chap001 - Multiple Choice Questions 1 Gaw Company owns 15...

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Multiple Choice Questions 1. Gaw Company owns 15% of the common stock of Teal Corporation and used the fair- value method to account for this investment. Teal reported net income of $110,000 for 2002 and paid dividends of $60,000 on October 1, 2002. How much income should Gaw recognize on this investment in 2002? A) $16,500 B) $ 9,000 C) $25,500 D) $ 7,500 E) $50,000 Answer: B Difficulty: Easy 2. Yult Company owns 25% of the common stock of Dent Co. and uses the equity method to account for the investment. During 2002, Dent reported income of $220,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2002, how much income should Yult recognize related to this investment? A) $20,000 B) $75,000 C) $55,000 D) $35,000 E) $46,000 Answer: C Difficulty: Medium 3. On January 1, 2003, 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 2003 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, 2003? A) $2,040,500 B) $2,212,500 C) $2,260,500 D) $2,171,500 E) $2,071,500 Answer: E Difficulty: Medium
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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. Answer: A Difficulty: Easy 5. On January 1, 2002, Dermot Company purchased 12% of the voting common stock of Horne Corp. On January 1, 2004, Dermot purchased 18% 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 2004 but should make no changes in its financial statements for 2002 and 2005. B) It should prepare consolidated financial statements for 2004. C) It must restate the financial statements for 2002 and 2003 as if the equity method had been used for those two years. D) It should record a prior period adjustment at the beginning of 2004 but should not restate the financial statements for 2002 and 2003. E) It must restate the financial statements for 2003 as if the equity method had been used then. Answer: C
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This note was uploaded on 02/15/2012 for the course ACCOUNTING 101 taught by Professor Mrhot during the Spring '11 term at Clarion.

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chap001 - Multiple Choice Questions 1 Gaw Company owns 15...

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