Multiple Choice Questions

1-1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter 01 The Equity Method of Accounting for Investments Multiple Choice Questions 1.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 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this investment in 2013?

A. $16,500.

B. $9,000.

C. $25,500.

D. $7,500.

E. $50,000.

2.Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2013, 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.

Advanced Accounting 12e Joe Hoyle Thomas SchaeferTimothy Doupnik (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter 1 / 4

1-2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• On January 1, 2013, 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 2013 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, 2013?

A. $2,040,500.

B. $2,212,500.

C. $2,260,500.

D. $2,171,500.

E. $2,071,500.

• A company 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.

• It owns 30% of another company's stock.

• It has a controlling interest (more than 50%) of another company's stock.

• The investment was made primarily to earn a return on excess cash.

• It does not have the ability to exercise significant influence over the operating policies of

the investee.

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1-3 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne

Corp. On January 1, 2013, 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 2013 but should make no changes in its financial

statements for 2012 and 2011.

• It should prepare consolidated financial statements for 2013.

• It must restate the financial statements for 2012 and 2011 as if the equity method had

been used for those two years.

• It should record a prior period adjustment at the beginning of 2013 but should not restate

the financial statements for 2012 and 2011.

• It must restate the financial statements for 2012 as if the equity method had been used

then.

• During January 2012, 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 2012, Wilton reported net income of $600,000. For 2013, 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, 2013?

A. $1,609,000.

B. $1,485,000.

C. $1,685,000.

D. $1,647,000.

E. $1,054,300.

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1-4 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• On January 1, 2013, 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 2013, 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, 2013?

A. $950,800.

B. $958,000.

C. $836,000.

D. $990,100.

E. $956,400.

• On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to

account for the investment. On January 1, 2014, 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 have accounted for this change?

• Jordan should continue to use the equity method to maintain consistency in its financial

statements.

• Jordan should restate the prior years' financial statements and change the balance in the

investment account as if the fair-value method had been used since 2013.

• Jordan has the option of using either the equity method or the fair-value method for 2013

and future years.

• Jordan should report the effect of the change from the equity to the fair-value method as a

retrospective change in accounting principle.

• Jordan should use the fair-value method for 2014 and future years but should not make a

retrospective adjustment to the investment account.

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