Advanced accounting ch 1, Chapter 01 - The Equity Method of Accounting for Investments, AA Ch. 1, Advanced Accounting Exam 1 (1-3), ACC 230 Exam 1

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Using the equity method of accounting, what is the journal entry to record the receipt of dividends during the current year? http://highered.mheducation.com/olc2/dl/940322/ch1_q2.jpg A B C D E

$.85 x 150,000 shares C

On Jan 1, Big Company acquires all of the common stock of Little Company by issuing 400,000 shares of $1 par value stock with a market value of $12 per share. Little reports earnings of $864,000 and pays dividends of $240,000 in the year of acquisition. The amortization of allocations related to the investment was $48,000. Big's net income, not including the investment, was $6,360,000, and it paid dividends of $400,000. On the consolidated financial statements, what amount is reported for Equity in Little Company's Earnings?

$0

On January 1, 2018, 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 2018, 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, 2018?

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

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Barger elects to use the equity method of accounting. What is the balance in the Investment in Booker account in the records of Barger Company at December 31, of the current year? $1,200,000 $1,247,500 $1,772,500 $1,900,000 $1,152,500

$1,247,500

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the BV of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total BV of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $0.85 per share dividend. Barger elects to use the equity method of accounting. What is the balance in the Investment in Booker account in the records of Barger Company at December 31, of the current year?

$1,247,500 Cost of purchase + income recognized - dividend received (150,000 * $0.85) = investment in Booker. ($1,200,000 + $175,000 - $127,500)

On January 1, 2018, 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 necessary. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2018 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, 2018?

$1,920,000 + ($670,000 × .45) - ($2.50 × 60,000) = $2,071,500

On March 31, Jumbo purchases 100% of Larz for $7,500,000 cash and 2,200,000 shares of Jumbo voting common stock (par value of $1). Jumbo's stock had a FV on March 31 of $40. Jumbo got 12,000,000 shares of Larz's voting common stock (par value $4) having a FV of $50 per share. Jumbo incurs $5,000,000 in direct combination costs and $3,500,000 in stock issuance costs. Using the purchase method, what is Jumbo's COST for this acquisition?

$100,500,000 Cash of $7,500,000 plus the FMV of Stock Issued (2,200,000 shares * $40) of $88,000,000 plus direct combination costs of $5,000,000 to get cost of investment in Larz of $100,500,000

On Jan 1, two years ago, Parkway Corporation purchased all of the outstanding CS of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are: Revenues: P $250,000 S $142,500 Expenses: P $175,000 S $100,000 Equipment (net): P $125,000 S $60,000 RE BOY: P $150,000 S $75,500 Dividends Paid: P $25,000 S $5,000 What is consolidated net income for the third year of operations if the parent company uses the initial value method?

$109,800

On Jan 1, two years ago, Parkway Corporation purchased all of the outstanding CS of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are: Revenues: P $250,000 S $142,500 Expenses: P $175,000 S $100,000 Equipment (net): P $125,000 S $60,000 RE BOY: P $150,000 S $75,500 Dividends Paid: P $25,000 S $5,000 What is consolidated net income for the third year of operations if the parent company uses the partial equity method?

$109,800 Revenues (add BVs) of $392,500 minus Expenses (add BV and include amortization) of $282,700 equals consolidated net income of $109,800

Shaw Company has the following account balances: Receivables $100,000 Inventory $150,000 Land $100,000 Building-net $250,000 Liabilities $100,000 CS $100,000 APIC $150,000 RE $250,000 Shaw's Land has a FV of $200,000, while its Building has a FV of $300,000. Shaw's liabilities have a FV of $75,000. Brooks company acquires Shaw Company on Dec 31, by issuing 5,000 shares of $5 par value common stock valued at $150 per share. Direct combination costs of $20,000 are paid to third parties and Brooks Company has estimated a $40,000 contingent performance liability. In the financial statements prepared immediately after the business combination, what is the amount of Goodwill using the acquisition method?

$115,000 FV (consideration transferred) by Brooks Company (750,000+40,000) of $790,000 minus the BV of Shaw of $500,000 to get the cost in excess of BV of $290,000 Allocations made to specific accounts based on difference in FV and BV: Land ($200,000-$100,000) to get $100,000 Building ($300,000-$250,000) to get $50,000 Liabilities($75,000-$100,000) to get $25,000. Subtract all of these from the $290,000 to get goodwill of $115,000

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 gross profit must be deferred by Tower?

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

Peter, Inc. owns 100% of The Rock Company. The BV of the Goodwill is $300,000. When Peter made its investment, The Rock had a FV of $2,800,000. Today, the value of The Rock has fallen to $2,250,000. An appraisal of The Rock's net assets reveals a FV of $2,075,000. How much "impairment" should Peter record related to its investment in The Rock?

$125,000 FV of Peter's Investment of $2,250,000 minus the FV of the Rock's assets of $2,075,000 to get Value Assigned to Implied Goodwill of $175,000 minus the Carrying Amount of Goodwill before impairment of $300,000 to get goodwill impairment of $125,000

On Jan 1, two years ago, Parkway Corporation purchased all of the outstanding CS of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are: Revenues: P $250,000 S $142,500 Expenses: P $175,000 S $100,000 Equipment (net): P $125,000 S $60,000 RE BOY: P $150,000 S $75,500 Dividends Paid: P $25,000 S $5,000 What is consolidated retained earnings at Jan 1 of the third year if the parent company uses the partial equity method?

$134,600 Parkway Corp RE at 1/1 of third year $150,000 minus the amortization for two years ($7,700 * 2 years) of $15,400 equals the consolidated retained earnings at 1/1 of third year of $134,600

On Jan 1, two years ago, Parkway Corporation purchased all of the outstanding CS of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are: Revenues: P $250,000 S $142,500 Expenses: P $175,000 S $100,000 Equipment (net): P $125,000 S $60,000 RE BOY: P $150,000 S $75,500 Dividends Paid: P $25,000 S $5,000 What is consolidated retained earnings at Jan 1 of the third year if the parent company uses the equity method?

$150,000

On Jan 1, two years ago, Parkway Corporation purchased all of the outstanding CS of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are: Revenues: P $250,000 S $142,500 Expenses: P $175,000 S $100,000 Equipment (net): P $125,000 S $60,000 RE BOY: P $150,000 S $75,500 Dividends Paid: P $25,000 S $5,000 What is consolidated retained earnings at Jan 1 of the third year if the parent company uses the initial value method?

$187,100 Parkway Corps retained earnings at 1/1 of third year of $150,000 plus additional equity accrual for first year ($25,000-$2,500) of $22,500 plus additional equity accrual for second year ($32,500-$2,500) of $30,000 minus amortization for two years ($7,700 * 2) for $15,400 for a total of consolidated retained earnings at 1/1 of third year of $187,100

On January 1, 20X1, 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 20X1 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, 20X1? $2,040,500. $2,212,500. $2,260,500. $2,171,500. $2,071,500.

$2,071,500.

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2018, how much income should Yaro recognize related to this investment?

$250,000 × .30 = $75,000

To settle a difference of opinion regarding Robin's fair values, Batman promises to pay an additional $100,000 to the former owners if Robin's earnings exceed $500,000 during the next annual period. Batman estimates a 30% probability that the $100,000 contingent payment will be required. Assuming a discount rate of 4%, the present value factor is .961538. Under the acquisition method, what is the contingent liability?

$28,846 Contingent additional payment of $100,000 multiply by the probability of occurring 30% to get $30,000. Then multiply that by the present value factor to get $28,846

Batman Co purchases Robin Inc on Jan 1 of the current year for more than the FV of Robin's net assets. On that date, the following values exist: Batman Co: Building: BV $400,000 FV $500,000 Equipment: BV $500,000 FV $450,000 Robin, Inc.: Building: BV $200,000 FV $700,000 Equipment: BV $250,000 FV $350,000 Push-down accounting is used. Immediately after the acquisition, what amounts in the equipment account appear on Robin's balance sheet and on the consolidated balance sheet?

$350,000 and $850,000

Emmy Company buys 30% of Soupy, Inc's common stock on January 1 of the current year for $440,000. The equity method of accounting is used. Soupy's net assets on that date totaled $1,100,000. Soupy immediately begins selling inventory to Emmy as follows: Inventory held at the end of one year is sold at the beginning of the next. Soupy reports net income of $110,000 in the first year and $150,000 in the second year while paying $50,000 in dividends each year. What should Emmy Company report as Equity in Soupy's Income at the end of the second year?

$37,200 Purchase price of Soupy stock of $440,000 and subtract Soupy's BV (1,100,000 * .30%) of $330,000 to get goodwill of $110,000. 1st year % of inventory on hand=$24,000/$120,000=20% 2nd year % of Inventory on hand=$80,000/$200,000=40% Income accrual (150,000*.30) of $45,000 plus recognition of 1st year unrealized gain (70,000*.20*.30) of $4,200 subtract deferral of 2nd year unrealized gain (100,000 *.40*.30) of 12,000 to get equity income in soupy of $37,200

On Dec 31 of the current year, Sam Company was merged into Paul Company. In carrying out the business combination, Paul Company issued 60,000 shares of its $10 par value common stock, with a FV of $15 per share, for all of Sam Company's outstanding CS. The stockholders' equity section of the two companies immediately before the business combination was: Paul Company: CS $500,000 APIC $200,000 RE $300,000 Same Company: CS $400,000 APIC $100,000 RE $200,000 Assume that the transaction is accounted for using the acquisition method. In the consolidated balance sheet at the end of the next year, the APIC account should be reported at?

$500,000

TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This acquisition gives TunaCo the ability to apply significant influence to Stanley's operating and financing policies and TunaCo elects to use the equity method of accounting. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a BV of $100,000 and a FMV of $400,000. During the current year, Stanley, Inc. reports net income of $140,000, while paying out dividends of $70,000 for the year. What is the "Investment in Stanley" account balance in TunaCo's accounting records at the end of the current year?

$512,500 Goodwill Computation (Stanley BV is $300,000 (.25 * 1,200,000) then subtract it from the cost of 500,000 to get $200,000). Net figure out the building (.25*300,000) to get $75,000 and subtract that from $200,000 to get the goodwill of $75,000. Cost of purchase $500,000 + income accrued (140,000 * .25) $35,000 - annual amortization-building (75,000/15) $5,000 - dividend received (70,000*.25) $17,500 to get $512,500

During January 2017, 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 2017, Wilton reported net income of $600,000. For 2018, 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, 2018?

$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

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?

$60,000 × .15 = $9,000

On Jan 1, Big Company acquired all of the common stock of Little Company by issuing 400,000 shares of $1 par value stock with a market value of $12 per share. Little reports earnings of $864,000 and pays dividends of $240,000 in the year of acquisition. The amortization of allocations related to the investment was $48,000. Big's net income, not including the investment, was $6,360,000, and it paid dividends of $400,000. What is the amount of consolidated net income?

$7,176,000 (6,360,000 + 864,000 less amortization of $48,000)

Tara Company owns 30% of Hawkins, Inc. and applies the equity method. During the current year, Hawkins buys inventory costing $400,000 and sells it to Tara for $500,000. At the end of the year, only 25% of this merchandise is still being held by Tara. What amount of unrealized gain must be deferred by Hawkins in reporting on the equity method?

$7,500 Inventory at year-end ($500,000 * $0.25) multiplied by the gross profit markup ($100,000/$500,000) equals the unrealized gain. Multiply the unrealized gain by the ownership share of 30% to get the intercompany unrealized gain-deferred. $125,000 * .20=$25,000 * .30 = $7,500

Smith Company holds 20% of the outstanding shares of Leef Greeting Cards and applies the equity method of accounting. For the current year, Leef reports earnings of $100,000 and pays cash dividends of $22,000. During the current year, Leef acquired inventory for $80,000, which was then sold to Smith for $100,000. At the end of the current year, Smith continues to hold merchandise with a transfer price of $40,000. Assuming no amortization expense related to this investment, what Equity in Investee Income should Smith report in the current year?

$7,600 Remaining year end inventory of $40,000 * gross profit markup ($20,000/$100,000) of .20 to get profit in remaining inventory of $8,000 Take the profit of $8,000 and multiply it by the ownership share of 20% to get $1,600 unrealized intercompany gain. Now do equity in income accrual ($100,000 * 20%) to get $20,000 and subtract the unrealized intercompany gain to get an equity in investee income of $18,400

Shaw Company has the following account balances: Receivables $100,000 Inventory $150,000 Land $100,000 Building-net $250,000 Liabilities $100,000 CS of $100,000 APIC of $150,000 RE of $250,000 Shaw's Land has a FV of $200,000, while its building has a FV of $300,000. Shaw's liabilities have a FV of $75,000. Brooks Company obtains all of the outstanding shares of Shaw for $750,000 cash. In the financial statements prepared immediately after the business combination, what is the amount of Goodwill using the purchase method?

$75,000 Purchase price of Shaw CS of $750,000 minus the BV of Shaw of $500,000 to get a cost in excess of BV of $250,000 Excess assigned to: Undervalued land of $100,000, undervalued building of $50,000, overvalued liabilities of $25,000. Subtract all of these from the $250,000 to get $75,000

Acker Inc. bought 40% of Howell Co. on January 1, 2017 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: https://snipboard.io/JUfXAC.jpg Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year. What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2017? $1,600. $4,000. $8,000. $15,000. $20,000.

$75,000-$55,000=$20,000 x ($15,000/$75,000)=$4,000 x 40%= $1,600 Deferred intraentity gross profit

On January 4, 2018, 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 2018, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2019, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

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

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Using the equity method of accounting, what is the journal entry to accrue the current year earnings? http://highered.mcgraw-hill.com/olc2/dl/940322/ch1_q3.jpg A B C D E

.25 x $700,000 D

Tara Company owns 30% of Hawkins, Inc. and applies the equity method. During the current year, Hawkins buys inventory costing $400,000 and sells it to Tara for $500,000. At the end of the year, only 25% of this merchandise is still being held by Tara. What amount of unrealized gain must be deferred by Hawkins in reporting on the equity method? $937.50 $30,000.00 $25,000.00 $7,500.00 $100,000.00

.30 ($100,000 x .25) = $7,500

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Barger elects to use the equity method of accounting. What is the balance in the Investment in Booker account in the records of Barger Company at December 31, of the current year? $1,200,000 $1,247,500 $1,772,500 $1,900,000 $1,152,500

1,200,000 + (.25 x 700,000)-($.85 x 150,000shares) = $1,247,500

On January 4, 20X2, 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 20X2, Bike reported net income of $500,000. For 20X3, 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 20X3? $120,000. $200,000. $300,000. $320,000. $500,000.

800,000 x 40%= 320,000

How should a permanent loss in value of an investment using the equity method be treated?

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

. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant influence. Which of the following statements is true?

A prospective change in accounting principle must occur.

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 cumulative effect change in accounting principle must occur. A prospective change in accounting principle must occur. A retrospective change in accounting principle must occur. The investor will not receive future dividends from the investee. Future dividends will continue to reduce the investment account.

A prospective change in accounting principle must occur.

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate. Which of the following statements is true?

A prospective change in accounting principle must occur.

When an investor sells shares of its investee company, which of the following statements is true?

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

What is a downstream sale? A sale from an investor to its investee A sale from a producer to its outside supplier A sale from an investee to its investor A sale from one manufacturer to another A sale from a small company to a large one

A sale from an investor to its investee

On January 1, Puckett Company paid $2.04 million for 68,000 shares of Harrison's voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison distributed a dividend of $2 per share during the year and reported net income of $627,000. What is the balance in the Investment in Harrison account found in Puckett's financial records as of December 31? $2,531,000 $2,236,400 $2,154,800 $2,290,800

Acquisition price = $2,040,000 Equity income ($627,000 × 40%) = 250,800 Dividends (68,000 shares × $2) = (136,000) Investment in Harrison Corporation as of December 31 $2,154,800

In January 20X4, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $761,000. This investment gave Domingo the ability to exercise significant influence over Martes. Martes's assets on that date were recorded at $4,095,000 with liabilities of $935,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 20X4, Martes reported net income of $232,000. In 20X5, Martes reported net income of $285,500. Dividends of $96,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Inc., at December 31, 20X5?

Acquisition price = $761,000 Income accruals: 20X4 - $232,000 × 20% = 46,400 20X5 - $285,500 × 20% = 57,100 Amortization (see below): 20X4 = (12,900) Amortization: 20X5 = (12,900) Dividends: 20X4-$96,000 × 20% = (19,200) 20X5-$96,000 × 20% = (19,200) Investment in Martes, December 31, 20X5 = $800,300 --- Acquisition price = $761,000 Acquired net assets of Martes ($3,160,000 × 20%) = (632,000) Excess cost to patent = $129,000 Annual amortization (10 year life) = $12,900

TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This acquisition gives TunaCo the ability to apply significant influence to Stanley's operating and financing policies and TunaCo elects to use the equity method of accounting. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a book value of $100,000 and a fair market value of $400,000. During the current year, Stanley reports net income of $140,000 while paying dividends of $70,000. What is the Investment in Stanley account balance in TunaCo's accounting records at the end of the current year? $500,000 $517,500 $530,000 $460,000 $512,500

Building: FMV-BV= $300,000 x .25 =75,000/15 yrs.= 5,000 annual amortization Investment Account: Jan 1 $500,000 Plus NI 140,000 x .25= 35,000 Less Amortization -5,000 Less Dividend 70,000 x.25=-17,500 EOY Investment 512,500

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Using the equity method of accounting, what is the journal entry to record the receipt of dividends during the current year? Cash 127,500 Investment in Booker, Inc 127,500

Cash 127,500 Investment in Booker, Inc 127,500

The entry to convert from the initial value method to the equity method usually involves a debit to Investment in Subsidiary account and a credit to what account? a. Subsidiary's end of the year RE b. Parent's end of the year RE c. Subsidiary's beginning of the year RE d. Parent's beginning of the year RE e. No entry is needed

D. Parent's beginning of the year RE

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total BV of $4,800,000. During the current year, Booker reported NI of $700,000 and paid a $0.85 per share dividend. Using the equity method of accounting, what is the journal entry to accrue the current year earnings?

Debit Investment in Booker, Inc. for $175,000 and credit Equity in Investee Income for the same

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total BV of $4,800,000. During the current year, Booker reported NI of $700,000 and paid a $0.85 per share dividend. Using the equity method of accounting, what is the journal entry to record the receipt of dividends during the current year?

Debit cash for $127,500 Credit Investment in Book, Inc. for the same

On January 1, 20X3, 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: https://snipboard.io/th7m01.jpg 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 20X3, and paid dividends of $100,000 during that year. How much goodwill is associated with this investment? $(500,000.) $0. $650,000. $1,000,000. $2,000,000.

Differences FV vs. BV 500,000 bldgs+500,000 Equip+500,000 Franchise =1,500,000 FV>BV x 30%=450,000 identified 1.100,000 Total > BV - 450,000 identified= 650,000 Unidentified aka Goodwill

All of the following statements regarding the investment account using the equity method are true except:

Dividends received are reported as revenue.

Which of the following is true regarding the change from the fair-value method to the equity method?

Dodge must record a debit of $200,000 to the Gates Investment Account.

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. Using the acquisition method, how should those costs be accounted for in a purchase transaction? A. Direct Combination Costs: Increase Investment and Stock Issuance Costs: Decrease Investment B. Direct Combination Costs: Increase Investment and Stock Issuance Costs: Decrease PIC C. Direct Combination Costs: Decrease Investment and Stock Issuance Costs: Increase Expenses D. Direct Combination Costs: Decrease PIC and Stock Issuance Costs: Increase Investment E. Direct Combination Costs: Increase Expenses and Stock Issuance Costs: Decrease PIC

E. Direct Combination Costs: Increase Expenses and Stock Issuance Costs: Decrease PIC

What journal entry will be recorded in 2019 to recognize its share of the intra-entity gross profit that was deferred in 2018?

Entry D

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? (I) Debit to the Investment account, and a Credit to the Equity in Investee 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.

Entry II only

What journal entry will be recorded at the end of 2018 to defer the recognition of the investor's share of the intra-entity gross profits?

Entry c

On Jan 1, two years ago, Parkway Corp purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets has a BV of $148,000. Equipment with an 8 year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over 10 years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of Dec 31 for this third year are as follows: Revenues: P $250,000 and S $142,500 Expenses: P $175,000 and S $100,000 Equipment(net): P $125,000 and S $60,000 RE BOY: P $150,000 and S $75,500 Dividends Paid: P $25,000 and S $5,000 For each of the three methods, what should be Investment in Shaw Company account balance in the records of Parkway at Dec 31 of the third year?

Equity Method: $286,900 Partial Equity Method: $310,000 Initial Value Method: $220,000 Allocation of Purchase Price at Jan 1 in year of acquisition: FV at acquisition date $220,000 minus the BV of Shaw $148,000 equals the excess of cost over book value of $72,000. Then subtract the allocation to database based on FV of $52,000 and subtract the allocation to equipment based on FV of $20,000 to get $0 Annual amortization expense: Equipment ($20,000/8) $2,500 Database ($52,000/10) $5,200 to equal $7,700 Equity Method: Invest in S initial cost $220,000 plus the income accrual for first year of $25,000 then subtract the amortization of first year of 7,700 and subtract the dividends received for first year of $2,500, then add income accrual second year of $32,500 and then subtract amortization for second year of $7,700 and subtract dividends received for second year $2,500 plus the income accrual for third year of $42,500. Then subtract the amortization for third year of $7,700 and subtract the dividends received for third year of $5,000 to get a grand total of $286,900 for investment in Shaw 12/31 of third year Partial Equity Method: Investment in S initial cost $220,000 plus income accrual first year of $25,000 minus dividends received first year of $2,500 plus income accrual second year of $32,500 minus the dividends received second year of $2,500 plus income accrual third year of $42,500 and then subtract dividends received third year of $5,000. Grand total of $310,000 Initial Value Method: $220,000

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

Goodwill.

Panner, Inc., owns 20 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $114,400 and then sells it to Watkins for $143,000. At the end of the year, Watkins still holds only $29,300 of merchandise. What amount of unrealized gross profit must Panner defer in reporting this investment using the equity method? $5,972 $8,372 $10,472 $1,172

Gross profit rate (GPR): $28,600 ÷ $143,000 = 20% Inventory remaining at year-end = $29,300 GPR = × 20% Unrealized gross profit = $5,860 Ownership = × 20% Intra-entity gross profit—deferred = $1,172

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend. Using the equity method of accounting, what is the journal entry to accrue the current year earnings? Investment in Booker, Inc $175,000 Equity in Investee Income $175,000

Investment in Booker, Inc $175,000 Equity in Investee Income $175,000

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the current year

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the prior year.

Which of the following results in an increase in the investment account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the prior year.

An investor should always use the equity method to account for an investment if:

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

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?

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

On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2019, 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 account for this change?

Jordan should use the fair-value method for 2019 and future years, but should not make a retrospective adjustment to the investment account.

An upstream sale of inventory is a sale:

Made by the investee to the investor.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Club account for the decline in value?

No accounting because the decline in fair value is temporary.

On January 3, 20X5, Matteson Corporation acquired 30 percent of the outstanding common stock of O'Toole Company for $1,449,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $823,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 20X5, O'Toole reported net income of $334,000 and declared cash dividends of $30,000. At December 31, 20X5, what should Matteson report as its investment in O'Toole under the equity method? $1,486,600 $1,540,200 $1,549,200 $1,477,600

Purchase price = $ 1,449,000 Basic 2015 equity accrual ($334,000 × 30%) = 100,200 Amortization of copyright: Excess payment ($1,449,000 − $823,000 = $626,000) to copyright allocated over 10 year life = (62,600) Dividends (30,000 × 30%) = (9,000) Investment account balance at year end = $1,477,600

Emmy Company buys 30% of Soupy, Inc's common stock on January 1 of the current year for $440,000. The equity method of accounting is used. Soupy's net assets on that date totaled $1,100,000. Soupy immediately begins selling inventory to Emmy as follows: http://highered.mcgraw-hill.com/olc2/dl/940322/ch1_q10.jpg Inventory held at the end of one year is sold at the beginning of the next. Soupy reports net income of $110,000 in the first year and $150,000 in the second year while paying $50,000 in dividends each year. What should Emmy Company report as Equity in Soupy's Income at the end of the second year? $45,000 $33,000 $37,200 $49,200 $52,800

Share of CY Net Income (.30 x 150,000)= 45,000 Reversal of Prior year GP deferral (.58333 x24,000 x.30)= 4,200 Record CY GP Deferral (.50 x 80,000 x .30) = -12,000 = Total Equity Income in Soup Y2 37,200

Which of the following results in a decrease in the investment account when applying the equity method?

Share of gross profit on intra-entity inventory sales for the current year.

When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI)?

The OCI would increase the investment.

When applying the equity method, how is the excess of cost over book value calculated and accounted for?

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

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

The investor must defer downstream ending inventory profits.

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?

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 statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

The same adjustments are made for upstream and downstream sales.

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

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

All of the following would require use of the equity method for investments except:

Valuation at fair value.

What is a downstream sale? a. A sale from an investor to its investee b. A sale from a producer to its outside supplier c. A sale from an investee to its investor d. A sale from one manufacturer to another e. A sale from a small company to a large one

a. A sale from an investor to its investee

Norbin Company uses the equity method to account for its investment in Stice Company's common stock. After the acquisition date, the investment account reported on Norbin's balance sheet would? a. be increase by Norbin's share of Stice's earnings and decreased by Norbin's share of Stice's losses b. be increase by Norbin's share of Stice's earnings but not be affected by Norbin's share of the losses c. not be affected at all d. not be affected by Norbin's share of Stice's earnings but be decreased by Norbin's share of Stice's lossess. e. be decrease by Norbin's share of Stice's earnings and increased by Nobin's share of Stice's losses.

a. Be increase by share of earnings and decreased by share of losses

Powell Company buys all of the outstanding common shares of South Bay Company on Jan 1 in the year of acquisition for $1,500,000 cash and uses the acquisition method. If a contingent cash payment is a portion of the negotiated FV of this acquisition, how will changes in the revaluation of the contingent performance payment affect the future financial statements? a. Changes from the revaluation are reported in the income statement as ordinary income b. Revaluations affect the acquisition price and are recorded in the Investment in South Bay account c. Changes from the revaluation are reported as prior period adjustments and affect Retained Earnings d. Revaluations in contingent performance payments are recorded in APIC contingent equity outstanding e. Revaluations do not effect the future financial statements

a. Changes from the revaluation are reported in the income statement as ordinary income

Using the acquisition method, when a bargain purchase occurs and the net amount of the FV of the separately identified assets and liabilities acquired exceed the FV of the consideration transferred: a. Assets are recorded at amounts below their assessed FV b. A gain on bargain purchase is recognized at the acquisition date c. A loss on bargain purchase is recognized at the acquisition date d. A contingent liability is recognized e. Goodwill is recognized and tested for impairment on an annual basis

b. A gain on bargain purchase is recognized at the acquisition date

Which of the following circumstances would require a write-down of goodwill? a. A decline in the FV of the related subsidiary b. A permanent impairment of value associated with the goodwill c. A decline in the FV of the related reporting unit d. A decline in the FV of the parent company e. An extraordinary loss event experience by the related reporting unit

b. A permanent impairment of value associated with the goodwill

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. Using the purchase method, how should those costs be accounted for in a purchase transaction? A. Direct Combination Costs: Increase Investment and Stock Issuance Costs: Decrease investment B. Direct Combination Costs: Increase Investment and Stock Issuance Costs: Decrease PIC C. Direct Combination Costs: Decrease Investment and Stock Issuance Costs: Increase expenses D. Direct Combination Costs: Decrease PIC and Stock Issuance Costs: Increase Investment E. Direct Combination Costs: Increase Expenses and Stock Issuance Costs: Increase Expenses

b. Direct Combination Costs: Increase Investment and Stock Issuance Costs: Decrease PIC

In accounting for a business combination as a purchase, a bargain purchase exists when? a. purchase price > book value b. FV of net assets > purchase price or the FV of the consideration c. FV of net assets < BV d. FV of net assets > BV e. FV of net assets < purchase price or the FV of the consideration

b. FV of net assets > purchase price or the FV of the consideration

Norbin Company uses the equity method to account for its investment in Stice Company's common stock. After the acquisition date, the investment account reported on Norbin's balance sheet would: be increased by Norbin's share of Stice's earnings and decreased by Norbin's share of Stice's losses. be increased by Norbin's share of Stice's earnings but not be affected by Norbin's share of Stice's losses. not be affected by Norbin's share of Stice's earnings and losses. not be affected by Norbin's share of Stice's earnings but be decreased by Norbin's share of Stice's losses. be decreased by Norbin's share of Stice's earnings and increased by Norbin's share of Stice's losses.

be increased by Norbin's share of Stice's earnings and decreased by Norbin's share of Stice's losses.

The FASB provides a FV reporting option for investments. Which of the following investments generally requires the use of the equity method of accounting? a. Available for sale securities b. Held to maturity securities c. 20-50% ownership in investments d. More than 50% ownership in investment e. Variable interests

c. 20-50% ownership in investments

What is an upstream sale? a. A sale from an investor to its investee b. A sale from a producer to its outside supplier c. A sale from an investee to its investor d. A sale from one manufacturer to another e. A sale from a small company to a large one

c. A sale from an investee to its investor

In preparing the consolidation worksheet for a business combination accounted for as a purchase using the purchase method, which one of the following is the appropriate basis for valuing fixed assets of a wholly-owned subsidiary? a. FV of the assets only b. BV as shown on the books of the subsidiary c. BV plus any excess of purchase price over BV of the acquired assets and liabilities d. historical cost as shown on the books of the subsidiary e. Current carrying value

c. BV plus any excess of purchase price over BV of the acquired assets and liabilities

A permanent decline in the investee's MV is recorded as a? a. Reduction of the Equity in Subsidiary Income account b. An extraordinary Loss on the Investor's Income Statement c. Reduction in the Investment Account d. Increase to the Investment Account e. No entry is made for market value declines

c. Reduction in the investment account

Powell Company buys all of the outstanding common shares of South Bay Company on Jan 1 in the year of acquisition for $1,500,000 cash. This price resulted in goodwill of $300,000. Because the subsidiary earned especially high profits over the next two years, Powell was required to pay South Bay's previous owners as additional $450,000 cash on Jan 1, two years later. Using the acquisition method, how should Powell report this additional payment? a. A retroactive adjustment is made to record the $450,000 as additional goodwill, as if the payment had been made on Jan 1, two years later. b. The $450,000 is expensed in the year of payment c. The $450,000 is recorded against the FV d. A contingent cash payment was recorded as a liability on the date of acquisition and the additional payment decreases the liability. e. The $450,000 payment is applied as a decrease in consolidated stockholders' equity

d. A contingent cash payment was recorded as a liability on the date of acquisition and the additional payment decreases the liability

On September 1, Mountainview Company acquired all of the outstanding common stock of Ward Company in a business combination accounted for as a pooling of interests. Both companies have a December 31 year-end and have been operating for five years. Consolidated net income for the year ended December 31 should include 12 months of net income for? a. only Mountainview b. only Ward c. Neither d. Both e. Mountainview and War (if Ward's net income is at least 30% of consolidated net income)

d. Both Mountainview and Ward

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 BV at the acquisition date c. Cost of the investment less the FV of the subsidiary's net assets and previously unrecorded intangible assets at the beginning of the year d. Cost of the investment less the FV of the subsidiary's net assets and previously unrecorded intangible assets at acquisition date e. Is no longer allowed under Federal Law

d. Cost of the investment less the FV of the subsidiary's net assets and previously unrecorded intangible assets at acquisition date

Which of the following statements are true? a. Firms that employ the equity method to account for an investment may switch to FV and have the option to switch back to the equity method. b. The FV option in reporting investments will probably increase the volatility in earnings that results from using different measurement attributes in reporting related financial assets and financial liabilities. c. Changes in FV are reported within comprehensive income d. FV for financial assets and liabilities provide more relevant and interpretable information than cost or cost-based measures

d. Fair values for financial assets and liabilities provide more relevant and interpretable information than cost or cost-based measures

Using the acquisition method, which of the following costs incurred in bringing about a business combination accounted for as a purchase should enter into determining the net income of the combined company for the period in which the expenses are incurred? a. Finders Fees: Yes, Attorney Fees: No, Brokers Fees: Yes b. Finders Fees: Yes, Attorney Fees: No, Brokers Fees: No c. Finders Fees: No, Attorney Fees: yes, Brokers Fees: yes d. Finders Fees: yes, Attorney Fees: yes, Brokers Fees: yes e. Finders Fees: No, Attorney Fees: No, Brokers Fees: No

d. Finders, Attorney, and Brokers Fees all yes

Using the acquisition method, a company acquires all of the shares of stock of another company. In-process research and development is present and estimated to have a $300,000 FV. How would you account for these costs? a. Always expense these costs at the acquisition date b. Expense these costs unless such costs represent assets with alternative future use c. Recognize these costs as an intangible asset and amortize the cost over a reasonable life d. Recognize these costs as an intangible asset and test for impairment e. These costs have no impact on the purchase

d. Recognize these costs as an intangible asset and test for impairment

Batman, Inc. acquires 19% of Superman, Inc. and owns the highest percentage of stock of any other stockholder. The CEO of Batman is on the Board of Directors of Superman. Material intercompany transactions exist between these two companies. Batman intends to hold this investment for at least two years. Batman will report this investment? a. As trading securities b. As available for sale securities c. As a consolidated entity d. Using the equity method e. As a special purpose equity

d. Using the equity method

In 2004, GAAP expanded the definition of "control" and addressed the definition and consolidation requirements for? a. Less than 50% owned subsidiaries b. Foreign Subsidiaries c. Permanently Impaired Subsidiaries d. Variable Interest Entities e. Entities financed with subordinated debt

d. Variable Interest Entities

According to SFAS 121, if the consolidated building asset grouping has suffered a permanent impairment, what account is written down first in recognizing the impairment loss? a. investment in subsidiary b. equity in subsidiary income c. buildings d. excess PIC e. goodwill

e. Goodwill

A company acquires a 25% investment in another corporation. The reporting of this investment depends primarily on? a. The percentage of ownership b. The length of time that the investor intends to own the investment c. Technology dependency d. Material intercompany transactions e. The degree of influence that the investor has over the investee

e. The degree of influence that the investor has over the investee

A company acquires a 25% investment in another corporation. The reporting of this investment depends primarily on: the percentage of ownership. the length of time that the investor intends to own the investment. technology dependency. material intercompany transactions. the degree of influence that the investor has over the investee.

the degree of influence that the investor has over the investee.

All of the following would require use of the equity method for investments except: material intra-entity transactions. investor participation in the policy-making process of the investee. valuation at fair value. technological dependency. significant control

valuation at fair value.