Test Bank for Advanced Accounting, 13th Edition, Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik,.pd

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 AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $60,000 × .15 = $9,000 [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 related to this investment? A) $24,000. B) $75,000. 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. 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 Topic: Equity method―Significant influence criterion Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [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 AICPA: FN Measurement [QUESTION] 6. During January 2017, 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 2017, Wilton reported net income of $600,000. For 2018, 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, 2018? A) $1,609,000. B) $1,485,000. C) $1,685,000. D) $1,647,000. E) $1,054,300. Answer: A Learning Objective: 01-04 Topic: Equity method―Investment account balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000 $1,400,000 - $1,020,000 = $380,000 / 10yrs = $38,000 Unrecorded Patents Amortization $1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000 [QUESTION] 7. On January 1, 2018, 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 goodwill. During 2018, 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, 2018? A) $950,800. B) $958,000. C) $836,000. D) $990,100. E) $956,400. Answer: A Learning Objective: 01-03 Learning Objective: 01-05c Topic: Equity method―Investment account balance Topic: Report investee losses Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,000,000 - $42,000 - $7,200 = $950,800 [QUESTION] 8. 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 as a retrospective change in accounting principle. E) Jordan should use the fair-value method for 2019 and future years, but should not make a retrospective adjustment to the investment account. Answer: E Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement