1 The Equity Method of Accounting for Investments
2 Consolidation of Financial Information
3 Consolidations—Subsequent to the Date of Acquisition
4 Consolidated Financial Statements and Outside Ownership
5 Consolidated Financial Statements—Intra-Entity Asset Transactions
6 Variable Interes...
,Chapter 01 - The Equity Method of Accounting for Investments
Multiple Choice:
[QUESTION]
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 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]
2. 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]
3. 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]
4. 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]
6. During January 2017, 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 2017, Wilton reported net income of $600,000. For 2018, 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, 2018?
A) $1,609,000.
B) $1,485,000.
C) $1,685,000.
D) $1,647,000.
E) $1,054,300.
Answer: A
Learning Objective: 01-04
Topic: Equity method―Investment account balance
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000
$1,400,000 - $1,020,000 = $380,yrs = $38,000 Unrecorded Patents Amortization
$1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000
[QUESTION]
7. On January 1, 2018, 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 2018, 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, 2018?
A) $950,800.
B) $958,000.
C) $836,000.
D) $990,100.
E) $956,400.
Answer: A
Learning Objective: 01-03
Learning Objective: 01-05c
Topic: Equity method―Investment account balance
Topic: Report investee losses
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
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