TEST BANK
Fundamentals of Advanced Accounting
Joe Ben Hoyle
7th Edition
JN
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SE
,Table of Contents
1. Intercorporate Acquisitions and Investments in Other Entities
2. Consolidations — Subsequent to the Date of Acquisition
3. Consolidated Financial Statements and Outside Ownership
4. Consolidated Reporting: Intercompany Transactions
5. Consolidated Reporting: Intercompany Bond Holdings
6. Consolidated Cash Flows and Ownership Changes
7. Variable Interest Entities, Intra-Entity Debt, and Other Issues
8. Segment and Interim Reporting
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9. Foreign Currency Transactions and Financial Statements
10. Partnerships: Formation and Operation
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11. Partnerships: Changes in Ownership and Liquidation
12. Accounting for State and Local Governments — Part I
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13. Accounting for State and Local Governments — Part II
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14. Accounting for Not-for-Profit Organizations
,File: Chapter 01 - The Equity Method of Accounting for Investments
Multiple Choice:
[QUESTION]
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 2018 and paid dividends of
$60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018?
A) $16,500.
B) $ 9,000.
C) $25,500.
D) $ 7,500.
E) $50,000.
Answer: B
Learning Objective: 01-01
Topic: Investments―Fair-value method
Difficulty: 1 Easy
Blooms: Apply
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AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $60,000 × .15 = $9,000
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[QUESTION]
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for
the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is
no amortization associated with the investment. During 2018, how much income should Yaro recognize
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related to this investment?
A) $24,000.
B) $75,000.
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C) $99,000.
D) $51,000.
E) $80,000.
Answer: B
Learning Objective: 01-03
Topic: Equity method―Investment income
Difficulty: 1 Easy
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $250,000 × .30 = $75,000
[QUESTION]
3. On January 1, 2018, 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 necessary. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a
dividend of $2.50 per share during 2018 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, 2018?
, A) $2,040,500.
B) $2,212,500.
C) $2,260,500.
D) $2,171,500.
E) $2,071,500.
Answer: E
Learning Objective: 01-03
Topic: Equity method―Investment account balance
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $1,920,000 + ($670,000 × .45) – ($2.50 × 60,000) = $2,071,500
[QUESTION]
4. 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.
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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 of the investee.
Answer: A
Learning Objective: 01-02
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Topic: Equity method―Significant influence criterion
Difficulty: 1 Easy
Blooms: Remember
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AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
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[QUESTION]
5. 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.
Answer: A
Learning Objective: 01-05a
Topic: Report change to equity method
Difficulty: 2 Medium
Blooms: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Fundamentals of Advanced Accounting
Joe Ben Hoyle
7th Edition
JN
U
R
SE
,Table of Contents
1. Intercorporate Acquisitions and Investments in Other Entities
2. Consolidations — Subsequent to the Date of Acquisition
3. Consolidated Financial Statements and Outside Ownership
4. Consolidated Reporting: Intercompany Transactions
5. Consolidated Reporting: Intercompany Bond Holdings
6. Consolidated Cash Flows and Ownership Changes
7. Variable Interest Entities, Intra-Entity Debt, and Other Issues
8. Segment and Interim Reporting
JN
9. Foreign Currency Transactions and Financial Statements
10. Partnerships: Formation and Operation
U
11. Partnerships: Changes in Ownership and Liquidation
12. Accounting for State and Local Governments — Part I
R
13. Accounting for State and Local Governments — Part II
SE
14. Accounting for Not-for-Profit Organizations
,File: Chapter 01 - The Equity Method of Accounting for Investments
Multiple Choice:
[QUESTION]
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 2018 and paid dividends of
$60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018?
A) $16,500.
B) $ 9,000.
C) $25,500.
D) $ 7,500.
E) $50,000.
Answer: B
Learning Objective: 01-01
Topic: Investments―Fair-value method
Difficulty: 1 Easy
Blooms: Apply
JN
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $60,000 × .15 = $9,000
U
[QUESTION]
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for
the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is
no amortization associated with the investment. During 2018, how much income should Yaro recognize
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related to this investment?
A) $24,000.
B) $75,000.
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C) $99,000.
D) $51,000.
E) $80,000.
Answer: B
Learning Objective: 01-03
Topic: Equity method―Investment income
Difficulty: 1 Easy
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $250,000 × .30 = $75,000
[QUESTION]
3. On January 1, 2018, 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 necessary. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a
dividend of $2.50 per share during 2018 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, 2018?
, A) $2,040,500.
B) $2,212,500.
C) $2,260,500.
D) $2,171,500.
E) $2,071,500.
Answer: E
Learning Objective: 01-03
Topic: Equity method―Investment account balance
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $1,920,000 + ($670,000 × .45) – ($2.50 × 60,000) = $2,071,500
[QUESTION]
4. 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.
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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 of the investee.
Answer: A
Learning Objective: 01-02
U
Topic: Equity method―Significant influence criterion
Difficulty: 1 Easy
Blooms: Remember
R
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
SE
[QUESTION]
5. 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.
Answer: A
Learning Objective: 01-05a
Topic: Report change to equity method
Difficulty: 2 Medium
Blooms: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
