Chapter 1-solution class

# Chapter 1-solution class - Chapter 1 The Equity Method of...

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Chapter 1 The Equity Method of Accounting for Investments Multiple Choice Questions 1. On January 1, 2010, Swanson Company buys 300,000 shares of LifeSys, Inc.’s common stock for \$1,800,000, the book value of the shares. This purchase gave Swanson a 30% ownership in LifeSys and the ability to exercise significant influence over operating and financing decisions. During 2010, LifeSys reported net income of \$500,000 and paid a \$1.20 per share dividend. What is the balance in Swanson’s Investment in LifeSys account at December 31, 2010? A. \$1,800,000 B. \$1,590,000 C. \$1,950,000 D. \$2,310,000 E. \$2,010,000 1. B Cost of purchase \$1,800,000 + Income accrual (\$500,000 × 30%) 150,000 – Dividend received (300,000 × \$1.20) (360, 000 ) = Investment in LifeSys Company \$1,590,000 Study Guide – Chapter 1 1

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2. On July 1, 2010, West Co. buys 1,000,000 shares of National Water, Inc.’s common stock for \$20,000,000, the book value of the shares. This purchase gave West Co. a 28% ownership in National Water and the ability to exercise significant influence over operating and financing decisions. For the fiscal year ending June 30, 2011, National Water reported net income of \$1,900,000 and paid a \$2.10 per share dividend. What is the balance in West Co’s Investment in National Water account at June 30, 2011? A. \$18,432,000 B. \$20,532,000 C. \$22,632,000 D. \$21,568,000 E. \$17,368,000 2. A Cost of purchase \$20,000,000 + Income accrual (\$1,900,000 × 28%) 532,000 – Dividend received (1,000,000 × \$2.10) (2,100, 000 ) = Investment in National Water Company \$ 18,432,000 2 Advanced Accounting – 10/e
3. Tara Company owns 22% of Hawkins, Inc. and applies the equity method. During the current year, Tara buys inventory costing \$300,000 and sells it to Hawkins for \$690,000. At the end of the year, only 15% of this merchandise (at the transfer price) is still being held by Hawkins. What amount of unrealized gain must be deferred by Tara in reporting on the equity method? A . \$58,500 B. \$85,800 C. \$45,000 D. \$12,870 E. \$22,770 3. D Inventory at year-end (\$690,000 × .15) \$103,500.00 Gross profit markup (\$390,000 ÷ \$690,000) × 565 Unrealized gain \$ 58,500.00 Ownership share × .22 Intra-entity unrealized gain — deferred \$ 12,870.00 Study Guide – Chapter 1 3

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4. What is a downstream sale? A. A sale from an investor to its investee B. A sale from a producer to its outside supplier C. A sale from an investee to its investor D. A sale from one manufacturer to another E. A sale from a small company to a large one 4. A 4 Advanced Accounting – 10/e
5. TunaCo purchases 30% of Stanley, Inc. on January 1, 2010 for \$1,000,000. This acquisition gives TunaCo the ability to apply significant influence to Stanley’s operating and financing policies.

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## This note was uploaded on 08/25/2011 for the course ACCT 440 taught by Professor Suresh during the Spring '11 term at Copenhagen Business School.

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Chapter 1-solution class - Chapter 1 The Equity Method of...

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