ACC 501 EXAM 1 (LATEST UPDATE) REAL QUESTIONS AND
VERIFIED ANSWERS |100% CORRECT | ALREADY GRADED
A
All of the following statements regarding the investment account using
the equity method are true except: Ans✓✓✓Dividends received are
reported as revenue.
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? Ans✓✓✓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.
A company has been using the equity method to account for its
investment. The company sells shares and does not continue to have
significant influence. Which of the following statements is true?
Ans✓✓✓A prospective change in accounting principle must occur.
(There are more than one answers) When an investor sells a portion of
an equity-method investment, (select all correct answers) Ans✓✓✓The
investment account should reflect a balance current as of the date of sale
The investor continues to apply the equity method if the investor
continues to have the ability to exercise significant influence over the
investee
The investor recognizes a gain or loss on the sale
,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?
(I) Debit to the Investment account, and a Credit to the Equity in
Investee Income account.
(II) Debit to Cash (for dividends received from the investee), and a
Credit to Investment Income account.
(III) Debit to Cash (for dividends received from the investee), and a
Credit to the Dividend Receivable. Ans✓✓✓Entry II only
An investor 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 an investee's stock
C) It has a controlling interest (more than 50%) of an investee'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 Ans✓✓✓A) It has the ability to exercise significant
influence over the operating policies of the investee.
On January 1, 2016, Dermot Company purchased 15% of the voting
common stock of Horne Corp. On January 1, 2018, 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 2018 but should make no changes
in its financial statements for 2017 and 2016.
B) It should prepare consolidated financial statements for 2018.
C) It must restate the financial statements for 2017 and 2016 as if the
equity method had been used for those two years.
D) It should record a prior period adjustment at the beginning of 2018
but should not restate the financial statements for 2017 and 2016.
E) It must restate the financial statements for 2017 as if the equity
method had been used then. Ans✓✓✓A) It must use the equity method
for 2018 but should make no changes in its financial statements for 2017
and 2016.
On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan
used the equity method to account for the investment. On January 1,
2019, 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 account 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 2018.
C) Jordan has the option of using either the equity method or the fair-
value method for 2018 and future years.
VERIFIED ANSWERS |100% CORRECT | ALREADY GRADED
A
All of the following statements regarding the investment account using
the equity method are true except: Ans✓✓✓Dividends received are
reported as revenue.
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? Ans✓✓✓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.
A company has been using the equity method to account for its
investment. The company sells shares and does not continue to have
significant influence. Which of the following statements is true?
Ans✓✓✓A prospective change in accounting principle must occur.
(There are more than one answers) When an investor sells a portion of
an equity-method investment, (select all correct answers) Ans✓✓✓The
investment account should reflect a balance current as of the date of sale
The investor continues to apply the equity method if the investor
continues to have the ability to exercise significant influence over the
investee
The investor recognizes a gain or loss on the sale
,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?
(I) Debit to the Investment account, and a Credit to the Equity in
Investee Income account.
(II) Debit to Cash (for dividends received from the investee), and a
Credit to Investment Income account.
(III) Debit to Cash (for dividends received from the investee), and a
Credit to the Dividend Receivable. Ans✓✓✓Entry II only
An investor 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 an investee's stock
C) It has a controlling interest (more than 50%) of an investee'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 Ans✓✓✓A) It has the ability to exercise significant
influence over the operating policies of the investee.
On January 1, 2016, Dermot Company purchased 15% of the voting
common stock of Horne Corp. On January 1, 2018, 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 2018 but should make no changes
in its financial statements for 2017 and 2016.
B) It should prepare consolidated financial statements for 2018.
C) It must restate the financial statements for 2017 and 2016 as if the
equity method had been used for those two years.
D) It should record a prior period adjustment at the beginning of 2018
but should not restate the financial statements for 2017 and 2016.
E) It must restate the financial statements for 2017 as if the equity
method had been used then. Ans✓✓✓A) It must use the equity method
for 2018 but should make no changes in its financial statements for 2017
and 2016.
On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan
used the equity method to account for the investment. On January 1,
2019, 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 account 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 2018.
C) Jordan has the option of using either the equity method or the fair-
value method for 2018 and future years.
