Chapter 12 Smartbook

Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 million and declared dividends of $1 million. Ziegler should report income from its investment of

$800,000

Holding gain or loss in other comprehensive income

AFS securities

Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct?

Barber mat choose to apply the fair value option.

Holding gain or loss in income

Trading debt securities

How are equity investments that lack significant influence adjusted?

Unrealized holding gain or loss is included in net income. A fair value adjustment is recorded at the end of every reporting period.

Consistent with the equity method, investment income is

based on investor's income times ownership percentage

All equity investments are initially recorded at

cost

Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at

cost

Dividends cause the investor's investment in the investee's net assets to

decrease

Goodwill arising from an investment accounted for under the equity method is

not amortized

Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the Statement of Cash Flows.

operating

The carrying value of an equity method investment consists of its initial cost plus

the investor's equity in the investee's undistributed income

Which reporting method should be used if the investor can exert significant influence over the investee?

Equity method

Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. During the year after the acquisition, the undervalued equipment will _____ Lerner's investment revenue by _____.

decrease; $1,500

If a company chooses to apply the fair value option to investments that otherwise would be accounted for under the equity method, the election

-is irrevocable -can be made for some investments and not others

How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?

A valuation allowance account is increased or decreased.

When an equity method investment is sold,

a gain or loss is recognized if the sales price is more or less than the book value.

If the investee reports a net loss, the equity investment account is not adjusted for additional expenses.

False

James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should

Credit dividend revenue

Gruen Corporation aquires a 25% interest in Blau Company for $1 million. The excess of investment cost over Gruen's share of the book value of Blau's net assets is solely attributable to goodwill. During the year, Blau reports income of $500,000 and declares dividends of $100,000. The carrying value of Gruen's investment at the end of the accounting period will be:

$1.1 million

When fair value of equity investments is not readily determinable

-the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments. -the investor needs to continually evaluate whether fair value is readily determinable. -the investor needs to assess annually whether the investment is impaired.

No holding gain or loss is recognized

HTM securities

Which of the following scenarios may require additional adjustments under the equity method?

The investor's acquisition cost exceeds the book value of the underlying net assets.

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct?

Von has significant influence over Neumann. Von owns 20-50% of Neumann's voting shares.

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale?

credit fair value adjustment $5,000 debit cash $505,000 credit investment in North stock $500,000

Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet.

curren or noncurrent assets

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with

debit investment in Saddle $450,000 credit cash $450,000

Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

decrease by $10,000

Silvia Company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

decrease by $30,000

Under the equity method, if the investee company reports a net loss, the investment balance will

decrease by the investor's proportionate share of the investee's net loss

Under the equity method, dividends received from the investment

decrease the investment account balance

Abbott Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquisition, the fair value of Berta's equipment with a remaining useful life of five years and no residual value exceeded its carrying value by $20,000. During the year after the acquisition, the undervalued equipment will _____ Abbott's investment revenue by _____.

decrease; $1,200

Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the

equity method

Additional adjustments under the equity method directly affect which of the following accounts?

investment investment revenue

On July 1, Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle reports income of $200,000 and declares dividends of 50,000. Adrianna should recognize income earned by debiting

investment in Saddle company for $35,000

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should

not amortize the difference between fair value and book value attributable to land.

When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the

original cost of the investment

When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the

original cost of the investment.

If an investment accounted for under the equity method is acquired during the year, income and other adjustments are

recognized for the portion of the year the investment was owned.

When fair value of equity investments is not readily determinable,

the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.