Chap001 - Chapter 01 - The Equity Method of Accounting for...

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Unformatted text preview: Chapter 01 - The Equity Method of Accounting for Investments Chapter 01 The Equity Method of Accounting for Investments Multiple Choice Questions 1-1 Chapter 01 - The Equity Method of Accounting for Investments 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 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A. $16,500 B. $9,000 Dividends paid: non-significant influence: $60,000 * .15 C. $25,500 D. $7,500 E. $50,000 Difficulty: Easy 2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2008, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2008, how much income should Yaro recognize related to this investment? A. $24,000 B. $75,000 Significant influence exercised: $250,000 * 75% = $75,000 C. $99,000 D. $51,000 E. $80,000 Difficulty: Easy 3. On January 1, 2008, 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 made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2008 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, 2008? A. $2,040,500 B. $2,212,500 C. $2,260,500 D. $2,171,500 E. $2,071,500 1,920,000 + (670,000 * 45%) (60,000 * 45%) = 2,072,500 Difficulty: Medium 1-2 Chapter 01 - The Equity Method of Accounting for Investments 4. 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 Difficulty: Easy 5. On January 1, 2006, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2008, 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 2008 but should make no changes in its financial statements for 2007 and 2006 B. It should prepare consolidated financial statements for 2008 C. It must restate the financial statements for 2007 and 2006 as if the equity method had been used for those two years D. It should record a prior period adjustment at the beginning of 2008 but should not restate the financial statements for 2007 and 2006...
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This note was uploaded on 12/17/2011 for the course ACC 220 ACC220 taught by Professor Leslie during the Spring '11 term at University of Phoenix.

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Chap001 - Chapter 01 - The Equity Method of Accounting for...

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