Topic: Dividends LO: 1 & 2 10. Principe holds a 10% equity investment in Del Fuego Inc. Clearwater Investments holds 40% of Del Fuego’s stock. On April 1, 2010, Del Fuego declares and pays dividends to its stockholders. How will the dividend affect each company’s balance sheet account: Del Fuego investment? PrincipeClearwater Investmentsa.No effectDecreaseb.No effectNo effectc.DecreaseNo effectd.DecreaseDecreasee.None of the aboveAnswer: Rationale: Principe should use the fair-value method to account for its investment in Del Fuego; therefore, a dividend would not affect its investment account. Clearwater Investments should use the equity method to account for its investment in Del Fuego. Therefore, a dividend will be deducted from its investment account and added to cash. a Cambridge Business Publishers, ©2010 7-8 Financial Accounting for MBAs, 4th Edition
Topic: Dividends LO: 1 & 2 11. Blue Dog Corp. holds a 10% equity investment in Del Fuego Inc. Masterfield Investments holds 40% of Del Fuego’s stock. On April 1, 2010, Del Fuego declares and pays dividends to its stockholders. How will the dividend affect each company’s net income for the year?Blue Dog Corp.Masterfield Investments e Topic: Levels of influence LO: 1, 2 & 3 12. GAAP indentifies several levels of influence / control. If Company A owns 15% of the outstanding voting stock of Company B, which level of influence / control is in evidence? a Topic: Equity method investment- Numerical calculations required LO: 2 13. Berlin Corporation purchases an investment in Best Pictures, Inc. at a purchase price of $3 million cash, representing 45% of the book value of Best Pictures. During the year, Best Pictures reports net income of $350,000 and pays $90,000 of cash dividends. At the end of the year, the market value of Berlin’s investment is $3.7 million. What is the year-end balance of the equity investment in Best Pictures? b © Cambridge Business Publishers, 2010 Test Bank, Module 7 7-9
Topic: Equity method investment LO: 2
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