Test Bank for Advanced Accounting 4e

Test Bank for Advanced Accounting 4e Robert Halsey Patrick Hopkins Chapter 1

Accounting for Intercorporate Investments

Learning Objectives – Coverage by question

Multiple Choice Exercises Problems LO1 – Explain when the equity method should be used.

3, 8, 9, 18

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

2, 4, 12

LO3 – Explain the amortization of excess assets, and the deferral of unrealized income.

5, 11, 19-21,

25-28, 40

2, 3 1

LO4 – Explain the process for deferral of unrealized income.

13, 29-32, 39 4 3

LO5 – Explain the equity method of accounting for less than 100% ownership.

1, 10, 11,

16-20, 24-26,

29-40

1-4, 6 1, 3, 4

LO6 – Explain when the equity method should be discontinued.14 1 LO7 – Explain the accounting for changes to and from the equity method.

6, 15, 22, 23 2

LO8 – Explain the required disclosures for equity method investments.

LO9 – Explain the criticisms of the equity method of accounting.

• / 4

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: 5

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

investee that earned $56,000 and paid $18,000 in dividends. As a result, Frisco Corporation

made the following entries:

Equity Investment 16,800 Equity Income 16,800

Cash 5,400 Dividend Revenue 5,400

What effect will these entries have on Frisco Corporation's balance sheet?

• Investment understated, retained earnings understated
• Investment overstated, retained earnings understated
• Investment overstated, retained earnings overstated
• No effect

Answer: c

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

LO: 2

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

increase in the investment account if it accounts for the investment under the fair value method or the equity method?

• Fair value method, YES; Equity method, YES
• Fair value method, NO; Equity method, NO
• Fair value method, YES; Equity method, NO
• Fair value method, NO; Equity method, YES

Answer: b

Topic: Significant Influence

LO: 1

• 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 investor and investee sign an agreement under which the investor surrenders significant

rights

• The investor tries and fails to obtain representation on the investee's board of directors
• The investor tries and fails to obtain financial information from the investee
• The second largest investor owns only 1% of the investee's outstanding stock

Answer: d 2 / 4

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: 3

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

of acquisition, Fischer’s land and buildings were undervalued on its balance sheet. During the year following the acquisition, how do these excesses of fair values over book values affect Angelo's Equity Income from Fischer?

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

Answer: a

Topic: Change to the Equity Method

LO: 7

• On January 1, Sons purchased 10% of Heller's common stock. On September 1, it purchased

another 30% of Heller's common stock. During November, Heller declared and paid a cash dividend on its common stock.

How much income from Heller should Sons report on its income statement?

• 10% of Heller's income for January 1 to August 31, plus 40% of Heller's income for the

remainder of the year

• 40% of Heller's income from September 1 to December 31 only
• 30% of Heller's income
• The amount of dividends received from Heller.

Answer: a

• / 4

Topic: Change to the Equity Method

LO: 7

• On January 1, Sons purchased 10% of Heller's common stock. On September 1, it purchased

another 30% of Heller's common stock. During November, Heller declared and paid a cash dividend on its common stock.

How much income from Heller should Sons report on its income statement?

• 10% of Heller's income for January 1 to August 31, plus 40% of Heller's income for the

remainder of the year

• 40% of Heller's income from September 1 to December 31 only
• 30% of Heller's income
• The amount of dividends received from Heller.

Answer: b

Topic: Significant Influence

LO: 1

• 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

Topic: Equity Method of Accounting for Investments

LO: 1

• 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

• / 4