A 2400 0 b 7500 0 c 9900 0 d 5100 0 e 8000 0 250000

A. $24,00
0.
B. $75,00
0.
C. $99,00
0.
D. $51,00
0.
E. $80,00
0.
$250,000 × .30 = $75,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance
in assessing whether the criterion is met.
Topic: Criteria for Utilizing the Equity Method
3. On January 1, 2013, 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 2013 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, 2013?
A. $2,040,5
00.
B. $2,212,5
00.
C. $2,260,5
00.
D. $2,171,5
00.
E. $2,071,5
00.
$1,920,000 + ($670,000 × .45) - ($2.50 × 60,000) = $2,071,500
AACSB: Analytic
AICPA BB: Critical Thinking
1-71

AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance
in assessing whether the criterion is met.
Topic: Criteria for Utilizing the Equity Method
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.
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity
shares of another company.
Topic: The Reporting of Investments in Corporate Equity Securities
5. On January 1, 2011, Dermot Company purchased 15% of the voting common stock
of Horne Corp. On January 1, 2013, 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 2013 but should make no changes in its
financial statements for 2012 and 2011.
B. It should prepare consolidated financial statements
for 2013.
C. It must restate the financial statements for 2012 and 2011 as if the equity
method had been used for those two years.
D. It should record a prior period adjustment at the beginning of 2013 but should
not restate the financial statements for 2012 and 2011.
E. It must restate the financial statements for 2012 as if the equity method had
been used then.