Advanced Accounting - Exam 1

On January 1, 2017, Dawson Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee has 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 operations of Sacco. The amount allocated to goodwill at January 1, 2017, is: a. $16,000 b. $13,000 c. $25,000 d. $9,000 e. $10,000

a. $16,000 book value purchased = (550,000 - 300,000) = 250,000 * 30% = 75,000 Excess: 75,000 * 30% = 25,000 Allocated to patent: 40,000 - 10,000 = 30,000 *30% = 9,000 Remainder to goodwill = 25,000 - 9,000 = 16,000

On January 1, 2017, Dawson Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee has 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 operations of Sacco. The equity in income of Sacco for 2017 is: a. $15,000 b. $13,500 c. $50,000 d. $7,500 e. $9,000

b. $13,500 2017 equity income = 50,000 * 30% = 15,000 2017 excess patent amortization = (40,000 - 10,000) / 6 = 5,000 * 30% = 1,500 15,000 - 1,500 = 13,500

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. $50,000 b. $9,000 c. $16,500 d. $7,500 e. $25,500

b. $9,000 = $60,000 * 15%

In a situation where the investor exercises significant influence over the invest, 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 invest 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 II and III b. Entries I and II c. Entry II only d. Entry III only e. Entry I only

c. Entry II only

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 restate the financial statements for 2017 and 2016 as if the equity method has been used for those two years. b. It should prepare consolidated financial statements for 2018. c. It should record a prior period adjustment at the beginning of 2018 but should not restate the financial statements for 2017 and 2016. d. It must use the equity method 2018 but should make no changes in its financial statements for 2017 and 2016. e. It must restate the financial statements for 2017 as if the equity method had been used then.

d. It must use the equity method 2018 but should make no changes in its financial statements for 2017 and 2016.