Test bank For Advanced Accounting
Multiple Choice Questions (chapters 1-3)
15th Edition by Joe Ben Hoyle
A company 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 another company's stock.
C) It has a controlling interest (more than 50%) of another company'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. - ANSA) It has the ability to exercise significant influence over the operating policies of
the investee.
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?
A) It must use the equity method for 2013 but should make no changes in its financial
statements for 2012 and 2011.
B) It should prepare consolidated financial statements for 2013.
C) It must restate the financial statements for 2012 and 2011 as if the equity method had been
used for those two years.
D) It should record a prior period adjustment at the beginning of 2013 but should not restate the
financial statements for 2012 and 2011.
E) It must restate the financial statements for 2012 as if the equity method had been used then.
- ANSC) It must restate the financial statements for 2012 and 2011 as if the equity method had
been used for those two years.
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?
A) Jordan should continue to use the equity method to maintain consistency in its financial
statements.
B) 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.
C) Jordan has the option of using either the equity method or the fair-value method for 2013 and
future years.
, D) Jordan should report the effect of the change from the equity to the fair-value method as a
retrospective change in accounting principle.
E) Jordan should use the fair-value method for 2014 and future years bu - ANSE) Jordan should
use the fair-value method for 2014 and future years but should not make a retrospective
adjustment to the investment account.
Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of
the end of 2013, Chip's common stock had suffered a significant decline in fair value, which is
expected to be recovered over the next several months. How should Club account for the
decline in value?
A) Club should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Club should decrease the balance in the investment account to the current value and
recognize a loss on the income statement.
D) Club should not record its share of Chip's 2013 earnings until the decline in the fair value of
the stock has been recovered.
E) Club should decrease the balance in the investment account to the current value and
recognize an unrealized loss on the balance sheet. - ANSB) No accounting because the decline
in fair value is temporary.
An upstream sale of inventory is a sale:
A) between subsidiaries owned by a common parent.
B) with the transfer of goods scheduled by contract to occur on a specified future date.
C) in which the goods are physically transported by boat from a subsidiary to its parent.
D) made by the investor to the investee.
E) made by the investee to the investor. - ANSE) made by the investee to the investor.
All of the following would require use of the equity method for investments except:
A) material intra-entity transactions.
B) investor participation in the policy-making process of the investee.
C) valuation at fair value.
D) technological dependency.
E) significant control. - ANSC) valuation at fair value.
All of the following statements regarding the investment account using the equity method are
true except:
A) The investment is recorded at cost.
B) Dividends received are reported as revenue.
C) Net income of investee increases the investment account.
D) Dividends received reduce the investment account.
E) Amortization of fair value over cost reduces the investment account. - ANSB) Dividends
received are reported as revenue.
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