ACCT 450 Test 1 MC TEST BANK Practice
Questions with correct answers Chamberlain
College of Nursing
1. When an investor uses the equity method to account for investments in common stock, the
investor's share of cash dividends from the investee should be recorded as....
Answer A deduction from the investment account
QUIZ 2. Which of the following does not indicate an investor company's ability to significantly
influence an
investee?
a. Material intra-entity transactions.
b. The investor owns 30 percent of the investee but another owner holds the remaining 70
percent.
c. Interchange of personnel.
d. Technological dependency.
,AnswerB. The investor owns 30 percent of the investee but another owner holds the remaining
70 percent.
QUIZ 3. Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This
ownership
did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an
addi-
tional 30 percent of Larker and now will use the equity method. How will the investor report
change?
a. A cumulative effect of an accounting change is shown in the current income statement.
b. A retrospective adjustment is made to restate all prior years presented using the equity
method.
c. No change is recorded; the equity method is used from the date of the new acquisition.
d. Hawkins will report the change as a component of accumulated other comprehensive
income
Answer C. No change is recorded; the equity method is used from the date of the new acquisition
QUIZ 4. Under fair-value accounting for an equity investment, which of the following affects the
income the
investor recognizes from its ownership of the investee?
a. The investee's reported income adjusted for excess cost over book value amortizations.
b. Changes in the fair value of the investor's ownership shares of the investee.
,c. Intra-entity profits from upstream sales.
d. Other comprehensive income reported by the investee
Answer B. Changes in the fair value of the investor's ownership shares of the investee
QUIZ 5. When an equity method investment account is reduced to a zero balance
a. The investor should establish a negative investment account balance for any future losses
reported
by the investee.
b. The investor should discontinue using the equity method until the investee begins paying
dividends.
c. Future losses are reported as unusual items in the investor's income statement.
d. The investment retains a zero balance until subsequent investee profits eliminate all
unrecognized
losses
Answer
D. The investment retains a zero balance until subsequent investee profits eliminate all
unrecognized losses
QUIZ 6. On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison's voting
common
stock, which represents a 40 percent investment. No allocation to goodwill or other specific
account
, was made. Significant influence over Harrison is achieved by this acquisition and so Puckett
applies
the equity method. Harrison declared a $2 per share dividend during the year and reported net
income
of $560,000. What is the balance in the Investment in Harrison account found in Puckett's
financial
records as of December 31?
a. $1,724,000
b. $1,784,000
c. $1,844,000
d. $1,884,000
Answer A. Acquisition price .........................................$1,600,000
Equity income ($560,000 × 40%).............. 224,000
Dividends (50,000 shares × $2.00) ................(100,000)
Investment in Harrison Corporation as of Dec 3 .............. =$1,724,000
QUIZ 7. In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock
of Mar-
tes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence
over Martes, whose balance sheet on that date showed total assets of $3,900,000 with
liabilities of
$900,000. Any excess of cost over book value of the investment was attributed to a patent
having a
remaining useful life of 10 years.
Questions with correct answers Chamberlain
College of Nursing
1. When an investor uses the equity method to account for investments in common stock, the
investor's share of cash dividends from the investee should be recorded as....
Answer A deduction from the investment account
QUIZ 2. Which of the following does not indicate an investor company's ability to significantly
influence an
investee?
a. Material intra-entity transactions.
b. The investor owns 30 percent of the investee but another owner holds the remaining 70
percent.
c. Interchange of personnel.
d. Technological dependency.
,AnswerB. The investor owns 30 percent of the investee but another owner holds the remaining
70 percent.
QUIZ 3. Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This
ownership
did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an
addi-
tional 30 percent of Larker and now will use the equity method. How will the investor report
change?
a. A cumulative effect of an accounting change is shown in the current income statement.
b. A retrospective adjustment is made to restate all prior years presented using the equity
method.
c. No change is recorded; the equity method is used from the date of the new acquisition.
d. Hawkins will report the change as a component of accumulated other comprehensive
income
Answer C. No change is recorded; the equity method is used from the date of the new acquisition
QUIZ 4. Under fair-value accounting for an equity investment, which of the following affects the
income the
investor recognizes from its ownership of the investee?
a. The investee's reported income adjusted for excess cost over book value amortizations.
b. Changes in the fair value of the investor's ownership shares of the investee.
,c. Intra-entity profits from upstream sales.
d. Other comprehensive income reported by the investee
Answer B. Changes in the fair value of the investor's ownership shares of the investee
QUIZ 5. When an equity method investment account is reduced to a zero balance
a. The investor should establish a negative investment account balance for any future losses
reported
by the investee.
b. The investor should discontinue using the equity method until the investee begins paying
dividends.
c. Future losses are reported as unusual items in the investor's income statement.
d. The investment retains a zero balance until subsequent investee profits eliminate all
unrecognized
losses
Answer
D. The investment retains a zero balance until subsequent investee profits eliminate all
unrecognized losses
QUIZ 6. On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison's voting
common
stock, which represents a 40 percent investment. No allocation to goodwill or other specific
account
, was made. Significant influence over Harrison is achieved by this acquisition and so Puckett
applies
the equity method. Harrison declared a $2 per share dividend during the year and reported net
income
of $560,000. What is the balance in the Investment in Harrison account found in Puckett's
financial
records as of December 31?
a. $1,724,000
b. $1,784,000
c. $1,844,000
d. $1,884,000
Answer A. Acquisition price .........................................$1,600,000
Equity income ($560,000 × 40%).............. 224,000
Dividends (50,000 shares × $2.00) ................(100,000)
Investment in Harrison Corporation as of Dec 3 .............. =$1,724,000
QUIZ 7. In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock
of Mar-
tes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence
over Martes, whose balance sheet on that date showed total assets of $3,900,000 with
liabilities of
$900,000. Any excess of cost over book value of the investment was attributed to a patent
having a
remaining useful life of 10 years.
