Chapter9ed02

Chapter9ed02 - Chapter 2 Test Bank STOCK...

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Chapter 2 Test Bank STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING Multiple Choice Questions LO1 1 When a Eagle Company has less than 50% of the voting stock of Fish Corporation which of the following applies? a. Only the fair value method b. Only the equity method c. Either the fair value method or the equity method d. Neither the fair value method or the equity method LO1 2 Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically charged to income on a periodic basis? a. amortization expense of goodwill b. depreciation expense on the excess fair value attributed to machinery c. amortization expense on the excess fair value attributed to lease agreements d. interest expense on the excess fair value attributed to long-term bonds payable LO2 3 Which one of the following statements is correct for an investor company? a. Once the balance in the Investment in Osprey Co. account reaches zero, it will not be reduced any further. b. Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss. c. Under the cost method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss. d. Under the equity method, any goodwill inherent or contained in the Investment in Osprey Co. account will be amortized to the income earned from the investee. 22
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4 Kestral Inc. owns 10% of Mouse Company. In the most recent year, Mouse had net earnings of $60,000 and paid dividends of $8,000. Kestral’s accountant mistakenly assumed considerable influence and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively? a. Understate and overstate. b. *Overstate and understate. c. Overstate and overstate. d. Understate and understate. LO2 5 Griffon Inc. 30% ownership in Duck Corp. should use the equity method under which of the following circumstances a. Surrender of significant stockholder rights by agreement between Griffon and Duck. b. Lack of Duck board membership. c. Temporary Griffon ownership. d. *Diverse ownership. LO2 6 Swan Corporation uses the fair value method of accounting for its investment in Pond Company, which one of the following events would affect the Investment in Pond Co. account? a. investee losses b. investee dividend payments c. *investee increase in share price from last period d. all of the above would affect the Investment in Pond Co. account LO3 7 Mudflat Corporation’s stockholder’s equity at December 31, 2004 included the following: 8% Preferred stock, $10 par value $ 2,000,000 Common stock, no par 20,000,000 Additional paid-in capital 8,000,000 Retained earnings 8,000,000 $ 38,000,000 Brolga Corporation purchases a 30% interest in Mudflat’s common stock from other shareholders on January 1, 2005 for $11,600,000. What is the book value of Brolga’s investment in Mudflat? a. $10,800,000
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Chapter9ed02 - Chapter 2 Test Bank STOCK...

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