Exam 1 Ch1

An investor who owns 30% of the common stock of an investee is most likely to exercise significant influence requiring use of the equity method when

the second largest investor owns only 1% of the investee's outstanding stock

On December 31, 2016, Midway, Inc. paid $380,000 for all of the common stock of Simmons Corp. On that date, Simmons had assets and liabilities with book values of $300,000 and $70,000; and fair values of $310,000 and $50,000, respectively. What amount of goodwill will be reported on the December 31, 2013 balance sheet?

$120,000

Everett Corporation purchased 25% of the common stock of the Jordan Corporation for $1,500,000 on January 2, 2016. Jordan Corporation paid cash dividends of $180,000 during 2016, and reported net income of $600,000 for 2016. Everett's Equity Income from Jordan is:

$150,000

Payton Corp. purchased a 30% interest in Butler Company on July 1, 2016. On October 20, 2016 Butler paid dividends of $40,000 to its common stockholders. The investee reported 2016 net income of $120,000, which was earned evenly throughout the year. What amount of Equity Income should Payton report in its 2016 income statement?

$18,000

On January 2, 2016, Leahy, Inc. purchased a 25% interest in Bava Corp. for $2,000,000 cash. During 2016, Bava's net income was $3,500,000 and it paid dividends of $800,000. What Equity Investment balance should Leahy report at December 31, 2016?

$2,675,000

Dye Corporation purchased all of Ventura Company's common stock on January 1, 2017, for $2,000,000 cash. The investee's stockholders' equity amounted to $1,600,000. The excess of $400,000 was due to an unrecorded patent with an eight-year life. In 2017, Ventura reported net income of $320,000 and paid dividends of $50,000. For 2017, what amount of Equity Income will Dye record?

$270,000

When an investor can no longer exert significant influence over the investee, it must change to the fair value method if the investment has a readily determinable fair value. What is the required accounting treatment on investor's books? Select one: A. A prior period adjustment is recorded to bring retained earnings to what it would have been if the new method had been used in the past. B. The book value on the date of change becomes the "cost" of the investment. C. The investment will be adjusted to its fair value. D. Both B and C are required. Correct

. Both B and C are required

Howell Co. received a cash dividend from a common stock investment. Should Howell report an increase in the investment account if it accounts for the investment under the fair value method or the equity method?

Neither Fair or Equity method

If an investor sells merchandise to an investee and the investee resells all of the items to outside parties in the same period, what equity method entry is required?

No equity method entry is required, since the gross profit is realized.

If a 30% acquisition is made at a price above book value due to an undervalued patent and the investor has significant influence over he investee, what will be the relationship between the Equity Investment account and the investee's stockholders' equity?

The Equity Investment account balance will equal 30% of investee's stockholders' equity at date of acquisition, plus the unamortized cost of the patent.

If a 30% acquisition is made at book value and the investor has significant influence over he investee, what will be the relationship between the Equity Investment account and the investee's stockholders' equity?

The Equity Investment account balance will equal 30% of investee's stockholders' equity throughout the life of the investment.

Which of the following does not indicate an investor company's ability to significantly influence an investee?

The investor owns 30% while another investor owns 70%

An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the equity investment account of the investor is

increased by its share of the earnings of the investee and is decreased by its share of the investee's losses.

In the case of an equity method investment for which there is a change in fair value

no gains are recognized in income until the investment is sold.

When a noncontrolling Equity Method Investment balance is reduced to zero as investee incurs losses Select one: A. the investor must change to the fair value method. B. the investment remains at zero until the investment is sold. C. additional investment losses will result in a credit balance in Equity Investment. D. the investment remains at zero until profits have eliminated the unrealized loss. Correct

the investment remains at zero until profits have eliminated the unrealized loss.