Test Bank for International Accounting, 16th Edition by Timothy Doupnik.pdf

Advanced Accounting 12th Edition by Hoyle Schaefer Doupn
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ik Test Bank
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, Chapter 01 Th
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e Equity Method of Accounting for Investments
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MultiplenChoicenQuestions



1. GawnCompanynownsn15%nofnthencommonnstocknofnTracenCorporationnandnusednthenfair-

valuenmethodntonaccountnfornthisninvestment.nTracenreportednnetnincomenofn$110,000nforn2013nan

dnpaidndividendsnofn$60,000nonnOctobern1,n2013.nHownmuchnincomenshouldnGawnrecognizenonnth

isninvestmentninn2013?




A. $16,500.

B. $9,000.

C. $25,500.

D. $7,500.

E. $50,000.




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,2. YaronCompanynownsn30%nofnthencommonnstocknofnDewnCo.nandnusesnthenequitynmethodntonacco
untnforntheninvestment.nDuringn2013,nDewnreportednincomenofn$250,000nandnpaidndividendsnof

$80,000.nTherenisnnonamortizationnassociatednwithntheninvestment.nDuringn2013,nhownmuchnincomensho
uldnYaronrecognizenrelatedntonthisninvestment?




A. $24,000.

B. $75,000.

C. $99,000.

D. $51,000.

E. $80,000.


3. OnnJanuaryn1,n2013,nPacernCompanynpaidn$1,920,000nforn60,000nsharesnofnLennonnCo.'snvotingn
commonnstocknwhichnrepresentsnan45%ninvestment.nNonallocationntongoodwillnornothernspecificnac

countnwasnmade.nSignificantninfluencenovernLennonnwasnachievednbynthisnacquisition.nLennonndis

tributednandividendnofn$2.50npernsharenduringn2013nandnreportednnetnincomenofn$670,000.nWhatnw

asnthenbalanceninnthenInvestmentninnLennonnCo.naccountnfoundninnthenfinancialnrecordsnofnPacerna

snofnDecembern31,n2013?




A. $2,040,500.

B. $2,212,500.

C. $2,260,500.

D. $2,171,500.

E. $2,071,500.




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, 4. Ancompanynshouldnalwaysnusenthenequitynmethodntonaccountnfornanninvestmentnif:




A. Itnhasnthenabilityntonexercisensignificantninfluencenovernthenoperatingnpoliciesnofntheninvestee.

B. Itnownsn30%nofnanotherncompany'snstock.

C. Itnhasnancontrollingninterestn(morenthann50%)nofnanotherncompany'snstock.

D. Theninvestmentnwasnmadenprimarilyntonearnnanreturnnonnexcessncash.

E. Itndoesnnotnhaventhenabilityntonexercisensignificantninfluencenovernthenoperatingnpoliciesnofnthe
investee.
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5. OnnJanuaryn1,n2011,nDermotnCompanynpurchasedn15%nofnthenvotingncommonnstocknofnHornenCo

rp.nOnnJanuaryn1,n2013,nDermotnpurchasedn28%nofnHorne'snvotingncommonnstock.nIfnDermotnachi
evesnsignificantninfluencenwithnthisnnewninvestment,nhownmustnDermotnaccountnfornthenchangentont

henequitynmethod?




A. Itnmustnusenthenequitynmethodnforn2013nbutnshouldnmakennonchangesninnitsnfinancialnstatements
forn2012nandn2011.
n



B. Itnshouldnpreparenconsolidatednfinancialnstatementsnforn2013.

C. Itnmustnrestatenthenfinancialnstatementsnforn2012nandn2011nasnifnthenequitynmethodnhadnbeen
n usednfornthosentwonyears.

D. Itnshouldnrecordnanpriornperiodnadjustmentnatnthenbeginningnofn2013nbutnshouldnnotnrestatenthe
n financialnstatementsnforn2012nandn2011.

E. Itnmustnrestatenthenfinancialnstatementsnforn2012nasnifnthenequitynmethodnhadnbeennusednthen.




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