SOLUTIONS MANUAL for Advanced Accounting,
15th Edition by Joe Ben Hoyle, Schaefer and
Doupnik Complete 19 Chapters
Chapter 01 The
Equity Method of Accounting for Investments
Multiple Choice Questions
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 dividends of $60,000 on October 1, 2013. How much income should
Gaw recognize on this investment in 2013?
A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to
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. $24,000.
B. $75,000.
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.
, C. $99,000.
D. $51,000.
E. $80,000.
3. On January 1, 2013, 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 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 as of December 31, 2013?
A. $2,040,500.
B. $2,212,500.
C. $2,260,500.
D. $2,171,500.
E. $2,071,500.
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.
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 achieves significant influence with this new investment, how must Dermot
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.
, account for the change to the equity method?
A. It must use the equity method for 2013 but should make no changes in its financial
statements for 2012 and 2011.
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 used for those two years.
D. It should record a prior period adjustment at the beginning of 2013 but should not
restate the financial statements for 2012 and 2011.
E. It must restate
the financial statements for 2012 as if the equity method had been used then.
6. During January 2012, 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 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 balance of Wells' Investment in Wilson Co. at December 31, 2013?
A. $1,609,000.
B. $1,485,000.
C. $1,685,000.
D. $1,647,000.
E. $1,054,300.
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
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.
, goodwill. During 2013, 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, 2013?
A. $950,800.
B. $958,000.
C. $836,000.
D. $990,100.
E. $956,400.
8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity
method to account for the investment. On January 1, 2014, 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 2013.
C. Jordan has the option of using either the equity method or the fair-value method for
2013 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 2014 and future years but should not
make a retrospective adjustment to the investment account.
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?
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.
15th Edition by Joe Ben Hoyle, Schaefer and
Doupnik Complete 19 Chapters
Chapter 01 The
Equity Method of Accounting for Investments
Multiple Choice Questions
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 dividends of $60,000 on October 1, 2013. How much income should
Gaw recognize on this investment in 2013?
A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to
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. $24,000.
B. $75,000.
1-1
.
, C. $99,000.
D. $51,000.
E. $80,000.
3. On January 1, 2013, 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 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 as of December 31, 2013?
A. $2,040,500.
B. $2,212,500.
C. $2,260,500.
D. $2,171,500.
E. $2,071,500.
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.
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 achieves significant influence with this new investment, how must Dermot
1-2
.
, account for the change to the equity method?
A. It must use the equity method for 2013 but should make no changes in its financial
statements for 2012 and 2011.
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 used for those two years.
D. It should record a prior period adjustment at the beginning of 2013 but should not
restate the financial statements for 2012 and 2011.
E. It must restate
the financial statements for 2012 as if the equity method had been used then.
6. During January 2012, 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 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 balance of Wells' Investment in Wilson Co. at December 31, 2013?
A. $1,609,000.
B. $1,485,000.
C. $1,685,000.
D. $1,647,000.
E. $1,054,300.
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
1-3
.
, goodwill. During 2013, 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, 2013?
A. $950,800.
B. $958,000.
C. $836,000.
D. $990,100.
E. $956,400.
8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity
method to account for the investment. On January 1, 2014, 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 2013.
C. Jordan has the option of using either the equity method or the fair-value method for
2013 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 2014 and future years but should not
make a retrospective adjustment to the investment account.
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?
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.
