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Exam1_ solutions

An investee company incurs an extraordinary loss

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11. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations B. The extraordinary loss would reduce the value of the investment C. The extraordinary loss should increase equity in investee income D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income E. The loss would be ignored but shown in the investor's notes to the financial statements Use the following to answer Questions 12 and 16: On January 1, 2008, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2008, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. 12. The amount allocated to goodwill at January 1, 2008 is 13. The equity in income of Sacco for 2008 is 14. The equity in income of Sacco for 2009 is 15. The balance in the investment in Sacco account at December 31, 2008 is A. $100,000 B. $112,000 C. $106,000 D. $107,500 E. 140,000
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16. The balance in the investment in Sacco account at December 31, 2009 is 17. At the date of an acquisition which is not a bargain purchase, the acquisition method 18. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? 19. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in an Acquisition transaction? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E
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