$d you verify that the equity method is appropriate in this case. In order to verify that the equity method is appropriate& the auditor shou$d determine hether the investor is a+$e to e8ercise significant inf$uence over the operations of the investee. The a+i$ity to inf$uence the investee=s operations is the most important criterion for adopting the equity method. The auditor shou$d $oo# for such evidence of significant inf$uence as B1C frequent or materia$ inter-company transactionsH B'C e8change of manageria$ personne$H B5C techno$ogica$ interdependencyH and B6C investor participation in the decision-ma#ing process of the investee.

Difficulty: Medium

/6. ,o does the use of the equity method affect the investor=s financia$ statements. The use of the equity method inf$uences the investor=s income statement and +a$ance sheet. *n the income statement& the investor=s tota$ revenues i$$ +e increased +y its share of the investee=s earnings reduced +y any amorti-ation of cost in e8cess of fair va$ue of deprecia+$e net assets. *n the +a$ance sheet& the investor=s tota$ assets i$$ inc$ude the investment account. The +a$ance of the investment account is increased +y the investor=s share of the investee=s income and decreased +y investee $osses and dividends paid and amorti-ation of deprecia+$e a$$ocations. The investor=s retained earnings are inf$uenced +y the investee=s income or $oss reported on the investor=s income statement.

Difficulty: Medium

/!. ?hat is the primary o+Eective of the equity method of accounting for an investment. The o+Eective of the equity method is to ref$ect the specia$ re$ationship +et een investor and investee. The equity method is used hen the investor ho$ds a re$ative$y $arge share of the investee& +ut not a contro$$ing interest. The $arge o nership percentage indicates that the investor has the a+i$ity to inf$uence the decision-ma#ing processes of the investee. Kse of the fair-va$ue method ou$d not ref$ect the re$ationship +et een the t o parties.

Difficulty: Medium

1-5)

Chapter 01 - The Equity Method of Accounting for Investments

/). ?hat is the Eustification for the timing of recognition of income under the equity method. According to the equity method& the investor shou$d recogni-e its share of the investee=s income in the same period in hich it is earned +y the investee. The A;@ argued that the equity method provided the +est app$ication of accrua$ accounting hen the investor cou$d e8ercise significant inf$uence over the investee.

Difficulty: Medium

/3. ?hat argument cou$d +e made against the equity method. An argument cou$d +e made against the recognition of income under the equity method. The investor is required to recogni-e its share of the investee=s income even hen it is un$i#e$y that the investor i$$ ever receive a$$ of this amount in cash dividends.

Difficulty: Medium

/(. ,o

ou$d a change +e made from the equity method to the fair va$ue method.

A change to the fair va$ue method is appropriate hen the investor can no $onger e8ercise significant inf$uence over the operations of the investee. >o retrospective adEustment of previous years= financia$ statements or the +a$ance in the investment account is required. The +a$ance in the investment account at the time of the change ou$d +e treated as the cost of the investment.

Difficulty: Hard

1-53

Chapter 01 - The Equity Method of Accounting for Investments

//. ?hy did the A;@ and the FA7@ require an investor to accrue a $ia+i$ity for future income ta8es hen using the equity method. The A;@ and the FA7@ required an investor to accrue a $ia+i$ity for income ta8es on the amount of the investor=s equity in the investee=s income& even though it is possi+$e that the investor i$$ not receive some of that amount for years& if ever. Iecogni-ing an income ta8 $ia+i$ity for the entire amount of potentia$ income ta8es is +ased on the matching princip$e. The amount of income ta8 e8pense is recogni-ed in the same period as the re$ated revenues regard$ess of hen the ta8 i$$ +e paid.

Difficulty: Medium

100. ?hen shou$d an investor not use the equity method for an investment of '1" in another corporation. ?hen the investor does not have significant inf$uence ith regard to the investee.

Difficulty: Easy

101. ?hat is the primary o+Eective of the fair va$ue method of accounting for an investment. The investor possesses on$y a sma$$ percentage of an investee and cannot e8pect to have a significant impact on the operations or decision ma#ing of the investee. Therefore& the shares are +ought in anticipation of cash dividends or in appreciation of stoc# mar#et va$ues.

Difficulty: Medium

10'. ,o

ou$d a change +e made from the fair va$ue method to the equity method.

According to A;@ 1(& the investment account and retained earnings of the investor shou$d +e adEusted to retrospective$y restate resu$ts of operations of prior periods.

Difficulty: Medium

1-5(

Chapter 01 - The Equity Method of Accounting for Investments

105. Char$ie Co. o ns 50" of the voting common stoc# of Turf 7ervices Inc. Char$ie uses the equity method to account for its investment. *n :anuary 1& '00(& the +a$ance in the investment account as %)'6&000. 0uring '00(& Turf 7ervices reported net income of %1'0&000 and paid dividends of %50&000. ?hat is the +a$ance in the investment account as of 0ecem+er 51& '00(.

Difficulty: Medium

106. Tin#er Co. o ns '!" of the common stoc# of ,ar+or Co. and uses the equity method to account for the investment. 0uring '00(& ,ar+or reported income of %1'0&000 and paid dividends of %60&000. ,ar+or o ns a +ui$ding ith a usefu$ $ife of t enty years hich is underva$ued +y %(0&000. "equired: ;repare a schedu$e to sho the equity income Tin#er shou$d recogni-e for '00( re$ated to this investment.

Difficulty: Medium

1-5/

Chapter 01 - The Equity Method of Accounting for Investments

10!. Aqua Corp. purchased 50" of the common stoc# of Marcus Co. +y paying %!00&000. *f this amount& %!0&000 is associated ith good i$$. "equired: ;repare the Eourna$ entry to record Aqua=s investment.

Difficulty: Medium

10). *n :anuary '& '00(& ,einreich Co. paid %!00&000 for '!" of the voting common stoc# of :ones Corp. At the time of the investment& :ones had net assets ith a +oo# va$ue and fair va$ue of %1&(00&000. 0uring '00(& :ones incurred a net $oss of %)0&000 and paid dividends of %100&000. Any e8cess cost over +oo# va$ue is attri+uta+$e to good i$$ ith an indefinite $ife. "equired: 1C ;repare a schedu$e to sho the amount of good i$$ from ,einrich=s investment in :ones. 'C ;repare a schedu$e to sho the +a$ance in ,einreich=s investment account at 0ecem+er 51& '00(.

Difficulty: Hard

1-60

Chapter 01 - The Equity Method of Accounting for Investments

103. *n :anuary 5& '00(& :en#ins Corp. acquired 60" of the outstanding common stoc# of @o$ivar Co. for %1&'00&000. This acquisition gave :en#ins the a+i$ity to e8ercise significant inf$uence over the investee. The +oo# va$ue of the acquired shares as %/!0&000. Any e8cess cost over the under$ying +oo# va$ue as assigned to a patent that as underva$ued on @o$ivar=s +a$ance sheet. This patent has a remaining usefu$ $ife of ten years. For the year ended 0ecem+er 51& '00(& @o$ivar reported net income of %51'&000 and paid cash dividends of %/)&000. "equired: ;repare a schedu$e to sho the +a$ance :en#ins a shou$d report as its Investment in @o$ivar Co. at 0ecem+er 51& '00(.

Difficulty: Hard

1-61

Chapter 01 - The Equity Method of Accounting for Investments

10(. *n :anuary 1& '00(& 7par# Corp. acquired a 60" interest in Cranston Inc. for %'!0&000. *n that date& Cranston=s +a$ance sheet disc$osed net assets of %650&000. 0uring '00(& Cranston reported net income of %100&000 and paid cash dividends of %50&000. 7par# so$d inventory costing %60&000 to Cranston during '00( for %!0&000. Cranston used a$$ of this merchandise in its operations during '00(. Any e8cess cost over fair va$ue is attri+uta+$e to an unamorti-ed trademar# ith a '0 year remaining $ife. "equired: ;repare a$$ of 7par#=s Eourna$ entries for '00( to app$y the equity method to this investment.

Difficulty: Hard

1-6'

Chapter 01 - The Equity Method of Accounting for Investments

10/. ?athan Inc. so$d %1(0&000 in inventory to Mi$$er Co. during '00(& for %'30&000. Mi$$er reso$d %10(&000 of this merchandise in '00( ith the remainder to +e disposed of during '00/. "equired: Assuming ?athan o ns '!" of Mi$$er and app$ies the equity method& prepare the Eourna$ entry ?a$than shou$d have recorded at the end of '00( to defer the unrea$i-ed intercompany inventory profit.

Difficulty: Hard

110. :ager Inc. ho$ds 50" of the outstanding voting shares of Minson Co. and appropriate$y app$ies the equity method of accounting. Amorti-ation associated ith this investment equa$s %11&000 per year. For '00(& Minson reported earnings of %100&000 and paid cash dividends of %60&000. 0uring '00(& Minson acquired inventory for %)'&600& hich as then so$d to :ager for %/)&000. At the end of '00(& :ager sti$$ he$d some of this inventory at its transfer price of %!0&000. "equired: 0etermine the amount of Equity in Investee Income :ager shou$d have reported for '00(.

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

111. *n :anuary '& '00(& ,u$$ Corp. paid %!1)&000 for '6" B6(&000 sharesC of the outstanding common stoc# of *$iver Co. ,u$$ used the equity method to account for the investment. At the end of '00(& the +a$ance in the investment account as %)'0&000. *n :anuary '& '00/& ,u$$ so$d 1'&000 shares of *$iver stoc# for %1' per share. For '00/& *$iver reported income of %11(&000 and paid dividends of %50&000. "equired: BA.C ;repare the Eourna$ entry to record the sa$e of the 1'&000 shares. [email protected] After the sa$e has +een recorded& hat is the +a$ance in the investment account. BC.C ?hat percentage of *$iver Co. stoc# does ,u$$ o n after se$$ing the 1'&000 shares. B0.C @ecause of the sa$e of stoc#& ,u$$ can no $onger e8ercise significant inf$uence over the operations of *$iver. ?hat effect i$$ this have on ,u$$=s accounting for the investment. BE.C ;repare ,u$$=s Eourna$ entries re$ated to the investment for the rest of '00/.

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Chapter 01 - The Equity Method of Accounting for Investments

Difficulty: Hard

1-6!

Chapter 01 - The Equity Method of Accounting for Investments

11'. *n :anuary 1& '00(& :o$$ey Corp. paid %'!0&000 for '!" of the voting common stoc# of Tige Co. *n that date& the +oo# va$ue of Tige as %(!0&000. A +ui$ding ith a carrying va$ue of %1)0&000 as actua$$y orth %''0&000. The +ui$ding had a remaining $ife of t enty years. Tige o ned a trademar# va$ued at %/0&000 over cost that as to +e amorti-ed over '0 years. 0uring '00(& Tige so$d to :o$$ey inventory costing %)0&000& at a mar#up of !0" on cost. At the end of the year& :o$$ey sti$$ o ned some of these goods ith a transfer price of %55&000. :o$$y uses a perpetua$ inventory system. Tige reported net income of %'00&000 during '00(. This amount inc$uded an e8traordinary gain of %5!&000. Tige paid dividends tota$ing %60&000. "equired: ;repare a$$ of :o$$ey=s Eourna$ entries for '00( in re$ation to Tige Co.& Assume the equity method is appropriate for use.

1-6)

Chapter 01 - The Equity Method of Accounting for Investments

Iequired Eourna$ entries1

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Chapter 01 - The Equity Method of Accounting for Investments

Difficulty: Hard

115. *n :anuary 1& '00(& ;ond Co. acquired 60" of the outstanding voting common shares of Iamp Co. for %300&000. *n that date& Iamp reported assets and $ia+i$ities ith +oo# va$ues of %'.' mi$$ion and %300&000& respective$y. A +ui$ding o ned +y Iamp had an appraised va$ue of %500&000& a$though it had a +oo# va$ue of on$y %1'0&000. This +ui$ding had a 1'-year remaining $ife and no sa$vage va$ue. It as +eing depreciated on the straight-$ine +asis. Iamp generated net income of %500&000 in '00( and a $oss of %1'0&000 in '00/. In each of these t o years& Iamp paid a cash dividend of %30&000 to its stoc#ho$ders. 0uring '00(& Iamp so$d inventory to ;ond that had an origina$ cost of %)0&000. The merchandise as so$d to ;ond for %/)&000. *f this +a$ance& %3'&000 as reso$d to outsiders during '00( and the remainder as so$d during '00/. In '00/& Iamp so$d inventory to ;ond for %1(0&000. This inventory had cost on$y %10(&000. ;ond reso$d %1'0&000 of the inventory during '00/ and the rest during '010. "equired: For '00( and then for '00/& ca$cu$ate the equity income to +e reported +y ;ond for e8terna$ reporting purposes.

1-6(

Chapter 01 - The Equity Method of Accounting for Investments

Difficulty: Hard

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Chapter 01 - The Equity Method of Accounting for Investments

116. ;urs$ey& Inc. acquires 10" of Iit- Corporation on :anuary 5& '00(& for %(0&000 hen the +oo# va$ue of Iit- as %(00&000. 0uring '00( Iit- reported net income of %1'!&000 and paid dividends of %50&000. *n :anuary 1& '00/& ;urs$ey purchased an additiona$ '0" of Iit- for %5'!&000& giving ;urs$ey the a+i$ity to significant$y inf$uence the operating po$icies of Iit-. Any e8cess of cost over +oo# va$ue is attri+uta+$e to good i$$ ith an indefinite $ife. ?hat Eourna$ entryBiesC isBareC required on :anuary 1& '00/.

Difficulty: Medium

7teven Company o ns 60" of the outstanding voting common stoc# of >ico$e Corp. and has the a+i$ity to significant$y inf$uence the investee=s operations. *n :anuary 5& '00/& the +a$ance in the Investment in %icole Corp. account as %!05&000. Amorti-ation associated ith this acquisition is %1'&000 per year. 0uring '00/& >ico$e earned net income of %1'0&000 and paid cash dividends of %60&000. ;revious$y in '00(& >ico$e had so$d inventory costing %5!&000 to 7teven for %!0&000. A$$ +ut '!" of that inventory had +een so$d to outsiders +y 7teven during '00(. Additiona$ sa$es ere made to 7teven in '00/ at a transfer price of %3!&000 that had cost >ico$e %!6&000. *n$y 10" of the '00/ purchases had not +een so$d to outsiders +y the end of '00/.

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Chapter 01 - The Equity Method of Accounting for Investments

11!. ?hat amount of unrea$i-ed inter-company inventory profit shou$d +e deferred +y 7teven at 0ecem+er 51& '00(. NB%!0&000 - %5!&000C 8 .'! 8 .60O 9 %1&!00

Difficulty: Medium

11). ?hat amount of unrea$i-ed inter-company profit shou$d +e deferred +y 7teven at 0ecem+er 51& '00/. NB%3!&000 - %!6&000C 8 .10 8 .60O 9 %(60

Difficulty: Medium

113. ?hat amount of equity income ou$d 7teven have recogni-ed in '00/ from its o nership interest in >ico$e. NB%1'0&000 8 .6C - %1'&000 - %(60 A %1&!00O 9 %5)&))0

Difficulty: Medium

11(. ?hat as the +a$ance in the Investment in %icole Corp. account at 0ecem+er 51& '00). N%!05&000 A %5)&))0 - B%60&000 8 .6CO 9 %!'5&))0

Difficulty: Hard

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