Advanced acct final2

According to GAAP, the pooling of interest method for business combinations A. Is preferred to the purchase method. B. Is allowed for all new acquisitions. C. Is no longer allowed for business combinations after June 30, 2001. D. Is no longer allowed for business combinations after December 31, 2001. E. Is only allowed for large corporate mergers like Exxon and Mobil

C

On January 1, 2013, 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 2013, 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. $500,000 Blgs + $500,000 Equipt + $500,000 Franchises = ($1,500,000 FV > BV) × 30% = $450,000 ($1,100,000 Total > BV) - ($450,000 Identified) = $650,000 Unidentified (Goodwill)

C

On January 4, 2013, 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 2013, 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. $5,000,000 × 40% = $2,000,000 BV for 40% of the Shares $3,000,000 Price Paid - $2,000,000 BV = $1,000,000 Excess

C

SEE PROBLEM 63 HOMEWORK On January 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, 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 $1,000 Loss only shown in Option C

C

Which one of the following is a characteristic of a business combination that is accounted for as an acquisition? A. Fair value only for items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. B. Fair value only for the consideration transferred by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. C. Fair value for the consideration transferred by the acquirer as well as the fair value of items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. D. Fair value for only consideration transferred and identifiable assets received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. E. Only fair value of identifiable assets received enters into the determination of the acquirer's accounting valuation of the acquired company

C

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.

C

See Problem 43 Chapter 1 Word Doc

C $7,500

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2013? A. $624,000. B. $636,000. C. $646,000. D. $656,000. E. $666,000

A

Cayman Inc. bought 30% of Maya Company on January 1, 2013 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 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2013? A. $900. B. $3,000. C. $4,500. D. $6,000. E. $9,000.

A

See Problem 43 Chapter 1 Word Doc

A

B. $8,000. 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.

A $75,000 - $55,000 = $20,000 × ($15,000/$75,000) = $4,000 × 40% = $1,600 Deferred Profit

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.

A $0 $80,000 - $52,000 = $28,000 Income Recognized; None Deferred

On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, 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.

A $1,560,000 $1,500,000 + $90,000 - $30,000 = $1,560,000

During January 2012, 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 2012, Wilton reported net income of $600,000. For 2013, 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, 2013? A. $1,609,000. B. $1,485,000. C. $1,685,000. D. $1,647,000. E. $1,054,300.

A. $1,609,000. $6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000 $1,400,000 - $1,020,000 = $380,000/10yrs = $38,000 Unrecorded Patents Amortization $1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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, 2013, is A. $119,500. B. $125,500. C. $116,500. D. $118,000. E. $100,000.

A. $119,500. $107,500 + $21,000 - ($30,000 × 30%) = $119,500

On January 1, 2013, 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 2013 and paid dividends of $36,000. On January 1, 2014, 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 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, 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 2014? A. $30,000. B. $16,420. C. $38,340. D. $18,000. E. $32,840.

A. $30,000. 2014 Income = ($120,000 × 25%) = $30,000

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, 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 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The balance in the investment account at December 31, 2014, is A. $370,000. B. $355,000. C. $305,000. D. $400,000. E. $105,000.

A. $370,000. $105,000 + $22,500 - $7,500 = $120,000 Balance 2013 Year End $120,000 + $200,000 + $80,000 - $30,000 = $370,000 Balance 2014 Year End

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, 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 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2013 with regard to the Gates investment is A. $7,500. B. $22,500. C. $15,000. D. $100,000. E. $150,000.

A. $7,500. $7,500 = Dividends received in 2013

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, 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 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2014 with regard to the Gates investment is A. $80,000. B. $30,000. C. $50,000. D. $15,000. E. $75,000.

A. $80,000. $200,000 × 40% = $80,000

On January 1, 2013, 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 2013, 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, 2013? A. $950,800. B. $958,000. C. $836,000. D. $990,100. E. $956,400.

A. $950,800. $1,000,000 - $42,000 - $7,200 = $950,800

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2013? A. A debit of $16,500. B. A debit of $21,500. C. A debit of $90,000. D. A debit of $165,000. E. There is no adjustment.

A. A debit of $16,500. ($215,000 × 10%) - ($50,000 × 10%) = $16,500 Debit to the Investment Account

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.

A. It has the ability to exercise significant influence over the operating policies of the investee.

Which of the following results in an increase in the investment account when applying the equity method? A. Unrealized gain on intra-entity inventory transfers for the prior year. B. Unrealized gain on intra-entity inventory transfers for the current year. C. Dividends paid by the investor. D. Dividends paid by the investee. E. Sale of a portion of the investment during the current year.

A. Unrealized gain on intra-entity inventory transfers for the prior year.

Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. a worksheet. B. Lisa's general journal. C. Victoria's general journal. D. Victoria's secret consolidation journal. E. the general journals of both companies.

A. a worksheet.

A statutory merger is a(n) A. business combination in which only one of the two companies continues to exist as a legal corporation. B. business combination in which both companies continue to exist. C. acquisition of a competitor. D. acquisition of a supplier or a customer. E. legal proposal to acquire outstanding shares of the target's stock.

A. business combination in which only one of the two companies continues to exist as a legal corporation.

CHECK PROBLEM #2 CHAPTER 2 In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? A. Option A B. Option B C. Option C D. Option D E. Option E

B

CHECK PROBLEM 59 HOMEWORK On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, 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. $20,000 Gain is Only shown in Option B

B

Cayman Inc. bought 30% of Maya Company on January 1, 2013 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 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized inventory profit to be deferred on December 31, 2014? A. $1,500. B. $2,400. C. $3,600. D. $4,000. E. $8,000.

B

On January 1, 2013, 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 2013, 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, 2013? A. $2,000,000. B. $2,005,000. C. $2,060,000. D. $2,090,000. E. $2,200,000. $2,000,000 + ($300,000 × 30%) - ($100,000 × 30%) - $55,000 = $2,005,000

B

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.

B. $3,240. $120,000 - $66,000 = $54,000 $24,000/$120,000 = 20% × $54,000 = $10,800 × 30% = $3,240

On January 4, 2013, 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 2013, 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. $800,000/20 = $40,000 per year Blgs × 40% = $16,000 $500,000/5 = $100,000 per year Equipt × 40% = $40,000 $700,000/10 = $70,000 per year Franchises × 40% = $28,000 $16,000 + $40,000 + $28,000 = $84,000 Annual Excess Amortization

B

Which one of the following is a characteristic of a business combination accounted for as an acquisition? A. The combination must involve the exchange of equity securities only. B. The transaction establishes an acquisition fair value basis for the company being acquired. C. The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company. D. The transaction may be considered to be the uniting of the ownership interests of the companies involved. E. The acquired subsidiary must be smaller in size than the acquiring parent.

B

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

B

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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: YEAR/ COST TO ACKER/ TRANSFER PRICE/ AMOUNT HELD BY HOWELL AT YEAR-END: 2010/ $55,000/ $75,000/ $15,000 2011/ $70,000/ $110,000/ $55,000 Howell reported net income of $100,000 in 2012 and $120,000 in 2013 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.

B $41,600 $120,000 × 40% = $48,000 + ($1,600 in 2012 Recognized Inventory Profit) - ($8,000 in 2013 Deferred Inventory Profit) = $41,600

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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: YEAR/ COST TO ACKER/ TRANSFER PRICE/ AMOUNT HELD BY HOWELL AT YEAR-END: 2010/ $55,000/ $75,000/ $15,000 2011/ $70,000/ $110,000/ $55,000 Howell reported net income of $10 Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2012? A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000.

B $598,400. $576,000 + ($100,000 × 40%) - ($40,000 × 40%) - ($1,600 Deferred Profit) = $598,400

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, 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, 2013? A. $1,900,000. B. $1,960,000. C. $2,000,000. D. $2,016,000. E. $2,028,000.

B. $1,960,000. $2,000,000 - $28,000 - $12,000 = $1,960,000

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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 2012, is A. $9,000. B. $13,500. C. $15,000. D. $7,500. E. $50,000.

B. $13,500. 2012 Equity Income = ($50,000 × 30%) = $15,000 2012 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500 $15,000 - $1,500 = $13,500

On January 1, 2013, 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 2013 and paid dividends of $36,000. On January 1, 2014, 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 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, 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, 2014 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

B. $143,400.

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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 2012? A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000.

B. $200,000. $500,000 × 40% = $200,000

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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 2013, is A. $22,500. B. $21,000. C. $12,000. D. $13,500. E. $75,000.

B. $21,000. 2013 Equity Income = ($75,000 × 30%) = $22,500 2013 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500 $22,500 - $1,500 = $21,000

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, 2013, the balance in the Investment in Ticker Co. account was $402,000. with the purchase of this investment is $8,000 per year. During 2013, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What was the balance in the Investment in Ticker Co. account at the end of 2013? A. $401,136. B. $413,872. C. $418,840. D. $412,432. E. $410,148.

B. $413,872 2013 Beginning Balance = $402,000 2013 Income Recognized = $22,672 2013 Dividend Received = ($36,000 × 30%) = $10,800 2013 Ending Balance = ($402,000 + $22,672 - $10,800) = $413,872

On January 4, 2013, 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 2013, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2014, 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.

B. $742,000. $800,000 + $80,000 - $32,000 = $848,000 - (5,000/40,000 × $848,000) = $742,000

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2013, 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.

B. $75,000. $250,000 × .30 = $75,000

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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: YEAR/ COST TO ACKER/ TRANSFER PRICE/ AMOUNT HELD BY HOWELL AT YEAR-END: 2010/ $55,000/ $75,000/ $15,000 2011/ $70,000/ $110,000/ $55,000 Howell reported net income of $10 Howell reported net income of $100,000 in 2012 and $120,000 in 2013 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.

B. $8,000. $110,000 - $70,000 = $40,000 × ($55,000/$110,000) = $20,000 × 40% = $8,000 Deferred Profit

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, 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: Net Income Dividends 2013 200,000 50,000 2014 225,000 50,000 2015 250,000 60,000 On April 1, 2014, 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 2014? A. $61,750. B. $81,250. C. $72,500. D. $59,250. E. $75,000.

B. $81,250. (First Qtr Income × 40%) + (2nd thru 4th Qtr Income × 30%) $25,000 + $56,250 = $81,250

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 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this investment in 2013? A. $16,500. B. $9,000. C. $25,500. D. $7,500. E. $50,000.

B. $9,000. $60,000 × .15 = $9,000

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.

B. A loss is reported the same as a loss in value of other long-term assets.

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

B. Dividends received are reported as revenue.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, 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 2013 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.

B. No accounting because the decline in fair value is temporary.

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.

B. The extraordinary loss would reduce the value of the investment.

On January 3, 2013, 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 2013, 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.

C 30,000

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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, 2012? A. $880,000. B. $2,400,000. C. $2,480,000. D. $2,600,000. E. $2,900,000.

C. $2,480,000. $2,400,000 + $200,000 - $120,000 = $2,480,000

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, 2013, 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 2013, Tickere arned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2012. The remainder was used during the first few weeks of 2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What amount of equity income would Atlarge have recognized in 2013 from its ownership interest in Ticker? A. $19,792. B. $27,640. C. $22,672. D. $24,400. E. $21,748

C. $22,672.

On January 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, 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.

C. $453,000. $604,000 - $151,000 = $453,000

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, 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: Net Income Dividends 2013 200,000 50,000 2014 225,000 50,000 2015 250,000 60,000 On April 1, 2014, 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, 2014 just before the sale of shares? A. $468,281. B. $468,750. C. $558,375. D. $616,000. E. $624,375.

C. $558,375. $540,000 + ($25,000 - $625) - $6,000 = $558,375 2014 Begin Investment Acct Balance + (40% of 1st Qtr Income - 1st Qtr Amort) - 1st Qtr Div

On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, 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.

C. $780,000. $1,560,000 × (15,000/30,000) = $780,000 Cost of shares Sold $1,560,000 - $780,000 Cost of Shares Sold = $780,000 Balance in the Investment Account

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

C. A realized gain or loss is reported as the difference between selling price and carrying value.

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.

C. A retrospective change in accounting principle must occur.

An example of a difference in types of business combination is: A. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition. B. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition. C. A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution. D. A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E. Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

C. A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution.

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital.

C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.

On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, 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 2013 but should make no changes in its financial statements for 2012 and 2011. B. It should prepare consolidated financial statements for 2013. C. It must restate the financial statements for 2012 and 2011 as if the equity method had been used for those two years D. It should record a prior period adjustment at the beginning of 2013 but should not restate the financial statements for 2012 and 2011. E. It must restate the financial statements for 2012 as if the equity method had been used then.

C. It must restate the financial statements for 2012 and 2011 as if the equity method had been used for those two years

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.

C. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.

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.

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.

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Unrealized gain on intra-entity inventory transfers for the current year. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Extraordinary gain of the investee.

C. Unrealized gain on intra-entity inventory transfers for the current year.

At the date of an acquisition which is not a bargain purchase, the acquisition method A. consolidates the subsidiary's assets at fair value and the liabilities at book value. B. consolidates all subsidiary assets and liabilities at book value. C. consolidates all subsidiary assets and liabilities at fair value. D. consolidates current assets and liabilities at book value, long-term assets and liabilities a tfair value. E. consolidates the subsidiary's assets at book value and the liabilities at fair value.

C. consolidates all subsidiary assets and liabilities at fair value.

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.

C. valuation at fair value.

. On January 1, 2013, 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 2013, 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 2013? A. $0. B. $30,000. C. $40,000. D. $55,000. E. $60,000. $500,000/15 = $33,333 per year Blgs × 30% = $10,000 $500,000/5 = $100,000 per year Equipt × 30% = $30,000 $500,000/10 = $50,000 per year Franchises × 30% = $15,000 $10,000 + $30,000 + $15,000 = $55,000 Annual Excess Amortization

D

Acquired in-process research and development is considered as A. a definite-lived asset subject to amortization. B. a definite-lived asset subject to testing for impairment. C. an indefinite-lived asset subject to amortization. D. an indefinite-lived asset subject to testing for impairment. E. a research and development expense at the date of acquisition

D

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

D

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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, 2012, is A. $25,000. B. $13,000. C. $9,000. D. $16,000. E. $10,000.

D

On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. At what amount will Inkblot be reflected in Trycker's December 31, 2012 balance sheet? A. $2,400,000. B. $2,280,000. C. $2,480,000. D. $2,800,000. E. $7,000,000

D

On January 4, 2013, 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 2013, 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. $800,000 Blgs + $500,000 Equipt + $700,000 Franchises = $2,000,000 FV > BV of Assets $2,000,000 × 40% = $800,000 FV Identified to Purchaser $1,000,000 Price Paid - $800,000 FV > BV = $200,000 Excess Unidentified (Goodwill)

D

See Problem 42 Chapter 1 Word Doc

D

Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year

D

Acker Inc. bought 40% of Howell Co. on January 1, 2012 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: YEAR/ COST TO ACKER/ TRANSFER PRICE/ AMOUNT HELD BY HOWELL AT YEAR-END: 2010/ $55,000/ $75,000/ $15,000 2011/ $70,000/ $110,000/ $55,000 Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2012? A. $10,000 B. $24,000. C. $36,000. D. $38,400. E. $40,000.

D $38,400 $100,000 × 40% = $40,000 - ($1,600 Deferred Inventory Profit) = $38,400

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, 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: Net Income Dividends 2013 200,000 50,000 2014 225,000 50,000 2015 250,000 60,000 On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2013? A. $90,000. B. $110,000. C. $67,500. D. $87,500. E. $78,750.

D $87,500 $225,000 × 40% = $90,000 $300,000 - $287,500 = $12,500/5 = $2,500 $90,000 - $2,500 = $87,500

On January 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, 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.

D. $1,000 loss. $604,000 × (10,000/40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price - $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares

On January 1, 2012, 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 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 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, 2012, is A. $100,000. B. $112,000. C. $106,000. D. $107,500. E. $140,000.

D. $107,500. $100,000 + $13,500 - ($20,000 × 30%) = $107,500

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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 2013? A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000.

D. $320,000. $800,000 × 40% = $320,000

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. What is the balance in the Investment in Stanley Corporation on December 31, 2013? A. $415,000. B. $512,500. C. $523,000. D. $539,500. E. $544,500.

D. $539,500.

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 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, 2012, was $1,000,000. The book value of Cook on January 1, 2013, 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: Net Income Dividends 2013 200,000 50,000 2014 225,000 50,000 2015 250,000 60,000 On April 1, 2014, 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, 2013? A. $517,500. B. $537,500. C. $520,000. D. $540,000. E. $211,250.

D. $540,000. $150,000 + $30,000 - $7,500 = $172,500 Balance 2012 Year End $172,500 + $300,000 + ($90,000 - $2,500) - $20,000 = $540,000 Balance 2013 Year End

On January 4, 2013, 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 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, 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.

D. $604,000. $560,000 + ($150,000 × 40%) - ($40,000 × 40%) = $604,000

On January 3, 2013, 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.

D. 300,000

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, 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 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 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.

D. A credit to retained earnings for $15,000. $22,500 - $7,500 = $15,000 CR to R/E

Using the acquisition method for a business combination, goodwill is generally defined as: A. Cost of the investment less the subsidiary's book value at the beginning of the year. B. Cost of the investment less the subsidiary's book value at the acquisition date. C. Cost of the investment less the subsidiary's fair value at the beginning of the year. D. Cost of the investment less the subsidiary's fair value at acquisition date. E. is no longer allowed under federal law.

D. Cost of the investment less the subsidiary's fair value at acquisition date.

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.

D. Entry 2 only.

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? A. Amortizations of purchase price over book value on date of purchase. B. Amortizations, since date of purchase, of purchase price over book value on date of purchase. C. Extraordinary gain of the investor. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Sale of a portion of the investment at a loss

D. Unrealized gain on intra-entity inventory transfers for the prior year.

On January 1, 2013, 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 2013, 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. $2,000,000 - ($3,000,000 × 30%) = $1,100,000 Price Paid > BV

E

On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2014, 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 2013. C. Jordan has the option of using either the equity method or the fair-value method for 2013 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 2014 and future years but should not make a retrospective adjustment to the investment account.

E

On January 1, 2013, 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 2013 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, 2013? A. $2,040,500. B. $2,212,500. C. $2,260,500. D. $2,171,500. E. $2,071,500. $1,920,000 + ($670,000 × .45) - ($2.50 × 60,000) = $2,071,500

E

On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. How are dividends received from Inkblot reflected in Trycker's accounting records for 2012? A. Reduce investment in Inkblot by $280,000. B. Increase Investment in Inkblot by $280,000. C. Reduce Investment in Inkblot by $120,000. D. Increase Investment in Inkblot by $120,000. E. Increase Dividend Income by $120,000.

E

On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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 2013? A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000. D. $320,000. $800,000 × 40% = $320,000 On January 4, 2012, 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 2012, Bike reported net income of $500,000. For 2013, 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, 2013? A. $2,400,000. B. $2,480,000. C. $2,500,000. D. $2,600,000. E. $2,680,000.

E. $2,680,000. $2,480,000 + $320,000 - $120,000 = $2,680,000

On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, 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.

E. $20,000 gain. $1,560,000 × (15,000/30,000) = $780,000 Cost of Shares Sold $800,000 Sales Price - $780,000 Cost of Shares Sold = $20,000 Gain on Sale of Shares

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2013 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.

E. $28,000 loss. $70,000 Loss × 40% = $28,000 Loss

What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division. B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company

E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company

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.

E. made by the investee to the investor.

See Problem 41 Chapter 1 on word doc

Entry C