Chapter 1
Accounting for
Intercorporate Investments
Learning Objectives – Coverage by question
Multiple Choice Exercises Problems
LO1 – Explain when the equity method
3, 8, 9, 18
should be used.
LO2 – Explain the mechanics of the
accounting for investments using 2, 4, 12
the equity method of accounting.
LO3 – Explain the amortization of 5, 11, 19-21,
excess assets, and the deferral 2, 3 1
of unrealized income. 25-28, 40
LO4 – Explain the process for deferral
13, 29-32, 39 4 3
of unrealized income.
LO5 – Explain the equity method of 1, 10, 11,
accounting for less than 100% 16-20, 24-26, 1-4, 6 1, 3, 4
ownership. 29-40
LO6 – Explain when the equity method
14 1
should be discontinued.
LO7 – Explain the accounting for
changes to and from the equity 6, 15, 22, 23 2
method.
LO8 – Explain the required disclosures
for equity method investments.
LO9 – Explain the criticisms of the
equity method of accounting.
,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
1. 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?
a. Investment understated, retained earnings understated
b. Investment overstated, retained earnings understated
c. Investment overstated, retained earnings overstated
d. No effect
Answer: c
Topic: Accounting for Investments Using the Equity Method and Fair Value Method
LO: 2
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?
a. Fair value method, YES; Equity method, YES
b. Fair value method, NO; Equity method, NO
c. Fair value method, YES; Equity method, NO
d. Fair value method, NO; Equity method, YES
Answer: b
Topic: Significant Influence
LO: 1
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. The investor 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
,Topic: Accounting for Investments Using the Equity Method
LO: 2
4. 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:
a. Not affected by its share of the earnings or losses of the investee
b. Not affected by its share of the earnings of the investee but is decreased by its share of the
losses of the investee.
c. Increased by its share of the earnings of the investee but is not affected by its share of the
investee's losses.
d. 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
5. 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?
a. Building, Decrease; Land, No Effect
b. Building, Decrease; Land, Decrease
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No Effect
Answer: a
Topic: Change to the Equity Method
LO: 7
6. 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?
a. 10% of Heller's income for January 1 to August 31, plus 40% of Heller's income for the
remainder of the year
b. 40% of Heller's income from September 1 to December 31 only
c. 30% of Heller's income
d. The amount of dividends received from Heller.
Answer: a
, Topic: Change to the Equity Method
LO: 7
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?
a. 10% of Heller's income for January 1 to August 31, plus 40% of Heller's income for the
remainder of the year
b. 40% of Heller's income from September 1 to December 31 only
c. 30% of Heller's income
d. The amount of dividends received from Heller.
Answer: b
Topic: Significant Influence
LO: 1
8. Which of the following does not indicate an investor company's ability to significantly influence an
investee?
a. Material inter-company transactions
b. The investor owns 30% while another investor owns 70%
c. Interchange of personnel
d. Technological dependency
Answer: b
Topic: Equity Method of Accounting for Investments
LO: 1
9. When a company holds between 20% and 50% of the outstanding stock of an investee, which of
the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. 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.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
Answer: b
