Test Bank, Chapter 1 1-1

©Cambridge Business Publishers, 2014 Test Bank, Chapter 1 1-1 Chapter 1 Accounting for Intercorporate Investments Learning Objectives – Coverage by question Multiple Choice Exercises Problems LO1 – Identify the types of business combinations and the accounting for each.

2, 9 5

LO2 – Explain the mechanics of the accounting for investments using the equity method of accounting.

2, 4, 12

LO3 – Explain when the equity method should be used.

3, 7, 8, 18

LO4 – Explain the amortization of excess assets, and the deferral of unrealized income.

5, 11, 19, 20, 21,

25, 26, 27, 28, 40

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LO5 – Explain the process for deferral of unrealized income.

13, 29, 30, 31,

32, 39

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LO6 – Explain the equity method of accounting for less than 100% ownership.

1, 10, 11, 16, 17,

18, 24, 33, 34, 35,

36, 37, 38

1, 3, 6 4

LO7 – Explain when the equity method should be discontinued.14 LO8 – Explain the accounting for changes to and from the equity method.

6, 15, 22, 23 2

LO9 – Explain the required disclosures for equity method investments.LO10 – Explain the criticisms of the equity method of accounting.Advanced Accounting 2e Halsey Hopkins (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

©Cambridge Business Publishers, 2014 1-2Advanced Accounting, 2 nd Edition

Chapter 1: Accounting for Intercorporate Investments

Multiple Choice Multiple Choice – Theory Topic: Accounting for Investments Using the Equity Method with Less Than 100% Ownership

LO: 6

• Grand Corporation uses the equity method of accounting for its investment in a 30%-owned

investee that earned $48,000 and paid $12,000 in dividends. As a result, Grand Corporation

made the following entries:

Equity Investment 14,400 Equity Income 14,400 Cash 3,600 Dividend Revenue 3,600 What effect will these entries have on Grand Corporation's balance sheet?a.Investment understated, retained earnings understated b.Investment overstated, retained earnings overstated c.Investment overstated, retained earnings understated d.No effect

Answer: b

Topic: Accounting for Investments Using the Equity Method and Fair Value Method

LO: 1, 2

• Bosch Co. received a cash dividend from a common stock investment. Should Bosch report an

increase in the investment account if it accounts for the investment under the fair value method or the equity method?a.Fair value method, NO; Equity method, NO b.Fair value method, YES; Equity method, YES c.Fair value method, YES; Equity method, NO d.Fair value method, NO; Equity method, YES

Answer: a

Topic: Significant Influence

LO: 3

• 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:

a.The investor and investee sign an agreement under which the investor surrenders significant rights b.The investor tries and fails to obtain representation on the investee's board of directors c.Tries and fails to obtain financial information from the investee d.The second largest investor owns only 1% of the investee's outstanding stock

Answer: d 2 / 4

©Cambridge Business Publishers, 2014 Test Bank, Chapter 1 1-3

Topic: Accounting for Investments Using the Equity Method

LO: 2

• 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:

• Not affected by its share of the earnings or losses of the investee
• Not affected by its share of the earnings of the investee but is decreased by its share of the

losses of the investee.

• Increased by its share of the earnings of the investee but is not affected by its share of the

investee's losses.

• Increased by its share of the earnings of the investee and is decreased by its share of the

investee's losses.

Answer: d

Topic: Accounting for Investments Using the Equity Method when Purchase Price Exceeds Book Value

LO: 4

• Richard uses the equity method to account for its investment in Plains on January 1. On the date

of acquisition, Plains’ land and buildings were undervalued on its balance sheet. How do these excesses of fair values over book values affect Richard's Equity Income from Plains?

• Building, Decrease; Land, Decrease
• Building, Decrease; Land, No Effect
• Building, Increase; Land, Increase
• Building, Increase; Land, No Effect

Answer: b

Topic: Change to the Equity Method

LO: 8

• On January 1, Wolf purchased 15% of Fieldman's common stock. On August 1, it purchased

another 30% of Fieldman 's common stock. During October, Fieldman declared and paid a cash dividend on its common stock. How much income from Fieldman should Wolf report on its income statement?

• 15% of Fieldman 's income for January 1 to July 31, plus 45% of Fieldman 's income for the

remainder of the year

• 45% of Fieldman 's income from August 1 to December 31 only
• 40% of Fieldman 's income
• The amount of dividends received from Fieldman.

Answer: a

Topic: Significant Influence

LO: 3

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

investee?

• Material inter-company transactions
• The investor owns 30% while another investor owns 70%
• Interchange of personnel
• Technological dependency

Answer: b

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©Cambridge Business Publishers, 2014 1-4 Advanced Accounting, 2 nd Edition

Topic: Equity Method of Accounting for Investments

LO: 3

• When a company holds between 20% and 50% of the outstanding stock of an investee, which of

the following statements applies?

• The investor should always use the equity method to account for its investment.
• The investor should use the equity method to account for its investment unless

circumstances indicate that it is unable to exercise "significant influence" over the investee.

• The investor must use the fair value method unless it can clearly demonstrate the ability to

exercise "significant influence" over the investee.

• The investor should always use the fair value method to account for its investment.

Answer: b

Topic: Basket Purchase vs. Net Asset Acquisition

LO: 1

• The main difference between a "basket purchase" and a net asset acquisition is that:
• In a net acquisition, all assets are valued at full fair value regardless of purchase price; while

in a "basket purchase" the purchase price is allocated to the various assets.

• In a "basket purchase", assets are valued at fair value while in a net asset acquisition; assets

are recorded at book values.

• In a net asset acquisition, the assets are not actually recorded on the investor's books.
• There is no difference in the accounting for the two types of transactions.

Answer: a

Topic: Accounting for Investments Using the Equity Method with Less Than 100% Ownership

LO: 6

• If a 30% acquisition is made at book value, what will be the relationship between the Equity

Investment account and the investee's stockholders' equity?

• There is no particular relationship
• The Equity Investment account will remain at original cost even as the investee's

stockholders' equity increases

• The Equity Investment account balance will equal 30% of investee's stockholders' equity

throughout the life of the investment

• The Equity Investment account balance will equal 30% of investee's stockholders' equity at

date of acquisition, but the relationship will change as the investee reports income and dividends.

Answer: c

Topic: Accounting for Investments Using the Equity Method when Purchase Price Exceeds Book Value

LO: 4, 6

• If a 30% acquisition is made at a price above book value due to an undervalued patent, what will be

the relationship between the Equity Investment account and the investee's stockholders' equity?

• There is no particular relationship
• The Equity Investment account will remain at original cost even as the investee's stockholders'

equity increases.

• The Equity Investment account balance will equal 30% of investee's stockholders' equity

throughout the life of the investment.

• The Equity Investment account balance will equal 30% of investee's stockholders' equity at

date of acquisition, plus the unamortized cost of the patent.

Answer: d

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