ACC 501 Test 2 2026- Questions with Complete
Solutions
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
a deduction to the investment account
What would not indicate an investor company's ability to significantly
influence the investee?
An investor could 30 percent of the investee but another owners holds the other 70
percent
Company A has owned 10 percent of Company B but does not have significant
influence. Company A has acquired 30 percent more of Company B and is
switching equity method. How will the investor report the change?
No change is recorded. Equity method is put into effect the date of the acquisition.
Under Fair value accounting for an equity investment, which of the following
affects the income of the investor recognizes from its ownership of the
investee?
changes in the fair value of the investor's ownership shares of the investee
, when an equity method investment accent is reduced to zero balance
The investment retains a zero balance until subsequent investee profits eliminate
all unrecognizable losses
What is the basic investment equation under equity method, when no goodwill
or other accounts are made?
Acquisition Price
+Investment Income(%)
-Dividends
= investment
Franklin purchases 40 precent of Johnson Company on January 1 for
500,000. Although Franklin did not se it, this acquisition gave Franklin the
ability to apply significant influence to Johnson's operating and financing
policies. Johnson reports assets on that date of $1,400,000 with liabilities of
$500,000. One building with a seven year life is undervalued on Johnson's
books by $140,000. Also , Johnson's book value for its trademark 10 year
remaining life in undervalued by $210,000. During the year Johnson reports
net income of $90,000 while declaring dividends of $30,000. What is the
Investment in Johnson Company (equity method) as of December 31?
Solutions
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
a deduction to the investment account
What would not indicate an investor company's ability to significantly
influence the investee?
An investor could 30 percent of the investee but another owners holds the other 70
percent
Company A has owned 10 percent of Company B but does not have significant
influence. Company A has acquired 30 percent more of Company B and is
switching equity method. How will the investor report the change?
No change is recorded. Equity method is put into effect the date of the acquisition.
Under Fair value accounting for an equity investment, which of the following
affects the income of the investor recognizes from its ownership of the
investee?
changes in the fair value of the investor's ownership shares of the investee
, when an equity method investment accent is reduced to zero balance
The investment retains a zero balance until subsequent investee profits eliminate
all unrecognizable losses
What is the basic investment equation under equity method, when no goodwill
or other accounts are made?
Acquisition Price
+Investment Income(%)
-Dividends
= investment
Franklin purchases 40 precent of Johnson Company on January 1 for
500,000. Although Franklin did not se it, this acquisition gave Franklin the
ability to apply significant influence to Johnson's operating and financing
policies. Johnson reports assets on that date of $1,400,000 with liabilities of
$500,000. One building with a seven year life is undervalued on Johnson's
books by $140,000. Also , Johnson's book value for its trademark 10 year
remaining life in undervalued by $210,000. During the year Johnson reports
net income of $90,000 while declaring dividends of $30,000. What is the
Investment in Johnson Company (equity method) as of December 31?
