Test Bank for Advanced Chapter 01; The Equity Method of Accounting for Investments
Accounting 12th Edition by Multiple Choice Questions
Joe Ben Hoyle, Thomas
Schaefer, Timothy Doupnik 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 2013 and paid
et al: A Complete Solution
dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this
investment in 2013?
2023 A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
1-2
.
,2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to 4. A company should always use the equity method to account for an investment if:
account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of
$80,000. There is no amortization associated with the investment. During 2013, how much income
should Yaro recognize related to this investment? 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.
A. $24,000. D. The investment was made primarily to earn a return on excess cash.
B. $75,000. E. It does not have the ability to exercise significant influence over the operating policies of the
C. $99,000. investee.
D. $51,000.
E. $80,000. 5. On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne
Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot
3. On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting achieves significant influence with this new investment, how must Dermot account for the change
common stock which represents a 45% investment. No allocation to goodwill or other specific to the equity method?
account was made. Significant influence over Lennon was achieved by this acquisition. Lennon
distributed a dividend of $2.50 per share during 2013 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 A. It must use the equity method for 2013 but should make no changes in its financial statements
for 2012 and 2011.
as of December 31, 2013?
B. It should prepare consolidated financial statements for 2013.
C. It must restate the financial statements for 2012 and 2011 as if the equity method had been
A. $2,040,500. used for those two years.
B. $2,212,500. D. It should record a prior period adjustment at the beginning of 2013 but should not restate the
C. $2,260,500. financial statements for 2012 and 2011.
D. $2,171,500. E. It must restate the financial statements for 2012 as if the equity method had been used then.
E. $2,071,500.
1-3 1-4
. .
,6. During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for 8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to
$1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in Nico. It
Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess no longer had the ability to exercise significant influence over the operations of Nico. How should
of cost over book value of Wells' investment was attributed to unrecorded patents having a Jordan have accounted for this change?
remaining useful life of ten years.
In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of
$750,000. Dividends of $200,000 were paid in each of these two years. What was the reported A. Jordan should continue to use the equity method to maintain consistency in its financial
statements.
balance of Wells' Investment in Wilson Co. at December 31, 2013?
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 2013.
A. $1,609,000. C. Jordan has the option of using either the equity method or the fair-value method for 2013 and
B. $1,485,000. future years.
C. $1,685,000. D. Jordan should report the effect of the change from the equity to the fair-value method as a
D. $1,647,000. retrospective change in accounting principle.
E. $1,054,300. E. Jordan should use the fair-value method for 2014 and future years but should not make a
retrospective adjustment to the investment account.
7. On January 1, 2013, 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 2013, Sleat 9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower
paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000
investment account on December 31, 2013? of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be
deferred by Tower?
A. $950,800.
B. $958,000. A. $6,480.
C. $836,000. B. $3,240.
D. $990,100. C. $10,800.
E. $956,400. D. $16,200.
E. $6,610.
1-5 1-6
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, Advanced Accounting 12th Edition by Hoyle Schaefer Doupnik Test Bank
10. On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams 8. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co.,
Corp., paying $800,000. There was no goodwill or other cost allocation associated with the paying $2,500,000. Austin decided to use the equity method to account for this investment. At the
investment. Watts has significant influence over Adams. During 2013, Adams reported income of time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the
$200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000 shares for following information about Gainsville's assets and liabilities:
$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. 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.
D. $761,000.
E. $925,000.
What is the amount of goodwill associated with the investment?
A. $500,000.
B. $200,000.
C. $0.
D. $300,000.
E. $400,000.
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. .
Accounting 12th Edition by Multiple Choice Questions
Joe Ben Hoyle, Thomas
Schaefer, Timothy Doupnik 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 2013 and paid
et al: A Complete Solution
dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this
investment in 2013?
2023 A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
1-2
.
,2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to 4. A company should always use the equity method to account for an investment if:
account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of
$80,000. There is no amortization associated with the investment. During 2013, how much income
should Yaro recognize related to this investment? 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.
A. $24,000. D. The investment was made primarily to earn a return on excess cash.
B. $75,000. E. It does not have the ability to exercise significant influence over the operating policies of the
C. $99,000. investee.
D. $51,000.
E. $80,000. 5. On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne
Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot
3. On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting achieves significant influence with this new investment, how must Dermot account for the change
common stock which represents a 45% investment. No allocation to goodwill or other specific to the equity method?
account was made. Significant influence over Lennon was achieved by this acquisition. Lennon
distributed a dividend of $2.50 per share during 2013 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 A. It must use the equity method for 2013 but should make no changes in its financial statements
for 2012 and 2011.
as of December 31, 2013?
B. It should prepare consolidated financial statements for 2013.
C. It must restate the financial statements for 2012 and 2011 as if the equity method had been
A. $2,040,500. used for those two years.
B. $2,212,500. D. It should record a prior period adjustment at the beginning of 2013 but should not restate the
C. $2,260,500. financial statements for 2012 and 2011.
D. $2,171,500. E. It must restate the financial statements for 2012 as if the equity method had been used then.
E. $2,071,500.
1-3 1-4
. .
,6. During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for 8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to
$1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in Nico. It
Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess no longer had the ability to exercise significant influence over the operations of Nico. How should
of cost over book value of Wells' investment was attributed to unrecorded patents having a Jordan have accounted for this change?
remaining useful life of ten years.
In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of
$750,000. Dividends of $200,000 were paid in each of these two years. What was the reported A. Jordan should continue to use the equity method to maintain consistency in its financial
statements.
balance of Wells' Investment in Wilson Co. at December 31, 2013?
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 2013.
A. $1,609,000. C. Jordan has the option of using either the equity method or the fair-value method for 2013 and
B. $1,485,000. future years.
C. $1,685,000. D. Jordan should report the effect of the change from the equity to the fair-value method as a
D. $1,647,000. retrospective change in accounting principle.
E. $1,054,300. E. Jordan should use the fair-value method for 2014 and future years but should not make a
retrospective adjustment to the investment account.
7. On January 1, 2013, 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 2013, Sleat 9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower
paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000
investment account on December 31, 2013? of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be
deferred by Tower?
A. $950,800.
B. $958,000. A. $6,480.
C. $836,000. B. $3,240.
D. $990,100. C. $10,800.
E. $956,400. D. $16,200.
E. $6,610.
1-5 1-6
. .
, Advanced Accounting 12th Edition by Hoyle Schaefer Doupnik Test Bank
10. On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams 8. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co.,
Corp., paying $800,000. There was no goodwill or other cost allocation associated with the paying $2,500,000. Austin decided to use the equity method to account for this investment. At the
investment. Watts has significant influence over Adams. During 2013, Adams reported income of time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the
$200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000 shares for following information about Gainsville's assets and liabilities:
$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. 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.
D. $761,000.
E. $925,000.
What is the amount of goodwill associated with the investment?
A. $500,000.
B. $200,000.
C. $0.
D. $300,000.
E. $400,000.
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. .
