ACCT 4030 Advanced Accounting: Chapter 2

Major Corp acquires 20% of the common stock of Minor Inc on October 1, 2021 for $300,000. Minor declares a divident of $50,000 on December 31, 2021. Major's share of dividends from this investment is what?

$10,000 (20% x $50,000)

Sapphire Designs Corp acquired all of the stock of Ruby Systems Inc on January 1, 2021. During 2021, Ruby Systems earned net income of $47,500. The net income earned by Sapphire Designs is $175,000, including the equity method income of $47,500. Compute the consolidated net income of Sapphire Designs for 2021.

$175,000 $175,000 - $47,500 + $47,500

Power Devices, Inc acquired 20% of Yates Zone Corp's common stock for $500,000 on January 1, 2021. During the acquisition year, Yates reported net income of $200,000, and declared dividends of $90,000. The carrying amount of the investment is $ under the equity method.

$522,000

Which of the following will decrease the investment account on the books of the investor when the equity method is applied?

- A net loss reported by the investee - Dividends delcared by the investee

Which of the following are approaches commonly used to account for investments in common stock?

- Equity Method - Consolidated - Fair Value

The journal entry made by a parent company to record its shares of the income from an investee company is referred to as the Equity accrual.

True

Tate Corp acquired 25% of Page Inc's common stock for $250,000 on January 1. In the acquisition year, Page Inc earned net income of $80,000 and declared dividends of $25,000. Calculate the carrying amount of the investment under the equity method.

$263,750 Original Cost of $250,000 plus share of net income of $80,000 x 25% = $20,000 minus share of dividends of $25,000 x 25% = $6,250

On January 1, 2021, Long Developers owned 20% of Short Developer's common stock. Long's investment in Short account balance on June 30 was $206,000. On July 1, 2021, Long acquired another 15% of Short's common stock for $170,000. Short reported net income $40,000 from July 1 to December 31. Short Developers also declared dividends of $20,000 on July 15. Calculate Long's balance in its investment in Short account on December 31, 2021.

$383,000 $206,000 + $170,000 + ($40,000 * 35%) - ($20,000 * 35%)

Which of the following are true of consolidation?

- During consolidation, the investment and related income accounts are eliminated in preparing the consolidated financial statements - It is appropriate when the investor can exercise control over the investee - The individual assets, liabilities, revenues, and expenses of the investee are combined with those of the investor

Which of the following methods would be used when an investor acquires more than 50% of an investee's voting shares?

Consolidation

If an investor purchases 40% of an investee's voting shares and this investment provides the investor with significant influence over the investee, the investor would apply which of the following methods to account for the investment?

Equity method

What will be the effect of the net income reported by an investee on the investment account of the investor?

The investment account will increase

The sale of all or part of an investment in common stock carried under the equity method is treated the same as the sale of any

noncurrent

Under the equity method of accounting for an investment, an investor records its investment at the

original

Corn Inc acquired 100% of Candy Corp's common stock for $200,000. The fair value of the investment was equal to the book value on the acquisition date. The investment account was equalt o the combined book value of CAndy Corp's common stock of $150,000 and REtained EArnings of $50,000. In the acquisition year, CAndy earned net income of $22,000 and declared dividends of $8,000. Candy's ending retained earnings balance is?

$64,000

Assume Adam Corp acquires 20% of the stock Baker Inc on Jan 1 2021 for $500,000. Adam acquired an additional 10% of the stock on June 1, 2021 for $300,000. Baker declares dividends of $15,000 on January 15 and $20,000 on July 15. Calculate Adam's share of total dividends declared by Baker.

$9,000 ($15,000 * 20%) + ($20,000 * 30%)

Which of the following are true regarding the equity method of accounting for investments in equity securities?

- Income recognized from the investee is reported as one line in the investor's income statement - It is appropriate when the investor has the ability to exercise significant influence over the investee and consolidation is not appropriate - The investment is reported as one line in the investor's balance sheet

Which of the following accounts are involved in the basic consolidation entry?

- Investment in Investee Company - Common Stock - Retained Earnings

Which of the following are recognized as income fo rthe investor under the fair value method?

- Investor's share of investee's dividends declared from earnings - Unrealized gains or losses during the investment period

Which of the following are true of a dividend declared by an investee under the equity method of accounting for an investment?

- It will be recorded as an asset on the books of an investor - It will decrease the balance of the investment account

Which of the following items are excluded from the parent's net income in calculating consolidated net income using a consolidation worksheet when the parent company owns 100% of the common stock of its subsidiary? The parent uses the equity method.

- Net income from consolidated subsidiaries - Equity investment income from consolidated subsidiaries

Which of the following will require journal entries by the investor when the investment is carried at fair value?

- Sales of shares - Purchases of shares

In which of the following situation will the 20% rule associates with the equity method not apply even though the investor holds more than 20% of the investee's voting stock?

- Severe restrictions placed by a foreign government - Existence of a majority shareholder

In which of the following situations will the equity method most likely be used for reporting investments in common stock?

- The investor holds 20% or more of the investee's voting stock - The investment is a corporate joint venture - The investor has the ability to exercise significant influence over the investee

Under the equity method, which of the following is a reason the carrying amount of an investment may not be equal to its original cost?

- The investor's share of dividends declared by the investee reduce the carrying value of the investment - The investor's share of the investee's income increases the investment's carrying value - The investor's share of the investee's net loss reduces the investment's carrying value

Which of the following investor accounts are affected in recording an increase in the fair value of an investee's stock?

- Unrealized gain on investee stock - Investment in investee stock

The equity method of accounting for investments in equity securities is appropriate when

- consolidation is not appropriate - the investor has the ability to exercise significant influence over the investee

Which of the following is true of the basic consolidation entry?

- eliminated the income from the investee company account - eliminates the equity account of the investee company - eliminates the investment in the investee company account

On January 1, 2021, Trueware Inc acquired 100% of the Crocus Corp's common stock for $600,000. The purchase price was equal to the book value of Crocus' net assets. The ending book value of the total investment was $655,000 as of the end of 2021, which is equal to Crocus' Common Stock of $500,000 and Retained Earnings of $155,000. During 2022, Crocus earned net income of $65,000 and declared and paid dividends of $20,000. Based on this information, which of the following is debited in the basic consolidation entry?

Common Stock for $500,000 Retained Earnings for $155,000 Income from Crocus Corp for $65,000

Assume Thor Corp purchases 100% of the common stock of Hulk Inc at book value for $450,000. On the acquisition date, the book value of Hulk's common stock is $300,000 and the book value of the retained earnings is $150,000. Which of the following is the basic consolidation entry recorded in the consolidated worksheet on the acquisition date?

Debit: Common stock for $300,000 Debit: Retained Earnings for $150,000 Credit: Investment in Hulk Inc for $450,000

Which of the following journal entries would an investor company record when an investee company declares dividends? Assume the dividends have not yet been paid and the equity method is applied.

Debit: Dividends Receivable Credit: Investment in Investee Company Stock

Which of the following is the journal entry made by an investor company to record its equity method investment in another company?

Debit: Investment in Investee Company Stock Credit: Cash

On January 1, 2021, Trueware Inc acquired 100% of the Crocus Corp's common stock for $600,000. The purchase price was equal to the book value of Crocus' net assets. The ending book value of the total investment was $655,000 as of the end of 2021, which is equal to Crocus' Common Stock of $500,000 and Retained Earnings of $155,000. During 2022, Crocus earned net income of $65,000 and declared and paid dividends of $20,000. Based on this information, which of the following is credited in the basic consolidation entry?

Dividends Declared for $20,000 Investment in Crocus Corp for $700,000

Under the equity method, the investor's income statement will include what amount of the investee's income or loss for the period?

The investor's proportionate share of the investee's income or loss

Consolidation is generally appropriate when one company, referred to as the parent, controls another company, referred to as a subsidiary

True

Investments in which the investor's voting stock gives it the ability to exercise significant influence over operating and financial policies of the subsidiary company should use the Equity method of accounting for the investment

True

The investee's dividends are viewed as distributions of previously recognized income that already has been capitalized in the carrying amount of the investment

True

Under the fair value method of accounting for investments in equity securities, income is recognized when

dividends are declared by the investee