Ch 2 LS - Advanced Financial Accounting

Which of the following is the investment consolidation entry recorded in the second year of ownership under the cost method?

Debit Common Stock and Debit Retained Earnings; Credit Investment in Investee Company

Which of the following accurately describes the effect of a stock dividend, split, or reverse stock split by an investee company on the parent's investment in investee account under the equity method?

They are not recorded in the books of the investor company.

True or false: Consolidated net income and consolidated net income attributable to the controlling interest are equal when all consolidated subsidiaries are wholly owned.

True

Consolidated retained earnings is that portion of the consolidated enterprise's earnings which is:

Undistributed and accrues to the parent company shareholders

Intercompany profit remaining unrealized at the end of the period must be:

deducted from the income

When subsidiary is purchased for an amount equal to the book value of the subsidiary's net assets, there is:

no difference between amount of investment and net assets of subsidiary

Sale of land by holding to its subsidiary above original cost will require a worksheet entry for

all the years for which subsidiary holds the land

A company holds 30% of another company's common stock. During 20X2, the investor company sold inventory to the investee company for $25,000. The original cost of the inventory was $20,000. The investee company sold half of the inventory to an outside company in 20X2 and retained the rest in its ending inventory. Calculate the amount of unrealized gross profit for 20X2.

$2,500

The correct answer is Jasper Inc. purchased 100% of Pearl Corp.'s common stock on January 1, 20X1. On the acquisition date, Jasper's common stock is $400,000 while Pearl's common stock is $220,000. The consolidated common stock recorded in the consolidation worksheet on the date of acquisition is

$400,000

Which of the following are recognized as income by the investor under the fair value method?

Investor's share of investee's dividends declared from earnings; Unrealized gains or losses during the investment period;

Which of the following are true of a dividend declared by an investee under the equity method of accounting for an investment?

It will decrease the balance of the investment account; It will be recorded as an asset on the books of an investor;

Which of the following items are included in the calculation of consolidated retained earnings at the end of the period?

Net income attributable to the controlling interest; Beginning consolidated retained earnings balance; Dividends declared by the parent company;

Power Devices, Inc. acquired 20% of Yates Zone Corp.'s common stock for $500,000 on January 1, 20X1. During the acquisition year, Yates reported net income of $200,000, and declared dividends of $90,000. The carrying amount of the investment is ______ under the equity method.

Carrying Amount = Original Cost + Share of Net Income - Share of Dividends = $500,000 + ($200,000 * 20%) - ($90,000 * 20%) = $500,000 + $40,000 - $18,000 = $522,000

What will be the effect of a reverse stock split on the carrying value of an investment when the investment is carried at fair value?

No effect on carrying value

In case of one-line consolidation, subsidiary's stockholders' equity accounts are eliminated because:

Subsidiary's stock is held entirely; Claims by outsiders are nil;

A company practicing modified equity method for consolidating a controlled subsidiary may:

apply equity method without making adjustments for unrealized profits; apply equity method without making adjustments for unrealized profits and amortization of differential; apply equity method without making adjustments for amortization of the differential;

Which of the following are approaches used in practice by investors in accounting for their consolidated subsidiaries?

Carry investment at cost; Apply the modified version of the equity method; Use the fully adjusted equity method;

The retained earnings statement has been dropped by many companies in recent years in favor of:

Changes in stockholders' equity

Sapphire Designs Corp. acquired all of the stock of Ruby Systems Inc. on January 1, 20X1. During 20X1, Ruby Systems earned net income of $47,500. The net income earned by Sapphire Designs is $175,000, including the equity method income of $47,500. Compute the consolidated net income of Sapphire Designs for the year 20X1.

Coinsilidated Net Income = ($175,000 - $47,500) + $47,500 = $175,000

Which of the following are true of consolidation entries?

Consolidation entries are used to adjust the totals of the individual account balances of the separate consolidating companies; Consolidation entries appear only in the consolidation worksheet and do not affect the books of the separate companies; Consolidation entries reflect the amounts that would appear if the legally separate companies were actually a single company;

An investor company owns 10% of the stock of an investee company and carries the investment at fair value. In the year 20X1, the investor company acquires an additional 20% of the stock of the same investee company. Which of the following are options for the investor company to account for the additional shares purchased?

Continue to carry the investment at fair value; Apply the equity method from the date of acquisition of additional investment;

Assume that a company purchases 20% of the common stock of another company for $250,000 on January 1st. On the last day of the on the acquisition year, the fair value of the common stock is $257,000. The investor receives a dividend of $18,000 during the acquisition year. Which of the following is the journal entry in the investor's books to record the receipt of dividends under the fair value option?

Debit Cash for $18,000; Credit Dividend Income for $18,000;

Assume a company acquired 100% of the common stock of another company on January 1, 20X1, and used the equity method to account for the investment. In the acquisition year, the investee company declared and paid cash dividends of $25,000. What is the investor company's journal entry to record the dividends received from the investee company?

Debit Cash for $25,000; Credit Investment in Investee Company for $25,000;

Alpha Corp. purchased 100% of the common stock of Omega Inc. on January 1, 20X1, for $250,000 when Omega had a balance of $150,000 in Common Stock and $100,000 in Retained Earnings. For 20X1, Alpha reported net income of $120,000 and Omega reported net income of $50,000. Also during 20X1, Alpha declared dividends of $30,000 and Omega declared dividends of $15,000. If Alpha uses the cost method to account for the investment in Omega, which of the following represents the dividend consolidation entry at the end of 20X1?

Debit Dividend Income for $15,000; Credit Dividends Declared for $15,000

Which of the following is the journal entry made by an investor company to record its share of the income from an investee company?

Debit Investment in Investee Company Stock; Credit Income from Investee Company

Assume a company purchases 100% of the common stock of another company on January 1, 20X2. Which of the following is the investor's journal entry to record the stock purchase?

Debit Investment in Investee Company; Credit Cash;

Which of the following items are excluded from the parent's net income in calculating consolidated net income using a consolidation worksheet when the parent company owns 100% of the common stock of its subsidiary? The parent uses the equity method.

Equity investment income from consolidated subsidiaries; Net income from consolidated subsidiaries;

True or false: Dividends declared by the investee are treated as a reduction of investment under both the equity and fair value methods.

False

True or false: The amount of detail provided by the use of the equity method is greater than that provided by consolidation.

False

If the parent company elects to carry investments in subsidiary at cost, what will be the entry in the books of parent company with respect to the income of subsidiary during the year?

No entries will be made.

When investment is carried at cost, what is the difference between the entires done in the books of the parent company in first and second year of ownership?

Only difference is the initial investment entry in the first year.

Bertie corp. invested in 25% shares of Keegan corp. for $120,000 on first day of current year. Keegan corp. reports net income of $40,000, and it declared dividend of $12,000 during the year. Calculate the ending balance of Investment in Keegan corp.

$127,000

Assume Alpha Corp. acquires 100% of the common stock of Bravo Inc. On the acquisition date, the retained earnings of Bravo is $165,000. The retained earnings of Alpha at the end of the year is $325,000. During the acquisition year, Bravo earns net income of $35,000 and declares dividends of $15,000. Based on this information, the value of consolidated retained earnings is

$325,000

Corn Inc. acquired 100% of Candy Corp.'s common stock for $200,000. The fair value of the investment was equal to the book value on the acquisition date. The investment account was equal to the combined book value of Candy Corp's Common Stock of $150,000 and Retained Earnings of $50,000. In the acquisition year, Candy earned net income of $22,000 and declared dividends of $8,000. Candy Corp.'s ending retained earnings balance is

$64,000

The adjustments done before adding the separate financial statements of companies for consolidation are:

Adjustments relating to holdings; Adjustments relating to intercompany transactions;

According to ASC323-10-15-10, which of the following are examples of evidence where an investor is unable to exercise significant influence over an investee?

Agreement by the investor to give up certain rights; Legal or regulatory challenges to the investor's influence;

Under the cost method, in the acquisition year, which of the following entries would be recorded?

An entry to record any dividend income from the investee company; An entry to record the initial investment in the investee company;

Which of the following entries is recorded in the second year of ownership in the books of the investor under the cost method of accounting for an investment?

An entry to record the dividend income received from the investee company.

Which of the following items are reported in consolidated financial statements?

Payables to external parties; Receivables from external parties;

Sergeant Corp. acquired 30% of the common stock of Corporal Inc. on July 1, 20X1 for $500,000. Corporal earned net income of $100,000 evenly throughout the year. Calculate Sergeant's share of Corporal's net income for 20X1 under the equity method.

Sergeant's portion of Corporal's Net Income * Sergeant's share in the common stock * 6 months / 12 months = $100,000 * 30% * (1/2) = $15,000

Which of the following is a method that a parent company may choose to account for an investment that is to be consolidated?

The Cost Method

Which of the following are reasons for eliminating the investment account with the basic consolidation entry?

The amount represented in the investment account is recorded separately as net assets of the subsidiary; From a single entity viewpoint, a company cannot hold an investment in itself;

Purchase of additional shares of a company already held is recorded:

The correct answer was same as an initial purchase; at the total cost incurred;

Which of the following are criticisms of the equity method of accounting for investments?

The investment account balance reported by the investor under the equity method does nothing to explain the investee's asset and capital structure; Income reported by the investor under the equity method does nothing to explain the composition of the income earned by the investee; The investment in stock of another company is reported as a single amount in the investor's balance sheet.

In which of the following cases will the companies present consolidated financial statements?

The investor company owns all of the common stock of the investee; The investor company has majority ownership of the investee;

Which of the following factors constitute evidence of the the investor company's ability to exercise significant influence over the investee company?

The investor has representation on the investee's board of directors; The investor participates in the policy making of the investee; There is an interchange of managerial personnel;

In which of the following situations will the equity method most likely be used for reporting investments in common stock?

The investor holds 20% or more of the investee's voting stock; The investor has the ability to exercise significant influence over the investee; The investment is a corporate joint venture.

Under the equity method, the investor's income statement will include what amount of the investee's income or loss for the period?

The investor's proportionate share of the investee's income or loss

If the parent accounts for subsidiaries using the equity method on its books, the retained earnings of each subsidiary is completely eliminated when the subsidiary is consolidated. Which of the following statements support this statement?

The noncontrolling interest's share of the subsidiary's retained earnings is not included in consolidated retained earnings; The retained earnings cannot be purchased; The parent's share of the subsidiary's income since acquisition is already included in the parent's equity-method retained earnings;

An investment in common stock that was previously accounted for with a method other than the equity method may become qualified for use of the equity method by

an increase in the level of ownership.

The sale of all or part of an investment in common stock carried under the equity method is treated the same as the sale of any ______ asset.

noncurrent

Under the equity method of accounting for an investment, an investor records its investment at the ______ cost.

original

An investor company owns 100% of the common stock of an investee company. In the second year of its ownership, the investor company reported net income of $120,000. This amount included the equity method income of $40,000 from the investee company. Calculate the consolidated net income for the second year.

120,000

Under the ______ method for accounting for investments, the investor recognizes income from the investment when the investee declares dividends.

cost

The investee's ______ are viewed as distributions of previously recognized income that already has been capitalized in the carrying amount of the investment.

dividends