ACC 501 Exam 1 2026- Questions with Complete
Solutions
All of the following statements regarding the investment account using the equity method
are true except:
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?
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?
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)
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.
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
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.
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.
D) Jordan should report the effect of the change from the equity to the fair-value method
Solutions
All of the following statements regarding the investment account using the equity method
are true except:
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?
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?
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)
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.
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
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.
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.
D) Jordan should report the effect of the change from the equity to the fair-value method
