Deck 1: The Equity Method of Accounting for Investments

Question 1

An upstream sale of inventory is a sale:

A)Between subsidiaries owned by a common parent.
B)With the transfer of goods scheduled by contract to occur on a specified future date.
C)In which the goods are physically transported by boat from a subsidiary to its parent.
D)Made by the investor to the investee.
E)Made by the investee to the investor.

Answer 1

Made by the investee to the investor.

Question 2

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 2

E

Question 3

REFERENCE: 01-03
On January 1,2018,Deuce Inc.acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and did not exercise significant influence.Wiz earned net income of $96,000 in 2018 and paid dividends of $36,000.The fair value of Deuce's investment was $80,000 at December 31,2018.On January 3,2019,Deuce bought an additional 10% of Wiz for $54,000.This second purchase gave Deuce the ability to significantly influence the decision making of Wiz.During 2019,Wiz earned $120,000 and paid $48,000 in dividends.As of December 31,2019,Wiz reported a net book value of $468,000.At the date of the second purchase,Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill.

-What amount of equity income should Deuce have reported for 2019?

A)$30,000.
B)$16,420.
C)$38,340.
D)$18,000.
E)$32,840.

Answer 3

$30,000.

Question 4

REFERENCE: 01-02
Atlarge Inc.owns 30% of the outstanding voting common stock of Ticker Co.and has the ability to significantly influence the investee's operations and decision-making.On January 1,2018,the balance in the Investment in Ticker Co.account was $402,000.Amortization associated with the purchase of this investment is $8,000 per year.During 2018,Ticker earned income of $108,000 and paid cash dividends of $36,000.Previously in 2017,Ticker had sold inventory costing $28,800 to Atlarge for $48,000.All but 25% of this merchandise was consumed by Atlarge during 2017.The remainder was used during the first few weeks of 2018.Additional sales were made to Atlarge in 2018;inventory costing $33,600 was transferred at a price of $60,000.Of this total,40% was not consumed until 2019.

-What amount of equity income would Atlarge have recognized in 2018 from its ownership interest in Ticker?

A)$19,792.
B)$27,640.
C)$22,672.
D)$24,400.
E)$21,748.

Question 5

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.

Question 6

REFERENCE: 01-02
Atlarge Inc.owns 30% of the outstanding voting common stock of Ticker Co.and has the ability to significantly influence the investee's operations and decision-making.On January 1,2018,the balance in the Investment in Ticker Co.account was $402,000.Amortization associated with the purchase of this investment is $8,000 per year.During 2018,Ticker earned income of $108,000 and paid cash dividends of $36,000.Previously in 2017,Ticker had sold inventory costing $28,800 to Atlarge for $48,000.All but 25% of this merchandise was consumed by Atlarge during 2017.The remainder was used during the first few weeks of 2018.Additional sales were made to Atlarge in 2018;inventory costing $33,600 was transferred at a price of $60,000.Of this total,40% was not consumed until 2019.

-What was the balance in the Investment in Ticker Co.account at the end of 2018?

A)$401,136.
B)$413,872.
C)$418,840.
D)$412,432.
E)$410,148.

Question 7

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.

Question 8

REFERENCE: 01-01
On January 3,2018,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities:
$\begin{array}{lcrr}& \text { Book Value } & \text { Fair Value } \\\text { Buildings (10-year life) } & \$ 400,000 & \$ 500,000 \\\text { Equipment (5 -year life) } & 1,000,000 & 1,300,000 \\\text { Franchises (8-year life) } & 0 & 400,000\end{array}$
For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired.

-For 2018,what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

A)$ 27,500.
B)$ 20,000.
C)$ 30,000.
D)$120,000.
E)$ 70,000.

Question 9

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.

Question 10

All of the following would require use of the equity method for investments except:

A)Material intra-entity transactions.
B)Investor participation in the policy-making process of the investee.
C)Valuation at fair value.
D)Technological dependency.
E)Interchange of managerial personnel.

Question 11

REFERENCE: 01-01
On January 3,2018,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities:
$\begin{array}{lcrr}& \text { Book Value } & \text { Fair Value } \\\text { Buildings (10-year life) } & \$ 400,000 & \$ 500,000 \\\text { Equipment (5 -year life) } & 1,000,000 & 1,300,000 \\\text { Franchises (8-year life) } & 0 & 400,000\end{array}$
For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired.

-What is the amount of goodwill associated with the investment?

A)$500,000.
B)$200,000.
C)$0.
D)$300,000.
E)$400,000.

Question 12

Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2018,Chip's common stock had suffered a significant decline in fair value,which is expected to recover over the next several months.How should Club account for the decline in value?

A)Club should switch to the fair-value method.
B)No accounting because the decline in fair value is temporary.
C)Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
D)Club should not record its share of Chip's 2018 earnings until the decline in the fair value of the stock has been recovered.
E)Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

Question 13

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.

Question 14

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.

Question 15

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.

A)Entries I and II.
B)Entries II and III.
C)Entry I only.
D)Entry II only.
E)Entry III only.

Question 16

Tower Inc.owns 30% of Yale Co.and applies the equity method.During the current year,Tower bought inventory costing $66,000 and then sold it to Yale for $120,000.At year-end,only $24,000 of merchandise was still being held by Yale.What amount of intra-entity gross profit must be deferred by Tower?

A)$ 6,480.
B)$ 3,240.
C)$10,800.
D)$16,200.
E)$ 6,610.

Question 17

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.

Question 18

REFERENCE: 01-03
On January 1,2018,Deuce Inc.acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and did not exercise significant influence.Wiz earned net income of $96,000 in 2018 and paid dividends of $36,000.The fair value of Deuce's investment was $80,000 at December 31,2018.On January 3,2019,Deuce bought an additional 10% of Wiz for $54,000.This second purchase gave Deuce the ability to significantly influence the decision making of Wiz.During 2019,Wiz earned $120,000 and paid $48,000 in dividends.As of December 31,2019,Wiz reported a net book value of $468,000.At the date of the second purchase,Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill.

-On Deuce's December 31,2019 balance sheet,what balance was reported for the Investment in Wiz Co.account?

A)$117,000.
B)$143,400.
C)$152,000.
D)$134,400.
E)$141,200.

Question 19

On January 4,2018,Watts Co.purchased 40,000 shares (40%)of the common stock of Adams Corp. ,paying $800,000.There was no goodwill or other cost allocation associated with the investment.Watts has significant influence over Adams.During 2018,Adams reported income of $200,000 and paid dividends of $80,000.On January 2,2019,Watts sold 5,000 shares for $125,000.What was the balance in the investment account after the shares had been sold?

A)$848,000.
B)$742,000.
C)$723,000.
D)$761,000.
E)$925,000.

Question 20

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.

Question 21

REFERENCE: 01-04
On January 1,2017,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2017,Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.

-The equity in income of Sacco for 2017,is

A)$ 9,000.
B)$13,500.
C)$15,000.
D)$ 7,500.
E)$50,000.

Question 22

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)A cumulative effect change in accounting principle must occur.
B)A prospective change in accounting principle must occur.
C)A retrospective change in accounting principle must occur.
D)The investor will not receive future dividends from the investee.
E)Future dividends will continue to reduce the investment account.

Question 23

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?

A)The investor should change to the fair-value method to account for its investment.
B)The investor should suspend applying the equity method until the investee reports income.
C)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.
D)The cumulative losses should be reported as a prior period adjustment.
E)The investor should report these as equity method losses in its income statement.

Question 24

REFERENCE: 01-05
Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2017,for $105,000 when the book value of Gates was $600,000.During 2017 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2018,Dodge purchased an additional 25% of Gates for $200,000.Any excess cost over book value is attributable to goodwill with an indefinite life.The fair-value method was used during 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2018 Gates reported net income of $200,000,and reported dividends of $75,000.

-Which of the following is true regarding the change from the fair-value method to the equity method?

A)Dodge must record a debit to additional paid-in capital in the amount of $200,000.
B)Dodge must record a debit to additional paid-in capital for $15,000.
C)Dodge must retrospectively apply the equity method to interests reported under the fair-value method.
D)Dodge must record a debit of $200,000 to the Gates Investment Account.
E)Dodge must record a credit of $15,000 to the Gates Investment Account.

Question 25

REFERENCE: 01-05
Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2017,for $105,000 when the book value of Gates was $600,000.During 2017 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2018,Dodge purchased an additional 25% of Gates for $200,000.Any excess cost over book value is attributable to goodwill with an indefinite life.The fair-value method was used during 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2018 Gates reported net income of $200,000,and reported dividends of $75,000.

-The balance in the investment account at December 31,2018,is

A)$335,000.
B)$355,000.
C)$400,000.
D)$412,500.
E)$480,000.

Question 26

REFERENCE: 01-04
On January 1,2017,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2017,Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.
The amount allocated to goodwill at January 1,2017,is

A)$25,000.
B)$13,000
C)$ 9,000.
D)$16,000.
E)$10,000.

Question 27

REFERENCE: 01-05
Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2017,for $105,000 when the book value of Gates was $600,000.During 2017 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2018,Dodge purchased an additional 25% of Gates for $200,000.Any excess cost over book value is attributable to goodwill with an indefinite life.The fair-value method was used during 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2018 Gates reported net income of $200,000,and reported dividends of $75,000.

-The income reported by Dodge for 2017 with regard to the Gates investment is

A)$ 7,500.
B)$ 22,500.
C)$ 15,000.
D)$100,000.
E)$150,000.

Question 28

REFERENCE: 01-04
On January 1,2017,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2017,Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.

-The balance in the Investment in Sacco account at December 31,2017,is

A)$100,000.
B)$112,000.
C)$106,000.
D)$107,500.
E)$140,000.

Question 29

REFERENCE: 01-04
On January 1,2017,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2017,Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.

-The balance in the Investment in Sacco account at December 31,2018,is

A)$119,500.
B)$125,500.
C)$116,500.
D)$118,000.
E)$100,000.

Question 30

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

A)The investor and investee make reciprocal entries to defer and recognize inventory profits.
B)The same adjustments are made for upstream and downstream sales.
C)Different adjustments are made for upstream and downstream sales.
D)No adjustments are necessary.
E)Adjustments will be made only when profits are known upon sale to outsiders.

Question 31

REFERENCE: 01-05
Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2017,for $105,000 when the book value of Gates was $600,000.During 2017 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2018,Dodge purchased an additional 25% of Gates for $200,000.Any excess cost over book value is attributable to goodwill with an indefinite life.The fair-value method was used during 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2018 Gates reported net income of $200,000,and reported dividends of $75,000.

-The income reported by Dodge for 2018 with regard to the Gates investment is

A)$80,000.
B)$30,000.
C)$50,000.
D)$15,000.
E)$75,000.

Question 32

When an investor sells shares of its investee company,which of the following statements is true?

A)A recognized gain or loss is reported as the difference between selling price and original cost.
B)An recognized gain or loss is reported as the difference between selling price and original cost.
C)A recognized gain or loss is reported as the difference between selling price and carrying value.
D)An unrealized gain or loss is reported as the difference between selling price and carrying value.
E)Any gain or loss is reported as part of comprehensive income.

Question 33

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

A)The investee must defer upstream ending inventory profits.
B)The investee must defer upstream beginning inventory profits.
C)The investor must defer downstream ending inventory profits.
D)The investor must defer downstream beginning inventory profits.
E)The investor must defer upstream beginning inventory profits.

Question 34

All of the following statements regarding the investment account using the equity method are true except:

A)The investment is recorded at cost.
B)Dividends received are reported as revenue.
C)Net income of investee increases the investment account.
D)Dividends received reduce the investment account.
E)Amortization of fair value over cost reduces the investment account.

Question 35

When an investor appropriately applies the equity method,how should it account for any investee Other Comprehensive Income (OCI)?

A)Under the equity method,the investor only recognizes its share of investee's income from continuing operations.
B)The OCI would reduce the investment.
C)The OCI would increase the investment.
D)The OCI would not appear on the investor's income statement but would be a component of comprehensive income.
E)The OCI would be ignored but shown in the investor's notes to the financial statements.

Question 36

A company has been using the fair-value method to account for its investment.The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate.Which of the following statements is true?

A)A cumulative effect change in accounting principle must occur.
B)A prospective change in accounting principle must occur.
C)A retrospective change in accounting principle must occur.
D)The investor will not receive future dividends from the investee.
E)Future dividends will continue to be recorded as revenue.

Question 37

REFERENCE: 01-04
On January 1,2017,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2017,Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.

-The equity in income of Sacco for 2018,is

A)$22,500.
B)$21,000.
C)$12,000.
D)$13,500.
E)$75,000.

Question 38

How should a permanent loss in value of an investment using the equity method be treated?

A)The equity in investee income is reduced.
B)A loss is reported in the same manner as a loss in value of other long-term assets.
C)The investor's stockholders' equity is reduced.
D)No adjustment is necessary.
E)Record an offset to cash.

Question 39

When applying the equity method,how is the excess of cost over book value calculated and accounted for?

A)The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets.
B)The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets.
C)The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.
D)The excess is allocated to goodwill.
E)The excess is ignored.

Question 40

After allocating cost in excess of book value,which asset or liability would not be amortized over a useful life?

A)Cost of goods sold.
B)Property,plant,& equipment.
C)Patents.
D)Goodwill.
E)Bonds payable.

Question 41

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-What was the balance in the investment account at December 31,2018?

A)$517,500.
B)$537,500.
C)$520,000.
D)$540,000.
E)$211,250.

Question 42

REFERENCE: 01-08
On January 4,2017,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values.
During 2017,Bike reported net income of $500,000.For 2018,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years.

-What was the reported balance of Harley's Investment in Bike Co.at December 31,2018?

A)$2,400,000.
B)$2,480,000.
C)$2,500,000.
D)$2,600,000.
E)$2,680,000.

Question 43

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-How much income did Mehan report from Cook during 2017?

A)$30,000.
B)$22,500.
C)$ 7,500.
D)$ 0.
E)$50,000.

Question 44

REFERENCE: 01-09
On January 1,2018,Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000,which approximated book value.During 2018,Barney paid dividends of $30,000 and reported a net loss of $70,000.

-What amount of equity income would Anderson recognize in 2018 from its ownership interest in Barney?

A)$12,000 income.
B)$12,000 loss.
C)$16,000 loss.
D)$28,000 income.
E)$28,000 loss.

Question 45

REFERENCE: 01-09
On January 1,2018,Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000,which approximated book value.During 2018,Barney paid dividends of $30,000 and reported a net loss of $70,000.

-Luffman Inc.owns 30% of Bruce Inc.and appropriately applies the equity method.During the current year,Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000.At year-end,all of the merchandise had been sold by Luffman to other customers.What amount of gross profit on intra-entity sales must be deferred by Luffman?

A)$ 0.
B)$ 8,400.
C)$28,000.
D)$52,000.
E)$80,000.

Question 46

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-How much income did Mehan report from Cook during 2018?

A)$90,000.
B)$110,000.
C)$67,500.
D)$87,500.
E)$78,750.

Question 47

REFERENCE: 01-10
On January 3,2018,Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation,paying $1,500,000.There was no goodwill or other cost allocation associated with the investment.Roberts has significant influence over Thomas.During 2018,Thomas reported net income of $300,000 and paid dividends of $100,000.On January 4,2019,Roberts sold 15,000 shares for $800,000.

-What is the gain/loss on the sale of the 15,000 shares?

A)$ 0
B)$10,000 gain.
C)$12,000 loss.
D)$15,000 loss.
E)$20,000 gain.

Question 48

REFERENCE: 01-06
Clancy Incorporated sold $210,000 of its inventory to Reid Company during 2018 for $350,000.Reid sold $224,000 of this merchandise in 2018 with the remainder to be disposed of during 2019.Assume Clancy owns 30% of Reid and accounts for its investment using the equity method.

-What journal entry will be recorded at the end of 2018 to defer the recognition of the investor's share of the intra-entity gross profits?
A.
$\begin{array}{llr} \text { Equity in income of Reid } &\$50,400\\ \text { Investment in Reid } & &\$50,400\\\end{array}$

B.
$\begin{array}{llr} \text {Investment in Reid } &\$50,400\\ \text { Equity in income of Reid } & &\$50,400\\\end{array}$

C.
$\begin{array}{llr} \text { Equity in income of Reid } &\$15,120\\ \text {Investment in Reid } &&\$15,120\\\end{array}$

D.
$\begin{array}{llr} \text { Investment in Reid } &\$15,120\\ \text { Equity in income of Reid } &&\$15,120\\\end{array}$

A)Entry A.
B)Entry B.
C)Entry C.
D)Entry D.
E)No entry is necessary.

Question 49

REFERENCE: 01-10
On January 3,2018,Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation,paying $1,500,000.There was no goodwill or other cost allocation associated with the investment.Roberts has significant influence over Thomas.During 2018,Thomas reported net income of $300,000 and paid dividends of $100,000.On January 4,2019,Roberts sold 15,000 shares for $800,000.

-What was the balance in the investment account before the shares were sold?

A)$1,560,000.
B)$1,600,000.
C)$1,700,000.
D)$1,800,000.
E)$1,860,000.

Question 50

REFERENCE: 01-08
On January 4,2017,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values.
During 2017,Bike reported net income of $500,000.For 2018,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years.

-What was the reported balance of Harley's Investment in Bike Co.at December 31,2017?

A)$880,000.
B)$2,400,000.
C)$2,480,000.
D)$2,600,000.
E)$2,900,000.

Question 51

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-What was the balance in the investment account at April 1,2019 just before the sale of shares?

A)$447,500.
B)$468,750.
C)$535,875.
D)$555,000.
E)$624,375.

Question 52

REFERENCE: 01-10
On January 3,2018,Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation,paying $1,500,000.There was no goodwill or other cost allocation associated with the investment.Roberts has significant influence over Thomas.During 2018,Thomas reported net income of $300,000 and paid dividends of $100,000.On January 4,2019,Roberts sold 15,000 shares for $800,000.

-What is the balance in the investment account after the sale of the 15,000 shares?

A)$750,000.
B)$760,000.
C)$780,000.
D)$790,000.
E)$800,000.

Question 53

REFERENCE: 01-10
On January 3,2018,Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation,paying $1,500,000.There was no goodwill or other cost allocation associated with the investment.Roberts has significant influence over Thomas.During 2018,Thomas reported net income of $300,000 and paid dividends of $100,000.On January 4,2019,Roberts sold 15,000 shares for $800,000.

-What is the appropriate journal entry to record the sale of the 15,000 shares?
A.
$\begin{array}{llr} \text {Cash } &800,000\\ \text {Investment in Thomas } &&800,000\\\end{array}$

B.
$\begin{array}{llr} \text { Cash } &800,000\\ \text { Investment in Thomas} &&780,000\\ \text {Gain on sale of investment } &&20,000\end{array}$

C.
$\begin{array}{llr} \text {Cash } &800,000\\ \text { Loss on investment} &12,000\\ \text {Investment in Thomas } &&812,000\end{array}$

D.
$\begin{array}{llr} \text { Cash } &800,000\\ \text { Investment in Thomas} &&790,000\\ \text { Gain on sale of investment } &&10,000\end{array}$

E.
$\begin{array}{llr} \text { Cash } &800,000\\ \text {Loss on investment } &15,000\\ \text { Investment in Thomas } &&815,000\end{array}$

A)A Above.
B)B Above.
C)C Above.
D)D Above.
E)E Above.

Question 54

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-How much of Cook's net income did Mehan report for the year 2019?

A)$61,750.
B)$81,250.
C)$72,500.
D)$59,250.
E)$75,000.

Question 55

REFERENCE: 01-08
On January 4,2017,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values.
During 2017,Bike reported net income of $500,000.For 2018,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years.

-How much income did Harley report from Bike for 2018?

A)$120,000.
B)$200,000.
C)$300,000.
D)$320,000.
E)$500,000.

Question 56

REFERENCE: 01-09
On January 1,2018,Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000,which approximated book value.During 2018,Barney paid dividends of $30,000 and reported a net loss of $70,000.

-What is the balance in the investment account on December 31,2018?

A)$1,900,000.
B)$1,960,000.
C)$2,000,000.
D)$2,016,000.
E)$2,028,000.

Question 57

REFERENCE: 01-06
Clancy Incorporated sold $210,000 of its inventory to Reid Company during 2018 for $350,000.Reid sold $224,000 of this merchandise in 2018 with the remainder to be disposed of during 2019.Assume Clancy owns 30% of Reid and accounts for its investment using the equity method.

-What journal entry will be recorded in 2019 to recognize its share of the intra-entity gross profit that was deferred in 2018?
A.
$\begin{array}{llr} \text { Equity in income of Reid } &\$50,400\\ \text { Investment in Reid } & &\$50,400\\\end{array}$

B.
$\begin{array}{llr} \text {Investment in Reid } &\$50,400\\ \text { Equity in income of Reid } & &\$50,400\\\end{array}$

C.
$\begin{array}{llr} \text { Equity in income of Reid } &\$15,120\\ \text {Investment in Reid } &&\$15,120\\\end{array}$

D.
$\begin{array}{llr} \text { Investment in Reid } &\$15,120\\ \text { Equity in income of Reid } &&\$15,120\\\end{array}$

A)Entry A.
B)Entry B.
C)Entry C.
D)Entry D.
E)No entry is necessary.

Question 58

REFERENCE: 01-11
On January 4,2018,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2018,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2019,Mason sold 10,000 shares for $150,000.

-What was the balance in the investment account before the shares were sold?

A)$520,000.
B)$544,000.
C)$560,000.
D)$604,000.
E)$620,000.

Question 59

REFERENCE: 01-07
On January 1,2017,Mehan,Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook.The fair value of the 15% investment was the same as the carrying value of the investment when,on January 1,2018,Mehan purchased an additional 25,000 shares (25%)of Cook for $300,000.This last purchase gave Mehan the ability to apply significant influence over Cook.The book value of Cook on January 1,2017 was $1,000,000.The book value of Cook on January 1,2018,was $1,100,000.Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.
Cook reports net income and dividends as follows.These amounts are assumed to have occurred evenly throughout the years:
$$\begin{array} { r r r } & \text { Net Incame } & \text { Dridends } \\2017 & \$ 200,000 & \$ 50,000 \\2018 & 225,000 & 50,000 \\2019 & 250,000 & 60,000\end{array}$$ On April 1,2019,just after its first dividend receipt,Mehan sells 10,000 shares of its investment.

-What is the balance in the investment account for the 15% ownership interest,at January 1,2018?

A)$150,000.
B)$172,500.
C)$180,000.
D)$157,500.
E)$170,000

Question 60

REFERENCE: 01-08
On January 4,2017,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values.
During 2017,Bike reported net income of $500,000.For 2018,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years.

-How much income did Harley report from Bike for 2017?

A)$120,000.
B)$200,000.
C)$300,000.
D)$320,000.
E)$500,000.

Question 61

REFERENCE: 01-13
On January 1,2018,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\\text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\\text { Franchises (10-vear life) } & 0 & 500,000\end{array}$ Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Rob Co.reported net income of $300,000 for 2018,and paid dividends of $100,000 during that year.

-What is the amount of the excess of purchase price over book value?

A)$(1,000,000. )
B)$ 400,000.
C)$ 800,000.
D)$ 1,000,000.
E)$ 1,100,000.

Question 62

REFERENCE: 01-12
On January 4,2018,Bailey Corp.purchased 40% of the voting common stock of Emery Co. ,paying $3,000,000.Bailey properly accounts for this investment using the equity method.At the time of the investment,Emery's total stockholders' equity was $5,000,000.Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (20-year life) } & \$ 1,000,000 & \$ 1,800,000 \\\text { Equipment (5-year life) } & 1,500,000 & 2,000,000 \\\text { Franchises (10-vear life) } & 0 & 700,000\end{array}$
Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Emery Co.reported net income of $400,000 for 2018,and paid dividends of $200,000 during that year.

-How much goodwill is associated with this investment?

A)$(500,000).
B)$ 0.
C)$ 100,000.
D)$ 200,000.
E)$2,000,000.

Question 63

REFERENCE: 01-15
Cayman Inc.bought 30% of Maya Company on January 1,2018 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows:
$$\begin{array} { c c c c } & \text { Cost to } & \text { Transfer } & \text { Amount Held by } \\\text { Year } & \text { Maya } & \text { Price } & \text { Cayman at Year-End } \\\hline 2018 & \$ 30,000 & \$ 45,000 & \$ 9,000 \\2019 & \$ 48,000 & \$ 80,000 & \$ 20,000\end{array}$$ Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year.

-What is the balance in Cayman's Investment in Maya account at December 31,2018?

A)$463,500.
B)$467,100.
C)$468,000.
D)$468,900.
E)$480,000.

Question 64

REFERENCE: 01-12
On January 4,2018,Bailey Corp.purchased 40% of the voting common stock of Emery Co. ,paying $3,000,000.Bailey properly accounts for this investment using the equity method.At the time of the investment,Emery's total stockholders' equity was $5,000,000.Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (20-year life) } & \$ 1,000,000 & \$ 1,800,000 \\\text { Equipment (5-year life) } & 1,500,000 & 2,000,000 \\\text { Franchises (10-vear life) } & 0 & 700,000\end{array}$
Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Emery Co.reported net income of $400,000 for 2018,and paid dividends of $200,000 during that year.

-What is the amount of excess amortization expense for Bailey's investment in Emery for the first year?

A)$ 0.
B)$ 84,000.
C)$100,000.
D)$160,000.
E)$400,000.

Question 65

REFERENCE: 01-15
Cayman Inc.bought 30% of Maya Company on January 1,2018 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows:
$$\begin{array} { c c c c } & \text { Cost to } & \text { Transfer } & \text { Amount Held by } \\\text { Year } & \text { Maya } & \text { Price } & \text { Cayman at Year-End } \\\hline 2018 & \$ 30,000 & \$ 45,000 & \$ 9,000 \\2019 & \$ 48,000 & \$ 80,000 & \$ 20,000\end{array}$$ Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year.

-What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31,2018?

A)$ 900.
B)$3,000.
C)$4,500.
D)$6,000.
E)$9,000.

Question 66

REFERENCE: 01-15
Cayman Inc.bought 30% of Maya Company on January 1,2018 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows:
$$\begin{array} { c c c c } & \text { Cost to } & \text { Transfer } & \text { Amount Held by } \\\text { Year } & \text { Maya } & \text { Price } & \text { Cayman at Year-End } \\\hline 2018 & \$ 30,000 & \$ 45,000 & \$ 9,000 \\2019 & \$ 48,000 & \$ 80,000 & \$ 20,000\end{array}$$ Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year.

-What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31,2019?

A)$1,500.
B)$2,400.
C)$3,600.
D)$4,000.
E)$8,000.

Question 67

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is the Equity in Howell Income that should be reported by Acker in 2017?

A)$10,000.
B)$24,000.
C)$36,000.
D)$38,400.
E)$40,000.

Question 68

REFERENCE: 01-13
On January 1,2018,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\\text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\\text { Franchises (10-vear life) } & 0 & 500,000\end{array}$ Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Rob Co.reported net income of $300,000 for 2018,and paid dividends of $100,000 during that year.

-What is the balance in Jackie Corp's Investment in Rob Co.account at December 31,2018?

A)$2,000,000.
B)$2,005,000.
C)$2,060,000.
D)$2,090,000.
E)$2,200,000.

Question 69

REFERENCE: 01-13
On January 1,2018,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\\text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\\text { Franchises (10-vear life) } & 0 & 500,000\end{array}$ Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Rob Co.reported net income of $300,000 for 2018,and paid dividends of $100,000 during that year.

-How much goodwill is associated with this investment?

A)$(500,000. )
B)$ 0.
C)$ 650,000.
D)$1,000,000.
E)$2,000,000.

Question 70

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is the balance in Acker's Investment in Howell account at December 31,2017?

A)$576,000.
B)$598,400.
C)$614,400.
D)$606,000.
E)$616,000.

Question 71

REFERENCE: 01-11
On January 4,2018,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2018,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2019,Mason sold 10,000 shares for $150,000.

-What is the appropriate journal entry to record the sale of the 10,000 shares?
A.
$\begin{array}{llr} \text { Cash} &150,000\\ \text { Investment in Hefly } &&150,000\\\end{array}$

B.
$\begin{array}{llr} \text { Cash} &150,000\\ \text { Investment in Hefly } &&130,000\\ \text { Gain on sale of investment } &&20,000\end{array}$

C.
$\begin{array}{llr} \text { Cash } &150,000\\ \text { Loss on sale of investment } &1,000\\ \text { Investment in Hefly } &&151,000\end{array}$

D.
$\begin{array}{llr} \text { Cash} &150,000\\ \text { Investment in Hefly } &&149,000\\ \text { Gain on sale of investment} &&1,000\end{array}$

E.
$\begin{array}{llr} \text { Cash} &150,000\\ \text {Loss on sale of investment } &10,000\\ \text { Investment in Hefly } &&160,000\end{array}$

A)A Above
B)B Above
C)C Above
D)D Above
E)E Above

Question 72

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31,2018?

A)$ 1,600.
B)$ 8,000.
C)$15,000.
D)$20,000.
E)$40,000

Question 73

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is the balance in Acker's Investment in Howell account at December 31,2018?

A)$624,000.
B)$636,000.
C)$646,000.
D)$656,000.
E)$666,000.

Question 74

REFERENCE: 01-15
Cayman Inc.bought 30% of Maya Company on January 1,2018 for $450,000.The equity method of accounting was used.The book value and fair value of the net assets of Maya on that date were $1,500,000.Maya began supplying inventory to Cayman as follows:
$$\begin{array} { c c c c } & \text { Cost to } & \text { Transfer } & \text { Amount Held by } \\\text { Year } & \text { Maya } & \text { Price } & \text { Cayman at Year-End } \\\hline 2018 & \$ 30,000 & \$ 45,000 & \$ 9,000 \\2019 & \$ 48,000 & \$ 80,000 & \$ 20,000\end{array}$$ Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year.

-What is the Equity in Maya Income that should be reported by Cayman in 2018?

A)$17,100.
B)$18,000.
C)$25,500.
D)$29,100.
E)$30,900.

Question 75

REFERENCE: 01-13
On January 1,2018,Jackie Corp.purchased 30% of the voting common stock of Rob Co. ,paying $2,000,000.Jackie properly accounts for this investment using the equity method.At the time of the investment,Rob's total stockholders' equity was $3,000,000.Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (15-year life) } & \$ 1,000,000 & \$ 1,500,000 \\\text { Equipment (5-year life) } & 2,500,000 & 3,000,000 \\\text { Franchises (10-vear life) } & 0 & 500,000\end{array}$ Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Rob Co.reported net income of $300,000 for 2018,and paid dividends of $100,000 during that year.

-What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co.for year 2018?

A)$ 0.
B)$30,000.
C)$40,000.
D)$55,000.
E)$60,000.

Question 76

REFERENCE: 01-11
On January 4,2018,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2018,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2019,Mason sold 10,000 shares for $150,000.

-What is the balance in the investment account after the sale of the 10,000 shares?

A)$390,000.
B)$420,000.
C)$453,000.
D)$454,000.
E)$465,000.

Question 77

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is the Equity in Howell Income that should be reported by Acker in 2018?

A)$32,000.
B)$41,600.
C)$48,000.
D)$49,600.
E)$50,600.

Question 78

REFERENCE: 01-14
Acker Inc.bought 40% of Howell Co.on January 1,2017 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
$$\begin{array} { c c c c } \text { Year } & \begin{array} { c } \text { Cost to } \\\text { Ycker }\end{array} & \begin{array} { c } \text { Transfer } \\\text { Price }\end{array} & \begin{array} { c } \text { Amount Held by } \\\text { Howell at Year-End }\end{array} \\\hline 2017 & \$ 55,000 & \$ 75,000 & \$ 15,000 \\2018 & \$ 70,000 & \$ 10,000 & \$ 55,000\end{array}$$ Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year.

-What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31,2017?

A)$ 1,600.
B)$ 4,000.
C)$ 8,000.
D)$15,000.
E)$20,000.

Question 79

REFERENCE: 01-12
On January 4,2018,Bailey Corp.purchased 40% of the voting common stock of Emery Co. ,paying $3,000,000.Bailey properly accounts for this investment using the equity method.At the time of the investment,Emery's total stockholders' equity was $5,000,000.Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:
$\begin{array}{lrr}&\text { Book Value } &\text { Fair Value }\\\text { Buildings (20-year life) } & \$ 1,000,000 & \$ 1,800,000 \\\text { Equipment (5-year life) } & 1,500,000 & 2,000,000 \\\text { Franchises (10-vear life) } & 0 & 700,000\end{array}$
Any excess of cost over fair value was attributed to goodwill,which has not been impaired.Emery Co.reported net income of $400,000 for 2018,and paid dividends of $200,000 during that year.

-What is the amount of the excess of purchase price over book value?

A)$(2,000,000).
B)$ 800,000.
C)$1,000,000.
D)$2,000,000.
E)$3,000,000.

Question 80

REFERENCE: 01-11
On January 4,2018,Mason Co.purchased 40,000 shares (40%)of the common stock of Hefly Corp. ,paying $560,000.At that time,the book value and fair value of Hefly's net assets was $1,400,000.The investment gave Mason the ability to exercise significant influence over the operations of Hefly.During 2018,Hefly reported income of $150,000 and paid dividends of $40,000.On January 2,2019,Mason sold 10,000 shares for $150,000.

-What is the gain/loss on the sale of the 10,000 shares?

A)$20,000 gain.
B)$10,000 gain.
C)$1,000 gain.
D)$1,000 loss.
E)$10,000 loss.