multiple choice questions 1 what method of accounting will generally be used when on 4307709

multiple choice questions 1 what method of accounting will generally be used when on 4307709

Multiple Choice Questions

1) What method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company?

A) Only the fair value method may be used.

B) Only the equity method may be used.

C) Either the fair value method or the equity method may be used, depending upon the relationship between the companies.

D) Neither the fair value method nor the equity method may be used, regardless of the level of ownership.

2) What method of accounting will generally be used when one company purchases between 20% to 50% of the outstanding stock of another company?

A) Only the fair value method may be used.

B) Only the equity method may be used.

C) Either the fair value method or the equity method may be used, depending upon the relationship between the companies.

D) Neither the fair value method nor the equity method may be used, regardless of the level of ownership.

3) Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis?

A) Amortization expense of goodwill

B) Depreciation expense on the excess fair value attributed to machinery

C) Amortization expense on the excess fair value attributed to lease agreements

D) Interest expense on the excess fair value attributed to long-term bonds payable

4) Which one of the following statements is correct for an investor company?

A) The balance in the Investment in Osprey Co. account can be reduced to represent a decline in the fair market value of the investment, but will not be adjusted if the fair market value increases.

B) Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss.

C) Once the balance in the Investment in Osprey Co. is reduced to zero, it will not be reduced any further.

D) Under the equity method, the balance in the Investment in Osprey Co. account will increase when cash dividends are received.

5) Pinkerton Inc. owns 10% of Sable Company. In the most recent year, Sable had net earnings of $40,000 and paid dividends of $6,000. Pinkerton's accountant mistakenly assumed Pinkerton had considerable influence over Sable and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively?

A) By using the equity method, the accountant has understated the investment account and overstated the net earnings.

B) By using the equity method, the accountant has overstated the investment account and understated the net earnings.

C) By using the equity method, the accountant has understated the investment account and understated the net earnings.

D) By using the equity method, the accountant has overstated the investment account and overstated the net earnings.

6) Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the following circumstances?

A) Griffon has surrendered significant stockholder rights by agreement between Griffon and Duck.

B) Griffon has been unable to secure a position on the Duck Corporation's Board of Directors.

C) Griffon has inadequate or untimely information to apply the equity method.

D) The ownership of Duck Corporation is diverse.

7) Pond Corporation uses the fair value method of accounting for its investment in Swan Company. Which one of the following events would affect the Investment in Swan Co. account?

A) Investee losses

B) Investee dividend payments

C) An increase in the investee's share price from last period

D) All of the above would affect the Investment in Swan Co. account.

8) Sadie Corporation's stockholders' equity at December 31, 2010 included the following:

6% Preferred stock, $10 par value$1,000,000

Common stock, $1 par value10,000,000

Other paid-in capital—common4,000,000

Retained earnings   4,000,000

$19,000,000

Pilga Corporation purchased a 30% interest in Sadie's common stock from other shareholders on January 1, 2011 for $5,800,000. What was the book value of Pilga's investment in Sadie on January 1, 2011?

A) $5,400,000

B) $5,700,000

C) $7,120,000

D) $7,440,000

9) Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2008 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2010 was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2011, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2011 for $500,000, how much gain was recognized on this transaction?

A) $278,950

B) $280,000

C) $280,950

D) $282,000

10) An investor uses the cost method of accounting for its investment in common stock. During the current year, the investor received $25,000 in dividends, an amount that exceeded the investor's share of the investee company's undistributed income since the investment was acquired. The investor should report dividend income of what amount?

A) $25,000

B) $25,000 less the amount in excess of its share of undistributed income since the investment was acquired

C) $25,000 less the amount that is not in excess of its share of undistributed income since the investment was acquired

"Get 15% discount on your first 3 orders with us"
Use the following coupon
"FIRST15"

Order Now

Related Posts