topic accounting for investments using the equity method when purchase price exceeds 4314389

topic accounting for investments using the equity method when purchase price exceeds 4314389

Topic:Accounting for Investments Using the Equity Method when Purchase Price Exceeds Book Value

LO: 4, 6

11.  If a 30% acquisition is made at a price above book value due to an undervalued patent, what will be the relationship between the Equity Investment account and the investee's stockholders' equity?

a.  There is no particular relationship

b.  The Equity Investment account will remain at original cost even as the investee's stockholders' equity increases.

c.  The Equity Investment account balance will equal 30% of investee's stockholders' equity throughout the life of the investment.

d.  The Equity Investment account balance will equal 30% of investee's stockholders' equity at date of acquisition, plus the unamortized cost of the patent.

Topic: Change in Market Value for an Equity Method Investment

LO: 2

12.  In the case of an equity method investment for which there is a change in market value:

a.  Unrealized gains are reported in the income statement, but unrealized losses are not reported

b. Unrealized gains and losses are reported on the balance sheet only

c.  Unrealized gains and losses are recognized in other comprehensive income

d.  No gains are recognized in income until the investment is sold

Topic: Intercompany Sales of Inventory Effect on Equity Investments

LO: 5

13.  If an investor sells merchandise to an investee and the investee resells all of the items to outside parties in the same period, what equity method entry is required?

a.  The entire gross profit is deferred with a debit to Equity Income and credit to Equity Investment.

b.  No equity method entry is required, since the gross profit is realized.

c.  The entire gross profit is deferred with a credit to Equity Income and Debit to Equity Investment

d.  The investor's percentage of the gross profit is deferred with a debit to Equity Income.

Topic: Equity Investment Balance of Zero

LO: 7

14. When the Equity Investment balance is reduced to zero as investee incurs losses:

a.  The investment remains at zero until the investment is sold

b.  The investment remains at zero until profits have eliminated the unrealized loss

c.  The investor must change to the fair value method

d.  Additional investment losses will result in a credit balance in Equity Investment

 

Topic: Change from the Equity Method

LO: 8

15.When an investor can no longer exert significant influence over the investee, it must change to the fair value method.  What is the required accounting treatment on investor's books?

a.  A prior period adjustment is recorded to bring retained earnings to what it would have been if the new method had been used in the past.

b.  The book value on the date of change becomes the “cost” of the investment.

c.  The investment will be adjusted to its fair value.

d.  Both b and c are required.

Multiple Choice–Computational

Topic: Equity Method Accounting when Less than 100% Ownership

LO: 6

16. On January 2, 2013, P. T. Binder, Inc. purchased a 25% interest in FunkCorp. for $1,000,000 cash.  During 2013, Funk's net income was $2,000,000 and it paid dividends of $600,000.  Binder's 2013income from Funkwas:

a.  $500,000

b.  $  150,000

c.  $1,400,000

d.  $420,000

Topic: Equity Method Accounting when Less than 100% Ownership

LO: 6

17.  Based on the facts described in Question 16, what Equity Investment balance should P. T. Binderreport at December 31, 2013?

a.  $1,000,000

b.  $850,000

c.  $1,350,000

d. $1,250,000

Topic: Equity Method Accounting when Less than 100% Ownership

LO: 3, 6

18.  CFR, Inc. purchased a 10% interest in The Candy Company on January 2, 2013.  The purchase price was $400,000. CFR's officers constitute a majority of The Candy Company’s board of directors.  The investee reported net income of $500,000 and paid dividends of $150,000 in 2013.  On the December 31, 2013, balance sheet, what amount should CFRreport as Equity Investment in The Candy Company?

a.  $900,000

b.  $870,000

c.  $800,000

d.  $830,000

Topic: Accounting for Equity Investments When the Purchase Price Exceeds Book Value

LO: 4

19.  KokoCo. purchased a 30% interest in LangeEnterprises on December 31, 2014for $200,000.  On that date, Lange's net assets had a book value of $500,000 and fair value of $600,000.  What amount of goodwill resulted from this acquisition?

a.  $0

b.  $40,000

c.  $60,000

d.  $100,000

Topic: Accounting for Equity Investments When the Purchase Price Exceeds Book Value

LO: 4

20. DotCo. acquired a 40% interest in Jefferson, Inc. with the excess of purchase price over book value solely attributable to equipment with a five-year life and undervaluation by $100,000.  During the year of acquisition, Jefferson reported net income of $150,000.  What amount of Equity Income should Dotreport on its income statement for the year of acquisition?

a.  $80,000

b.  $112,000

c.  $120,000

d. $104,000

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