Deck 1: The Equity Method of Accounting for Investments

Question 1

On January 3, 2011, 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: 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.

Answer 1

D

Question 2

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2011, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered 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 2011 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.

Answer 2

B

Question 3

On January 1, 2011, 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 made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2011 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, 2011?

A) $2,040,500.
B) $2,212,500.
C) $2,260,500.
D) $2,171,500.
E) $2,071,500.

Answer 3

E

Question 4

On January 1, 2011, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2012, 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 have accounted 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 2011.
C) Jordan has the option of using either the equity method or the fair-value method for 2011 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 2012 and future years but should not make a retrospective adjustment to the investment account.

Question 5

During January 2010, 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 2010, Wilton reported net income of $600,000. For 2011, 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, 2011?

A) $1,609,000.
B) $1,485,000.
C) $1,685,000.
D) $1,647,000.
E) $1,054,300.

Question 6

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, 2011, 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 2011, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2010, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2010. The remainder was used during the first few weeks of 2011. Additional sales were made to Atlarge in 2011; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2012. What amount of equity income would Atlarge have recognized in 2011 from its ownership interest in Ticker?

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

Question 7

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 inventory profit must be deferred by Tower?

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

Question 8

On January 3, 2011, 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: 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 2011, 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, 2011, 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 2011, 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, 2011?

A) $950,800.
B) $958,000.
C) $836,000.
D) $990,100.
E) $956,400.

Question 10

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, 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 11

A company 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 another company's stock.
C) it has a controlling interest (more than 50%) of another company'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 12

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) significant control.

Question 13

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, 2011, 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 2011, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2010, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2010. The remainder was used during the first few weeks of 2011. Additional sales were made to Atlarge in 2011; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2012. What was the balance in the Investment in Ticker Co. account at the end of 2011?

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

Question 14

On January 1, 2011, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2011 and paid dividends of $36,000. On January 1, 2012, 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 2012, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2012, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. On Deuce's December 31, 2012 balance sheet, what balance was reported for the Investment in Wiz Co. account?

A) $139,560.
B) $143,400.
C) $310,130.
D) $186,080.
E) $182,250.

Question 15

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.

Question 16

On January 4, 2011, 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 2011, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2012, 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 17

On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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 2011 but should make no changes in its financial statements for 2010 and 2009.
B) It should prepare consolidated financial statements for 2011.
C) It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years.
D) It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009.
E) It must restate the financial statements for 2010 as if the equity method had been used then.

Question 18

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? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.

A) Entries 1 and 2.
B) Entries 2 and 3.
C) Entry 1 only.
D) Entry 2 only.
E) Entry 3 only.

Question 19

On January 1, 2011, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2011 and paid dividends of $36,000. On January 1, 2012, 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 2012, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2012, Wiz reported a net book value of $468,000. For both purchases, 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 2012?

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

Question 20

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 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?

A) $16,500.
B) $9,000.
C) $25,500.
D) $7,500.
E) $50,000.

Question 21

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. 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 22

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 the same as a loss in value of other long-term assets.
C) The investor's stockholders' equity is reduced.
D) No adjustment is necessary.
E) An extraordinary loss would be reported.

Question 23

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported 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 2010, is

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

Question 24

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 25

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2012 with regard to the Gates investment is

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

Question 26

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported 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, 2011, is

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

Question 27

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

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

Question 28

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. The balance in the investment account at December 31, 2012, is

A) $370,000.
B) $355,000.
C) $305,000.
D) $400,000.
E) $105,000.

Question 29

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

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

Question 30

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 31

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported 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 2011, is

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

Question 32

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2011 with regard to the Gates investment is

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

Question 33

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. Which adjustment would be made to change from the fair-value method to the equity method?

A) A debit to additional paid-in capital for $15,000.
B) A credit to additional paid-in capital for $15,000.
C) A debit to retained earnings for $15,000.
D) A credit to retained earnings for $15,000.
E) A credit to a gain on investment.

Question 34

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control 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 35

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 losses as extraordinary items.

Question 36

When applying the equity method, how is the excess of cost over book value 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 37

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported 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, 2010, is

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

Question 38

Which statement is true concerning unrealized profits in intra-entity inventory transfers 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 39

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

A) A realized gain or loss is reported as the difference between selling price and original cost.
B) An unrealized gain or loss is reported as the difference between selling price and original cost.
C) A realized 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 as comprehensive income.

Question 40

On January 1, 2010, 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 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported 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, 2010, is

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

Question 41

On January 3, 2011, 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 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, 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 42

On January 4, 2011, 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 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, 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 43

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, 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 2012?

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

Question 44

On January 3, 2011, 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 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record the sale of the 15,000 shares?

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

Question 45

On January 1, 2011, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2011, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2011 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 46

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 unrealized intercompany profit must be deferred by Luffman?

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

Question 47

On January 4, 2010, 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 2010, Bike reported net income of $500,000. For 2011, 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 2010?

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

Question 48

On January 4, 2011, 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 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, 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 49

On January 3, 2011, 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 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, 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

On January 4, 2011, 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 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, 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.

Question 51

On January 4, 2010, 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 2010, Bike reported net income of $500,000. For 2011, 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, 2010?

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

Question 52

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.
How much income did Mehan report from Cook during 2011?

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

Question 53

On January 4, 2010, 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 2010, Bike reported net income of $500,000. For 2011, 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 2011?

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

Question 54

On January 3, 2011, 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 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, 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 55

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, 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, 2012 just before the sale of shares?

A) $468,281.
B) $468,750.
C) $558,375.
D) $616,000.
E) $624,375.

Question 56

On January 4, 2010, 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 2010, Bike reported net income of $500,000. For 2011, 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, 2011?

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

Question 57

On January 1, 2011, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2011, 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, 2011?

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

Question 58

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.
What is the balance in the investment account at December 31, 2010?

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

Question 59

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, 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, 2011?

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

Question 60

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 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, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.
How much income did Mehan report from Cook during 2010?

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

Question 61

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011?

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

Question 62

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2012?

A) $34,200.
B) $34,800.
C) $34,500.
D) $36,000.
E) $37,800.

Question 63

On January 1, 2011, 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: 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 2011, 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, 2011?

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

Question 64

On January 4, 2011, 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 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares?

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

Question 65

On January 4, 2011, 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: 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 2011, 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 66

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2012?

A) $488,700.
B) $489,600.
C) $492,000.
D) $494,400.
E) $514,500.

Question 67

On January 4, 2011, 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: 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 2011, 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 68

On January 4, 2011, 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: 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 2011, 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 69

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011?

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

Question 70

On January 1, 2011, 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: 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 2011, 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 2011?

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

Question 71

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2010?

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

Question 72

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2011?

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

Question 73

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2010?

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

Question 74

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2011?

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

Question 75

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2011?

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

Question 76

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2011?

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

Question 77

Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010?

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

Question 78

On January 1, 2011, 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: 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 2011, 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 79

On January 1, 2011, 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: 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 2011, 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 80

Cayman Inc. bought 30% of Maya Company on January 1, 2011 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: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the amount of unrealized inventory profit to be deferred on December 31, 2012?

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