473 quiz 2

The equity method follows the __________ for recognizing investment income

accrual basis

An upstream sales refers to a situation where

an investor company buys inventory from its investee

In using the accrual basis, the equity method recognizes income for the investor

as earnings are reported by the investee

When an equity method investment account is reduced to a zero balance due to a current year investee loss, the investor should....

-accrue no additional losses -discontinue use of the equity method and not establish a negative balance -leave the investment account balance at zero until subsequent investee profits eliminate all unrecognized losses

Why does the equity method consider investee dividends as an inappropriate measure of investment income to an investor?

-investee dividends provide for a cash basis of income recognition, not an accrual basis -an investor can influence the timing of investee dividends and thus manipulate income

The equity method in accounting for an equity investment is applied when the investor company:

-participates in policy-making decisions of the investee -has representation on the investee's board of directors

The fair value option for reporting investments that would otherwise be accounted for under the equity method requires

-the inclusion in net income of changes in the fair value of an equity investment -the valuation of the equity method investment at fair value as of investor's balance sheet date -an irrevocable election to elect fair value as the measurement attribute for an equity investment

When an investor sells a portion of an equity method investment...

-the investment account should reflect a balance current as of the date of sale -the investor recognizes a gain or loss on the sale -the investor continues to apply the quity method if the investor continues to have the ability to exercise significant influence over the investee

Under the fair value method of accounting for an investment in another firm's ownership shares, the investor increase its investment account when

-the investor purchases shares of the investee -the fair value of the investee's shares increase -the investee declares a dividend

An intra-entity inventory sale occurs between an investor and its equity method investee. What factors determine the amount of gross profit from the sale to be deferred as of the end of the year?

-the investor's proportionate ownership of the investee - the seller's gross profit % -the amount of the intra-entity sale remaining in ending inventory

An investor originally purchased 5% of an investee and appropriately applied the fair value method to account for its investment. Later, the investor purchased sufficient additional shares to qualify the investment for the equity method. How should the investor account for the newly qualified equity investment?

Add the cost of the shares to the current basis of its previous 5% investment

Because certain intangible assets are considered to have indefinite lives, they are not subject to...

Amortization

The account objective underlying the equity method for investments is to...

report the investment and related income reflecting the close relationship between the investor and investee

If an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method?

the investment's total fair value as of the date the investment qualifies for the equity method

In applying the equity method,

the investor recognizes its proportionate share of the investee's income

Under the equity method, the investor records a credit to the investment account if a _____________ is reported on the investee's income statement

net loss

Zell company sells inventory at a $10,000 gross profit to its equity method investee, Aaron Company. Before the end of the year, Aaron resells all of this inventory to an outside, unrelated entity. As a result of these activities, Zell company should....

recognize the entire $10,000 gross profit on its income statement

When an equity method investee company's activities require recognition of OCI, the investor company...

records its proportionate share of the investee's OCI as AOCI on its financial records

An investor sells inventory to it's investee, at a profit. At year end, the investee has not disposed of this inventory. How should the investor account for the gross profit from this intra-entity inventory sale?

Defer the investor's proportionate ownership share of the intra-entity gross profit

An investor that accounts for an equity investment under the cost method records income from the investment based on its share of....

Dividends declared from the investee

Which of the following are included in net income for an investment in equity shares accounted for under the fair value method?

Dividends from the investee

What income statement account should an investor use to defer its proportional share of intra-entity gross profits remaining in ending inventory from sales to an investee?

Equity in Investee Income

As of the date the equity method become applicable for an investment, the investor allocates its purchase price to its share of the investee's assets and liabilities based on their individual...

Fair market value

When an equity method investment suffers a permanent decline in value, the investor recognizes an impairment loss and writes down the investment account to...

Fair value

When provisions and contracts grant Firm A decision making power over Firm B's operating and financing policies

Firm A must include Firm B in its consolidated financial statements

Under the equity method, the excess of the invesment costs over the proportionately-owned acquisition date fair value of the investee's net indentifiable assets is allocated to the asset...

Goodwill

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%?

In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet

The term used to describe inventory sales between and investor company and its equity method investee is

Intra-entity sales

If an increase in an investment now provides an investor with the ability to exercise significant influence over an investee, the change to the equity method of investment account is applied on a....

Prospective basis

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value in applying the equity method?

The equity method will likely expense excess costs allocated to different assets over different useful lives

When an investor sells inventory to its equity method investee, how is the reported sales balance on the investor's income statement affected?

The sales account remains unaffected

How should an investor recognize previously deferred gross profits from purchases from its equity method investee?

Through a credit to Equity in Investee Income

T or F For investments accounted for under the equity method, the direction of any intra-entity sales (upstream or downstream) does not affect reported income statement balances.

True

T or F When an investor sells inventory that had been purchased from its equity method investee, the investor recognizes any related deferred gross profit.

True

the ability to exercise significant influence over the operating and financial policies of an investee company is the sole criterion for application of the...

equity method