Test Bank For Advanced Accounting Joe Ben Hoyle 13th Edition
ISBN-13: 978-1259444951 ISBN-10: 1259444953
Chapter 01 – The Equity Method of Accounting for Investments
Multiple Choice:
[QUESTION]
- 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?
- A) $16,500.
- B) $9,000.
- C) $25,500.
- D) $7,500.
- E) $50,000.
Answer: B
Learning Objective: 01-01
Topic: Investments―Fair-value method
Difficulty: 1 Easy
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $60,000 × .15 = $9,000
[QUESTION]
- 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?
- A) $24,000.
- B) $75,000.
- C) $99,000.
- D) $51,000.
- E) $80,000.
Answer: B
Learning Objective: 01-03
Topic: Equity method―Investment income
Difficulty: 1 Easy
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $250,000 × .30 = $75,000
[QUESTION]
- 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?
- A) $2,040,500.
- B) $2,212,500.
- C) $2,260,500.
- D) $2,171,500.
- E) $2,071,500.
Answer: E
Learning Objective: 01-03
Topic: Equity method―Investment account balance
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $1,920,000 + ($670,000 × .45) – ($2.50 × 60,000) = $2,071,500
[QUESTION]
- An investor 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 an investee’s stock.
- C) It has a controlling interest (more than 50%) of an investee’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.
Answer: A
Learning Objective: 01-02
Topic: Equity method―Significant influence criterion
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
- 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?
- A) It must use the equity method for 2018 but should make no changes in its financial statements for 2017 and 2016.
- B) It should prepare consolidated financial statements for 2018.
- C) It must restate the financial statements for 2017 and 2016 as if the equity method had been used for those two years.
- D) It should record a prior period adjustment at the beginning of 2018 but should not restate the financial statements for 2017 and 2016.
- E) It must restate the financial statements for 2017 as if the equity method had been used then.
Answer: A
Learning Objective: 01-05a
Topic: Report change to equity method
Difficulty: 2 Medium
Blooms: Understand
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
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