Test Bank Kkk

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1. Jinky is trying to decide whether to accept a bonus of 25% of net income after salaries and bonus or a salary of P97,500 plus a bonus of 10% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be P450,000. What amount of income would be necessary so that Jinky would consider the choices to be equal? a. P1,100,000 b. P1,197,500 c. P650,00 d. P1,262,500 2. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and office equipment that cost P945,000. The equipment had been used in her sole proprietorship and had been 70% depreciated, the appraised value of the equipment is P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method, the partners’ capital must be in conformity with their profit and loss ratio upon formation. In the formation of a partnership, which of the following is true? a. The agreed capital of Jamby upon formation is P2,625,000 b. The total agreed capital of the partnership is P4,375,000 c. The capital of Miriam will increase by P105,000 as a result of the transfer of capital d. There is either an investment or withdrawal of asset under the bonus method 3. Batanes Construction Company recognized gross loss of P42,000 on its long-term project which has accumulated costs of P490,000. To finish the project, the company estimates that it has to incur additional cost of P735,000. The contract price is: a. P798,000 b. P1,330,000 c. P1,225,000 d. P1,183,000 35 Free Test Bank for Advanced Accounting by Fayerman Multiple Choice Questions

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Transcript of Test Bank Kkk

Page 1: Test Bank Kkk

1.        Jinky is trying to decide whether to accept a bonus of 25% of net income after salaries and bonus or a salary of P97,500 plus a bonus of 10% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be P450,000. What amount of income would be necessary so that Jinky would consider the choices to be equal?a. P1,100,000 b. P1,197,500 c. P650,00 d. P1,262,500

2.       Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and office equipment that cost P945,000. The equipment had been used in her sole proprietorship and had been 70% depreciated, the appraised value of the equipment is P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method, the partners’ capital must be in conformity with their profit and loss ratio upon formation.

In the formation of a partnership, which of the following is true?a.       The agreed capital of Jamby upon formation is P2,625,000b.      The total agreed capital of the partnership is P4,375,000c.       The capital of Miriam will increase by P105,000 as a result of the transfer of capitald.      There is either an investment or withdrawal of asset under the bonus method

3.       Batanes Construction Company recognized gross loss of P42,000 on its long-term project which has accumulated costs of P490,000. To finish the project, the company estimates that it has to incur additional cost of P735,000. The contract price is:a. P798,000 b. P1,330,000 c. P1,225,000 d. P1,183,000

35 Free Test Bank for Advanced Accounting by Fayerman Multiple Choice Questions

The parties to a joint venture will initially record their share of the investment at:

1. a) Fair value.2. b) Cost.3. c) Amortized value.4. d) Equity value.

Walton Ltd. has the following shareholders: Sifter Co. — 60%, Fallwell — 30%, Garney Ltd. — 10%. Fallwell does not conduct any business with Walton, nor has it been able to

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secure a seat on the Board of Directors. Which of the following statements is TRUE?

1. a) Falwell has significant influence over Walton.2. b) Fallwell should treat Walton as a non-strategic investment.3. c) Fallwell should consider Walton to be a special purpose entity.4. d) Fallwell should consider Walton to be an associated company.

At the beginning of 2013, Ridley Ltd. acquired 15% of the voting shares of Gasser Co. for $150,000. Ridley does not have any significant influence over Gasser. Ridley reports the investment using the cost method. In 2013, Gasser earned net income of $70,000 and paid dividends of $40,000. In 2014, Gasser earned net income of $80,000 and paid dividends of $100,000. At the end of 2014, what is the balance of Ridley's "Investment in Gasser"

account?

1. a) $150,1502. b) $154,5003. c) $150,0004. d) $182,500

At the beginning of 2013, Zylon Ltd. acquired 15% of the voting shares of Hendrick Co. for $150,000. Zylon does not have any significant influence over Hendrick. Zylon reports the investment using the cost method. In 2013, Hendrick earned net income of $70,000 and paid dividends of $40,000. In 2014, Hendrick earned net income of $80,000 and paid dividends of $100,000. At the end of 2014, what journal entry should Zylon make to record

its share of Hendrick's net income?

1. a) DR Investment in Hendrick 12,000; CR Investment income 12,0002. b) DR Investment in Hendrick 80,000; CR Investment income 80,0003. c) No entry is required4. d) DR Investment in Hendrick 18,000; CR Investment income 18,000

Regarding significant influence with respect to an associate, which of the following

statements is TRUE?

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1. a) The investor–associate relationship is directly opposite in nature compared to that existing between a parent and subsidiary.

2. b) There is a requirement for the investor to hold shares, or have a beneficial interest, in the associate.

3. c) The application of the cost method of accounting is based on the investor owning shares in the associate.

4. d) If significant influence is exercised by one company over another by virtue of an association or contract other than from the holding of shares, then the equity method cannot be applied in relation to the associate.

Dither Co. owns 100% of the common shares of Franklin Ltd. Dither records its investment in Franklin using the cost method. Dither and Franklin have transactions with each other. In preparing Dither's consolidated financial statements, which of the following

should be done?

1. a) Dividends received by Dither from Franklin should be deducted from Dither's dividend income.

2. b) Franklin's retained earnings should be deducted from Dither's retained earnings.3. c) Dither's receivable from Franklin should be netted with Dither's accounts receivable.4. d) Franklin's share capital should be added to Dither's share capital.

There is a presumption that a company which owns less than 20% of the voting shares of

another company has:

1. a) Total control.2. b) Joint control.3. c) Significant influence. 4. d) A non-strategic investment.

The equity method is applied:

1. a) when one of the parties is designated as a subsidiary.2. b) when a contractual agreement is written up providing joint control.3. c) from the date the investor obtains significant influence over the investee.4. d) on that date when it becomes clear that an investor has no power to participate in the

financial and operating decisions of the investee.

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How are most significant influence investments in equity securities actually recorded on the

investors books?

1. a) Using the equity method.2. b) Using proportionate consolidation.3. c) On a fully consolidated basis.4. d) Using the cost method.

Which methods will result in the same income and shareholders' equity?

1. a) Cost and consolidation.2. b) Equity and consolidation.3. c) Cost and equity.4. d) Each method results in different income and shareholder's equity amounts.

How do joint ventures differ from private corporations?

1. a) A joint venture does not have a board of directors.2. b) There can only be two parties in a joint venture.3. c) Venturers cannot make unilateral decisions.4. d) The joint venturers must share the risks and profits of the joint venture equally.

A subsidiary is defined as an entity that is controlled by another company. Three criteria must be present in order for there to be control. The parent must have all of the following

except:

1. a) the ability to direct the financial and operating policies of another company.2. b) the ability to obtain returns from another company. 3. c) the ability to use its power to affect the returns from another company. 4. d) the ability to issue any class of securities in a public market on behalf of another

company.

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Larsen Ltd. has the following shareholders: Miller Co. — 60%; Sadaat Ltd. — 30%; Peterson Ltd. — 10%. Sadaat has two seats on Larsen's five-person board of directors.

Which of the following statements is TRUE?

1. a) Larsen is a special purpose entity to Sadaat.2. b) Sadaat has control over Larsen.3. c) Sadaat should treat Larsen as a non-strategic investment.4. d) Sadaat has significant influence over Larsen.

Which of the following factors does NOT provide evidence of the existence of significant

influence?

1. a) Representation on the board of directors or equivalent governing body of the investee.2. b) Rights to direct the investee to enter into, or veto any changes to, transactions for the

benefit of the investor.3. c) Material transactions between the investor and the investee.4. d) Interchange of managerial personnel.

In changing from the cost method to consolidation, which of the following is NOT

required?

1. a) Elimination of intercompany transactions and balances.2. b) Replacement of the "Investment in Subsidiary" account with the assets and liabilities

of the subsidiary.3. c) Elimination of the subsidiary's retained earnings since acquisition.4. d) Elimination of the subsidiary's share capital account.

At the beginning of 2013, Zed Ltd. acquired 15% of the voting shares of Pine Co. for $150,000. Zed does not have any significant influence over Pine. Zed reports the investment using the cost method. In 2013, Pine earned net income of $70,000 and paid dividends of $40,000. In 2014, Pine earned net income of $80,000 and paid dividends of $100,000. At the end of 2014, what journal entry should Zed make to record the dividends from Pine?

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1. a) No entry is required2. b) DR Cash 12,000; CR Investment in Pine 12,0003. c) DR Cash 15,000; CR Investment in Pine 15,0004. d) DR Cash 15,000; CR Investment income 15,000

A joint arrangement that is not structured as a separate entity is a(n) __________.

1. a) association.2. b) joint operation. 3. c) consolidation.4. d) passive investment.

Which of the following statements about the direct approach to consolidation is TRUE?

1. a) The starting point for preparing the consolidated financial statements is the financial statements for each of the parent and subsidiary companies.

2. b) It can be used for both simple and complex consolidations.3. c) It is a more methodical and less intuitive approach than the worksheet approach.4. d) The starting point for preparing the consolidated financial statements is the trial

balance for each of the parent and subsidiary companies.

A financial asset includes all of the following EXCEPT:

1. a) Cash.2. b) A debt instrument of another company.3. c) A contractual right to receive cash or another financial asset from another company.4. d) A contractual right to exchange financial instruments under conditions that are

potentially favourable.

Which of the following statements regarding joint ventures is FALSE?

1. a) A joint venture must be set up as a separate vehicle.

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2. b) A company is a party to a joint venture when it does not have the right to the assets or the obligations for the liabilities.

3. c) A company is a party to a joint venture when it has the rights to the venture’s net assets.

4. d) A joint venture is usually a joint arrangement that involves the use of the assets and other resources of the parties, often to manufacture and sell joint products.

Foster Corporation uses the equity method to account for its 25% investment in Vector Corporation and receives $25,000 in dividends. How should Foster account for these

dividends?

1. a) An increase in assets.2. c) An increase in income.3. b) A decrease in the investment.4. d) A decrease in income.

Jamison Co. owned 60% of Tyler Co.'s voting shares and 25% of Simon Ltd.'s voting shares. Tyler owns 30% of Simon's voting shares. Which of the following statements is

TRUE?

1. a) Tyler is the only subsidiary of Jamison.2. b) Simon is a subsidiary of both Tyler and Jamison.3. c) Simon is the only subsidiary of Tyler.4. d) Both Tyler and Simon are subsidiaries of Jamison.

Which of the following is NOT an indicator of significant influence?

1. a) The investor and the investee share office space and use the same accounting firm.2. b) The investor has representation on the investee's board of directors.3. c) There are material transactions between the investor and the investee.4. d) The investor provides computing services to the investee.

On whose books are the consolidating adjusting entries recorded?

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1. a) Only on the consolidated worksheet.2. b) In the general journal of both the parent company and on the consolidated worksheet.3. c) In the general journal of both the parent and subsidiary companies and on the

consolidated worksheet.4. d) In the general journal of both the parent and subsidiary companies.

In Canada, which subsidiaries must be included in consolidated financial statements?

1. a) All subsidiaries, except for ones in unrelated industries.2. b) All domestic subsidiaries.3. c) All subsidiaries, except for ones where control is impaired.4. d) All subsidiaries.

Non-strategic investments can be classified as fair value through profit or loss (FVTPL) or as fair value through other comprehensive income (OCI). Which of the following

statements is true?

1. a) Under both FVTPL and OCI, changes in the fair value of the investment are reported as other comprehensive income on the statement of comprehensive income.

2. b) Under both FVTPL and OCI, changes in the fair value of the investment are reported under the net income section on the statement of comprehensive income.

3. c) Under both FVTPL and OCI, dividends received from the investee are reported as other comprehensive income on the statement of comprehensive income.

4. d) Under both FVTPL and OCI, dividends received from the investee are reported under the net income section on the statement of comprehensive income.

Clausen Ltd. has a passive investment in Kaitlin Ltd. Clausen has elected to treat Kaitlin as a fair value through other comprehensive income (OCI) investment under IFRS 9

Financial Instruments. Which of the following statements is TRUE?

1. a) Dividends from Kaitlin are reported as a separate component of Clausen's shareholders' equity.

2. b) Year to year changes in the fair value of the Investment in Kaitlin are reported as net income in Clausen's SCI.

3. c) Fair value accumulated gains and losses in the Investment in Kaitlin should be reported as a separate component in Clausen's shareholders' equity.

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4. d) Dividends from Kaitlin are reported as other comprehensive income in Clausen's Statement of Comprehensive Income.

______________ has sometimes been described as ‘one-line consolidation’.

1. a) The equity method of accounting2. b) A joint venture3. c) A passive investment4. d) Significant influence

Which of the following is the first step in determining if one company controls another such

that a parent/subsidiary relationship exists?

1. a) Determine the relevant activities of the investee.2. b) Determine how decisions are made regarding the relevant activities.3. c) Determine whether the investor has the current ability to direct those relevant

activities.4. d) Determine the purpose and design of the investee.

Which of the following statements regarding non-strategic investments in equity is

FALSE?

1. a) There are possible exceptions to FVTPL. 2. b) At the day of acquisition when the investment in shares is originally recorded, the

company has the option of making an “irrevocable election” where it decides that subsequent changes to fair value will be put in other comprehensive income rather than through income.

3. c) The “irrevocable election” can be made for investments that are held for trading.4. d) Items that are originally placed in Other Comprehensive Income cannot be recycled

through profit and loss.

Which of the following statements is FALSE?

1. a) Entities are required to present non-strategic investments in equity as financial assets.

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2. b) Financial assets under IFRS 9 are shown at fair value with the difference in fair value going through income.

3. c) Entities may make an irrevocable election to show the gains and losses through other comprehensive income.

4. d) Under ASPE, all financial investments in shares are reflected at fair value unless the shares trade in a public market.

Naylor Ltd. owns 100% of the common shares of Edward Ltd. During the year, Naylor reported net income of $108,000 including its income from its investment in Edward accounted for under the cost method. Edward reported net income of $20,000 and paid dividends of $8,000 during the year. What net income will be reported by Naylor on its separate-entity financial statements under the equity method and on its consolidated

financial statements?

1. a) Equity Method$120,000; Consolidated Financial Statements $120,0002. b) Equity Method $112,000; Consolidated Financial Statements $112,0003. c) Equity Method $120,000; Consolidated Financial Statements $112,0004. d) Equity Method $112,000; Consolidated Financial Statements $120,000

Which of the following statements is FALSE?

1. a) A joint arrangement is a contractual arrangement which provides for joint control.2. b) Joint control requires majority agreement among the parties sharing control.3. c) Two types of joint arrangements exist: joint operations and joint ventures.4. d) The parties to a joint operation are required to report their share of each asset and

liability.

Leno Ltd. has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on

Leno's financial statements?

1. a) A holding of 20,000 of the 25,000 outstanding common shares of Riser Co.2. b) A holding of 3,000 of the 10,000 outstanding preferred shares of Riser Co.3. c) A holding of 15,000 of the 50,000 outstanding common shares of Riser Co.4. d) A holding of 5,000 of the 60,000 outstanding common shares of Riser Co.

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On January 1, 2013, Tonya Ltd. started Chen Ltd. by contributing $600,000 and received 100% of the common shares of Chen. Chen reported net income of $40,000 in 2013 and $85,000 in 2014 and paid out 40% of its net income as dividends in each year. Under the equity method, which of the following amounts should be reported on Tonya's separate-

entity 2014 financial statements?

1. a) 2. Investment in Chen$600,000; Investment Income $34,0003. b) Investment in Chen $685,000; Investment Income $85,0004. c) Investment in Chen$625,000; Investment Income $34,0005. d) Investment in Chen $625,000; Investment Income $40,000

30 Free Test Bank for Advanced Accounting 1st Edition by Hamlen Multiple Choice Questions

SFAS 115 divides investments with readily determinable fair values into what categories?

1. a.trading and held-to-maturity investments2. b.trading, held-to-maturity, and equity methodinvestments3. c.available-for-sale and held-to-maturity investments4. d.trading, available-for-sale, and held-to-maturity investments.

A company acquires all of the voting stock in Prolin Company, and records the transaction by debiting “Investment in Prolin Company.” The company is accounting for its

investment as a:

1. a.statutory consolidation.2. b.variable interest entity.3. c.joint venture.4. d.stock acquisition.

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Following IFRS, when are held-to-maturity investments considered to be impaired?

1. a.Book value is greater than market value, and there is objective evidence of loss events.2. b.Book value is greater than market value, and there is an active market for the

investment.3. c.Book value is greater than value-in-use, and the decline is considered to be other than

temporary.4. d.Book value is greater than value-in-use, and the investment no longer pays dividends or

interest.

A company acquires all of the assets and liabilities of another company in a statutory

merger. Which statement is false?

1. a.The acquiring company reports the acquired assets and liabilities at fair value at the date of acquisition.

2. b.The acquiring company does not report acquired intangible assets unless they are already reported on the acquired company’s books.

3. c.The acquired company no longer exists as a separate entity.4. d.the acquiring company does not revalue its assets and liabilities to fair value at the date

of acquisition.

Which statement below is false concerning IFRS for marketable debt and equity

investments?

1. a.Trading investments are reported at fair value, with unrealized gains and losses reported in income.

2. b.Available-for-sale investments are reported at fair value, with unrealized gains and losses reported in equity.

3. c.Impairment losses are reported in equity, and cannot be reversed.4. d.Held-to-maturity investments are reported at amortized cost.

What is “value-in-use,” as used in reporting intercorporate investments, per IFRS?

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1. a.Present value of the investment’s future expected cash flows.2. b.Market value of the investment in an active market.3. c.Present value of the investment’s future dividend payments.4. d.Market value of the investment when acquired.

Equity in net income is affected by all but which one of these items related to the investee?

1. a.impairments of indefinite life intangibles of the investee2. b.markup on inventory sold by the investee to the investor3. c.markup on inventory sold by the investor to the investee4. d.amortization of previously unreported intangibles of the investee.

Rand Corporation acquires all of Southern Company’s assets and liabilities on January 1, 2012, for $15,000,000 in cash. At the date of acquisition, Southern’s balance sheet reported assets of $75,000,000 and liabilities of $65,000,000. Investigation reveals that Southern’s reported plant assets are overvalued by $1,400,000. Rand reports how much goodwill on

this acquisition?

1. a.$5,000,0002. b.$6,400,0003. c.$3,600,0004. d.$2,000,000

If a company elects the fair value option under SFAS 159 for all of its eligible investments, which of its investments are not reported at fair value, with unrealized gains and losses

reported in income?

1. a.significant influence investments2. b.available-for-sale investments3. c.held-to-maturity investments4. d.controlled investments

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Following IFRS, impairment loss for intercorporate investments with significant influence

occurs when:

1. a.book value is higher than market value.2. b.book value is higher than the higher of market value or value-in-use.3. c.the decline in value is other than temporary.4. d.the present value of the investment’s future cash flows is greater than its carrying value.

If a U.S. company invests in a joint venture, it may report the investment as:

1. a.a trading investment.2. b.a held-to-maturity investment.3. c.an equity method investment.4. d.a statutory merger.

On December 20, 2011, a company pays $40,000 for a stock, classified as a trading security. On December 31, 2011, the company’s year-end, the stock has a market value of $43,000. The company sells the stock in 2012 for $41,000. On its income statement, the company

reports:

1. a.a gain of $3,000 in 2011, and a loss of $2,000 in 2012.2. b.no gain or loss in 2011, and a gain of $1,000 in 2012.3. c.a gain of $3,000 in 2011, and no gain or loss in 2012.4. d.no gain or loss in 2011, and a gain of $3,000 in 2012.

Which statement is true concerning proportionate consolidation? Proportionate

consolidation:

1. a.is allowed for investments with significant influence and controlling intercorporate investments.

2. b.reports the intercorporate investment at net book value as an asset on the investor’s balance sheet.

3. c.increases the investor’s leverage (total liabilities/total assets) if the investee has higher leverage than the investor.

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4. d.increases the investor’s total equity if the investee has positive retained earnings.

Impairment losses on held-to-maturity investments are:

1. a.not reported.2. b.reported in other comprehensive income.3. c.reported as a direct adjustment to beginning retained earnings.4. d.reported on the income statement.

Proportionate consolidation is:

1. a.used to report investments in marketable securities, held for long-term investment.2. b.not allowed in the U.S.3. c.a way to report all the assets and liabilities of another company on the investor’s books.4. d.an alternative way to report controlling investments under IFRS.

On December 20, 2011, a company pays $40,000 for a stock, classified as an available-for-sale security. On December 31, 2011, the company’s year-end, the stock has a market value of $43,000. The company sells the stock in 2012 for $41,000. On its income statement, the

company reports:

1. a.a gain of $3,000 in 2011, and a loss of $2,000 in 2012.2. b.no gain or loss in 2011, and a gain of $1,000 in 2012.3. c.a gain of $3,000 in 2011, and no gain or loss in 2012.4. d.no gain or loss in 2011, and a gain of $3,000 in 2012.

Following U.S. GAAP, when should a company use the equity method to report an

intercorporate investment?

1. a.The company significantly influences the decisions of the investee.2. b.The investee is the company’s major supplier.3. c.The company owns 20 – 50% of the investee’s voting stock.4. d.The company is holding the investment in its long-term portfolio.

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U.S. GAAP general requires joint ventures to be reported as:

1. a.equity method investments.2. b.trading securities.3. c.consolidated controlled investments.4. d.available-for-sale securities.

Impairment losses on equity method investments are:

1. a.not reported.2. b.reported in other comprehensive income.3. c.reported as a direct adjustment to beginning retained earnings.4. d.reported on the income statement.

Impairment losses are reported on a equity method investment when:

1. a.its fair value is less than its book value.2. b.its fair value is less than its book value, and the decline is judged to be other than

temporary.3. c.its fair value is zero.4. d.its fair value is less than its book value, and there is an active market for the investment.

Which item below is least likely to be a reason a company invests in the securities of

another company?

1. a.Earn a return on temporarily idle cash.2. b.Speculate based on private information that the stock price will increase.3. c.Balance a risk-adjusted portfolio with the expectation of dividends and capital gains.4. d.Facilitate activity along the supply chain.

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Following IFRS, when should a company use the equity method to report an intercorporate

investment?

1. a.The company significantly influences the decisions of the investee.2. b.The investee is the company’s major supplier.3. c.The company owns 20 – 50% of the investee’s voting stock.4. d.The company is holding the investment in its long-term portfolio.

Held-to-maturity investments are reported at:

1. a.fair value, with unrealized gains and losses reported on the income statement.2. b.fair value, with unrealized gains and losses reported in other comprehensive income.3. c.amortized cost.4. d.cost, with unrealized gains and losses reported on the income statement.

A company acquires all of the assets and liabilities of another company. Which one of the

following increases the amount of goodwill the acquiring company reports?

1. a.The acquired company’s equipment is undervalued.2. b.The acquired company has previously unreported intangibles.3. c.The acquired company’s debt is undervalued.4. d.The acquired company’s inventory is undervalued.

At the beginning of the current year, Trux, Inc. enters a joint venture with another company. Each company invests €25,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €1,500,000 and pays no dividends. At the end of the year the joint venture’s balance sheet reports €65,000,000 in assets and €13,500,000 in liabilities. If Trux uses proportionate consolidation to report its investment

in the joint venture, its liabilities will be:

1. a.the same as if it used the equity method to report the investment.2. b.€13,500,000 higher than if it used the equity method to report the investment.3. c.€25,000,000 lower than if it used the equity method to report the investment.4. d.€6,750,000 higher than if it used the equity method to report the investment.

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When a company owns a controlling interest in the stock of another legally separate

company, the acquired company is called a:

1. a.variable interest entity.2. b.subsidiary.3. c.equity method investment.4. d.held-to-maturity investment.

Sharil Company owns 40% of Tonlen Company. What is the most likely reason Sharil

made this investment?

1. a.Earn a return on temporarily idle cash.2. b.Speculate based on private information that the stock price will increase.3. c.Balance a risk-adjusted portfolio with the expectation of dividends and capital gains.4. d.Facilitate activity along the supply chain.

Impairment testing requires a comparison of an asset’s book value with its fair value, with impairment losses reported on the income statement. Which of the following investments

are NOT tested for impairment?

1. a.trading securities2. b.Held-to-maturity investments3. c.Equity method investments4. d.Joint ventures

Porter Corporation acquires all of Quinn Company’s assets and liabilities on January 1, 2012, for $10,000,000 in cash. At the date of acquisition, Quinn’s balance sheet reported assets of $50,000,000 and liabilities of $46,000,000. Investigation reveals that Quinn’s reported plant assets are undervalued by $2,500,000. Porter reports how much goodwill on

this acquisition?

1. a.$6,000,0002. b.$2,500,0003. c.$3,500,000

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4. d.$2,000,000

Impairment losses on trading investments are:

1. a.not reported.2. b.reported in other comprehensive income.3. c.reported as a direct adjustment to beginning retained earnings.4. d.reported on the income statement.

Total Points: 0 correct out of 30

Exam Finished

18 Free Test Bank for Advanced Accounting 10th Edition by Beams Multiple Choice Questions

Which of the following is a reason why a company would expand through a combination,

rather than by building new facilities?

1. a. A combination might provide cost advantages. 2. b. A combination might provide fewer operating delays.3. c. A combination might provide easier access to intangible assets.4. d. All of the above are possible reasons that a company might choose a combination.

Goodwill arising from a business combination is

1. a. charged to Retained Earnings after the acquisition is completed.2. b. amortized over 40 years or its useful life, whichever is longer.3. c. amortized over 40 years or its useful life, whichever is shorter.4. d. never amortized.

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Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent

office filing cost. In recording the combination

1. a. fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp.

2. b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durer at purchase.

3. c. the patent is recorded as an asset at fair market value.4. d. the patent's market value increases goodwill.

In reference to international accounting for goodwill, which of the following statements is

correct?

1. a. U.S. companies have complained that past accounting rules for amortizing goodwill placed them at a disadvantage in competing against foreign companies for merger partners.

2. b. Some foreign countries permitted the immediate write-off of goodwill to stockholders’ equity.3. c. The IASB and the FASB are working to eliminate differences in accounting for business

combinations.4. d. All of the above are correct.

A business combination in which a new corporation is created and two or more existing

corporations are combined into the newly created corporation is called a

1. a. merger.2. b. purchase transaction.3. c. pooling-of-interests.4. d. consolidation.

In recording acquisition costs, which of following procedures is correct?

1. a. Registration costs are expensed, and not charged against the fair value of the securities issued.

2. b. Indirect costs are charged against the fair value of the securities issued.

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3. c. Consulting fees are expensed.4. d. None of the above procedures is correct.

According to FASB 141, liabilities assumed in an acquisition will be valued at the

1. a. estimated fair value.2. b. historical book value.3. c. current replacement cost.4. d. present value using market interest rates.

In a merger, which of the following will occur?

1. a. A merger occurs when one corporation takes over the operations of another business entity, and the acquired entity is dissolved.

2. b. None of the business entities will be dissolved.3. c. The acquired assets will be recorded at book value by the acquiring entity.4. d. None of the above is correct.

Raphael Company paid $2,000,000 for the net assets of Paris Corporation and Paris was then dissolved. Paris had no liabilities. The fair values of Paris’ assets were $2,500,000. Paris’s only non-current assets were land and equipment with fair values of $160,000 and $640,000, respectively. At what value will the equipment be recorded by Raphael?

1. a. $640,0002. b. $240,0003. c. $400,0004. d. $0.

With respect to goodwill, an impairment

1. a. will be amortized over the remaining useful life.2. b. is a two-step process which analyzes each business unit of the entity. 3. c. is a one-step process considering the entire firm.

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4. d. occurs when asset values are adjusted to fair value in a purchase.

In reference to the FASB disclosure requirements, which of the following is correct?

1. a. Information related to several minor acquisitions may not be combined.2. b. Firms are not required to disclose the business purpose for a combination3. c. Notes to the financial statements of an acquiring corporation must disclose that the business

combination was accounted for by the acquisition method.4. d. All of the above are correct.

Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of Bull Company in an all-stock transaction. Picasso paid the investment bankers

$35,000. Picasso will treat the investment banker fee as:

1. a. an expense for the current year. 2. b. a prior period adjustment to Retained Earnings. 3. c. additional goodwill on the consolidated balance sheet. 4. d. a reduction in paid-in capital.

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value exceeds the investment cost, which of the following statements is correct?

1. a. A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.

2. b. the value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit.

3. c. it is allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain.

4. d. It is allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.

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A business combination occurs when a company acquires an equity interest in another

entity and has

1. a. at least 20% ownership in the entity.2. b. more than 50% ownership in the entity.3. c. 100% ownership in the entity. 4. d. control over the entity, irrespective of the percentage owned.

According to FASB Statement 141, which one of the following items may not be accounted

for as an intangible asset apart from goodwill?

1. a. A production backlog.2. b. A talented employee workforce.3. c. Noncontractual customer relationships.4. d. Employment contracts.

FASB favors consolidation of two entities when

1. a. one acquires less than 20% equity ownership of the other.2. b. one company’s ownership interest in another gives it control of the acquired company, yet

the acquiring company does not have a majority ownership in the acquired. Typically, this is in the 20%-50% interest range.

3. c. one acquires two thirds equity ownership in the other. 4. d. one gains control over the entity, irrespective of the equity percentage owned.

Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring Florence

Company. Michangelo will treat the $100,000 as

1. a. an expense for the current year. 2. b. a prior period adjustment to retained earnings. 3. c. additional cost to investment of Florence on the consolidated balance sheet. 4. d. a reduction in paid-in capital.

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In Statement 142, which of the following methods does the FASB consider the best

indicators of fair values in the evaluation of goodwill impairment?

1. a. Senior executive’s estimates.2. b. Financial analyst forecasts.3. c. Market value.4. d. The present value of future cash flows discounted at the firm’s cost of capital.

Total Points: 0 correct out of 18

Exam Finished

49 Free Test Bank for Advanced Accounting 10th edition by Hoyle Multiple Choice Questions

Which of the following results in a decrease in the Equity in Investee Income account when

applying the equity method?

1. A. Dividends paid by the investor.2. B. Net income of the investee.3. C. Unrealized gain on intra-entity inventory transfers for the current year.4. D. Unrealized gain on intra-entity inventory transfers for the prior year.5. E. Extraordinary gain of the investee.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2011, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account

for the decline in value?

1. A. Club should switch to the fair-value method.2. B. No accounting because the decline in fair value is temporary.

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3. C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.

4. D. Club should not record its share of Chip's 2011 earnings until the decline in the fair value of the stock has been recovered.

5. E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

On January 4, 2011, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2011, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2012, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares

had been sold?

1. A. $848,000.2. B. $742,000.3. C. $723,000.4. D. $761,000.5. E. $925,000.

Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.What is the balance in Acker's Investment in Howell account at

December 31, 2010?

1. A. $576,000.2. B. $598,400.3. C. $614,400.4. D. $606,000.5. E. $616,000.

On January 1, 2011, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2011, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the

balance in the investment account on December 31, 2011?

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1. A. $950,800.2. B. $958,000.3. C. $836,000.4. D. $990,100.5. E. $956,400.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.

What is the balance in the investment account after the sale of the 10,000 sha

1. A. $390,000.2. B. $420,000.3. C. $453,000.4. D. $454,000.5. E. $465,000.

When an investor sells shares of its investee company, which of the following statements is

true?

1. A. A realized gain or loss is reported as the difference between selling price and original cost.2. B. An unrealized gain or loss is reported as the difference between selling price and original cost.3. C. A realized gain or loss is reported as the difference between selling price and carrying value.4. D. An unrealized gain or loss is reported as the difference between selling price and carrying

value.5. E. Any gain or loss is reported as part as comprehensive income.

An upstream sale of inventory is a sale:

1. A. between subsidiaries owned by a common parent.2. B. with the transfer of goods scheduled by contract to occur on a specified future date.3. C. in which the goods are physically transported by boat from a subsidiary to its parent.4. D. made by the investor to the investee.5. E. made by the investee to the investor.

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Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw

recognize on this investment in 2011?

1. A. $16,500.2. B. $9,000.3. C. $25,500.4. D. $7,500.5. E. $50,000.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.What is the appropriate journal entry to record the sale of the 10,000 shares?

1. A. A Above2. B. B Above3. C. C Above4. D. D Above5. E. E Above

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.

How much goodwill is associated with this investment?

1. A. $(500,000).2. B. $0.3. C. $100,000.4. D. $200,000.5. E. $2,000,000.

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On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000.no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas.In 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000.What is the balance in the investment account after

the sale of the 15,000 shares?

1. A. $750,000.2. B. $760,000.3. C. $780,000.4. D. $790,000.5. E. $800,000.

Which of the following results in an increase in the investment account when applying the

equity method?

1. A. Unrealized gain on intra-entity inventory transfers for the prior year.2. B. Unrealized gain on intra-entity inventory transfers for the current year.3. C. Dividends paid by the investor.4. D. Dividends paid by the investee.5. E. Sale of a portion of the investment during the current year.

When applying the equity method, how is the excess of cost over book value accounted for?

1. A. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets.

2. B. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets.

3. C. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.

4. D. The excess is allocated to goodwill.5. E. The excess is ignored.

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An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

1. A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations.

2. B. The extraordinary loss would reduce the value of the investment.3. C. The extraordinary loss should increase equity in investee income.4. D. The extraordinary loss would not appear on the income statement but would be a

component of comprehensive income.5. E. The loss would be ignored but shown in the investor's notes to the financial statements.

Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.What is the balance in Acker's Investment in Howell account at

December 31, 2011?

1. A. $624,000.2. B. $636,000.3. C. $646,000.4. D. $656,000.5. E. $666,000.

All of the following statements regarding the investment account using the equity method

are true except:

1. A. The investment is recorded at cost.2. B. Dividends received are reported as revenue.3. C. Net income of investee increases the investment account.4. D. Dividends received reduce the investment account.5. E. Amortization of fair value over cost reduces the investment account.

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A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has

been deemed appropriate. Which of the following statements is true?

1. A. A cumulative effect change in accounting principle must occur.2. B. A prospective change in accounting principle must occur.3. C. A retrospective change in accounting principle must occur.4. D. The investor will not receive future dividends from the investee.5. E. Future dividends will continue to be recorded as revenue.

On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000.no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas.In 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000.What was the balance in the investment account

before the shares were sold?

1. A. $1,560,000.2. B. $1,600,000.3. C. $1,700,000.4. D. $1,800,000.5. E. $1,860,000.

Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.What is the Equity in Howell Income that should be reported by Acker

in 2011?

1. A. $32,000.2. B. $41,600.3. C. $48,000.4. D. $49,600.5. E. $50,600.

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Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.What is the amount of unrealized intra-entity inventory profit to be

deferred on December 31, 2011?

1. A. $1,600.2. B. $8,000.3. C. $15,000.4. D. $20,000.5. E. $40,000

On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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?

1. A. It must use the equity method for 2011 but should make no changes in its financial statements for 2010 and 2009.

2. B. It should prepare consolidated financial statements for 2011.3. C. It must restate the financial statements for 2010 and 2009 as if the equity method had been

used for those two years.4. D. It should record a prior period adjustment at the beginning of 2011 but should not restate the

financial statements for 2010 and 2009.5. E. It must restate the financial statements for 2010 as if the equity method had been used then.

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers.

What amount of unrealized intercompany profit must be deferred by Luffman?

1. A. $0.2. B. $8,400.3. C. $28,000.4. D. $52,000.5. E. $80,000.

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All of the following would require use of the equity method for investments except:

1. A. material intra-entity transactions.2. B. investor participation in the policy-making process of the investee.3. C. valuation at fair value.4. D. technological dependency.5. E. significant control.

Which of the following results in a decrease in the investment account when applying the

equity method?

1. A. Dividends paid by the investor.2. B. Net income of the investee.3. C. Net income of the investor.4. D. Unrealized gain on intra-entity inventory transfers for the current year.5. E. Purchase of additional common stock by the investor during the current year.

Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.What is the Equity in Howell Income that should be reported by Acker

in 2010?

1. A. $10,000.2. B. $24,000.3. C. $36,000.4. D. $38,400.5. E. $40,000.

On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000.no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas.In 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012,

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Roberts sold 15,000 shares for $800,000. What is the gain/loss on the sale of the 15,000

shares?

1. A. $0.2. B. $10,000 gain.3. C. $12,000 loss.4. D. $15,000 loss.5. E. $20,000 gain.

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2011 for $350,000. Reid sold $224,000 of this merchandise in 2011 with the remainder to be disposed of during 2012. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded at the end of 2011 to defer the unrealized intra-entity

profits?

1. A. Entry A.2. B. Entry B.3. C. Entry C.4. D. Entry D.5. E. No entry is necessary.

How should a permanent loss in value of an investment using the equity method be

treated?

1. A. The equity in investee income is reduced.2. B. A loss is reported the same as a loss in value of other long-term assets.3. C. The investor's stockholders' equity is reduced.4. D. No adjustment is necessary.5. E. An extraordinary loss would be reported.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for

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$150,000.What is the amount of excess amortization expense for Bailey's investment in Em

1. A. $0.2. B. $84,000.3. C. $100,000.4. D. $160,000.5. E. $400,000.

Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses,

which of the following statements is true?

1. A. The investor should change to the fair-value method to account for its investment.2. B. The investor should suspend applying the equity method until the investee reports income.3. C. The investor should suspend applying the equity method and not record any equity in income

of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.

4. D. The cumulative losses should be reported as a prior period adjustment.5. E. The investor should report these losses as extraordinary items.

Which statement is true concerning unrealized profits in intra-entity inventory transfers

when an investor uses the equity method?

1. A. The investor and investee make reciprocal entries to defer and realize inventory profits.2. B. The same adjustments are made for upstream and downstream transfers.3. C. Different adjustments are made for upstream and downstream transfers.4. D. No adjustments are necessary.5. E. Adjustments will be made only when profits are known upon sale to outsiders.

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2011 for $350,000. Reid sold $224,000 of this merchandise in 2011 with the remainder to be disposed of during 2012. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded in 2012 to realize the intra-entity profit that was deferred in

2011?

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1. A. Entry A.2. B. Entry B.3. C. Entry C.4. D. Entry D.5. E. No entry is necessary.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.

What is the amount of the excess of purchase price over book value?

1. A. $(2,000,000).2. B. $800,000.3. C. $1,000,000.4. D. $2,000,000.5. E. $3,000,000.

Which of the following results in an increase in the Equity in Investee Income account

when applying the equity method?

1. A. Amortizations of purchase price over book value on date of purchase.2. B. Amortizations, since date of purchase, of purchase price over book value on date of purchase.3. C. Extraordinary gain of the investor.4. D. Unrealized gain on intra-entity inventory transfers for the prior year.5. E. Sale of a portion of the investment at a loss.

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account; 2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue; 3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment

account.

1. A. Entries 1 and 2.2. B. Entries 2 and 3.3. C. Entry 1 only.

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4. D. Entry 2 only.5. E. Entry 3 only.

Which statement is true concerning unrealized profits in intra-entity inventory transfers

when an investor uses the equity method?

1. A. The investee must defer upstream ending inventory profits.2. B. The investee must defer upstream beginning inventory profits.3. C. The investor must defer downstream ending inventory profits.4. D. The investor must defer downstream beginning inventory profits.5. E. The investor must defer upstream beginning inventory profits.

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following

statements is true?

1. A. A cumulative effect change in accounting principle must occur.2. B. A prospective change in accounting principle must occur.3. C. A retrospective change in accounting principle must occur.4. D. The investor will not receive future dividends from the investee.5. E. Future dividends will continue to reduce the investment account.

On January 1, 2011, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2012, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the

operations of Nico. How should Jordan have accounted for this change?

1. A. Jordan should continue to use the equity method to maintain consistency in its financial statements.

2. B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2011.

3. C. Jordan has the option of using either the equity method or the fair-value method for 2011 and future years.

4. D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.

5. E. Jordan should use the fair-value method for 2012 and future years but should not make a retrospective adjustment to the investment account.

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Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During

2011, how much income should Yaro recognize related to this investment?

1. A. $24,000.2. B. $75,000.3. C. $99,000.4. D. $51,000.5. E. $80,000.

Which adjustment would be made to change from the fair-value method to the equity

method?

1. A. A debit to additional paid-in capital for $15,000.2. B. A credit to additional paid-in capital for $15,000.3. C. A debit to retained earnings for $15,000.4. D. A credit to retained earnings for $15,000.5. E. A credit to a gain on investment.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. in 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.What was

the balance in the investment account before the shares were sold?

1. A. $520,000.2. B. $544,000.3. C. $560,000.4. D. $604,000.5. E. $620,000.

Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in

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dividends each year.What is the amount of unrealized intra-entity inventory profit to be

deferred on December 31, 2010?

1. A. $1,600.2. B. $4,000.3. C. $8,000.4. D. $15,000.5. E. $20,000.

Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity

inventory profit must be deferred by Tower?

1. A. $6,480.2. B. $3,240.3. C. $10,800.4. D. $16,200.5. E. $6,610.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. In 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000.What is

the gain/loss on the sale of the 10,000 shares?

1. A. $20,000 gain.2. B. $10,000 gain.3. C. $1,000 gain.4. D. $1,000 loss.5. E. $10,000 loss.

A company should always use the equity method to account for an investment if:

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1. A. it has the ability to exercise significant influence over the operating policies of the investee.2. B. it owns 30% of another company's stock.3. C. it has a controlling interest (more than 50%) of another company's stock.4. D. the investment was made primarily to earn a return on excess cash.5. E. it does not have the ability to exercise significant influence over the operating policies of the

investee.

On January 3, 2011, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000.no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas.In 2011, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2012, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record

the sale of the 15,000 shares?

1. A. A Above.2. B. B Above.3. C. C Above.4. D. D Above.5. E. E Above.

After allocating cost in excess of book value, which asset or liability would not be amortized

over a useful life?

1. A. Cost of goods sold.2. B. Property, plant, & equipment.3. C. Patents.4. D. Goodwill.5. E. Bonds payable.

The balance in the investment account at December 31, 2012, is

1. A. $370,000.2. B. $355,000.3. C. $305,000.4. D. $400,000.5. E. $105,000.

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Total Points: 0 correct out of 49

Exam Finished

45 Free Test Bank for Advanced Accounting 12th Edition by Hoyle Multiple Choice Questions

On January 1, 2013, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2013, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the

balance in the investment account on December 31, 2013?

1. A) $950,800. 2. B) $958,000. 3. C) $836,000. 4. D) $990,100. 5. E) $956,400.

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has

been deemed appropriate. Which of the following statements is true?

1. A) A cumulative effect change in accounting principle must occur. 2. B) A prospective change in accounting principle must occur. 3. C) A retrospective change in accounting principle must occur. 4. D) The investor will not receive future dividends from the investee. 5. E) Future dividends will continue to be recorded as revenue.

Which statement is true concerning unrealized profits in intra-entity inventory transfers

when an investor uses the equity method?

1. A) The investee must defer upstream ending inventory profits.

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2. B) The investee must defer upstream beginning inventory profits. 3. C) The investor must defer downstream ending inventory profits. 4. D) The investor must defer downstream beginning inventory profits. 5. E) The investor must defer upstream beginning inventory profits.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000.There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the balance in the

investment account after the sale of the 15,000 shares?

1. A) $750,000. 2. B) $760,000. 3. C) $780,000. 4. D) $790,000. 5. E) $800,000.

Which of the following results in a decrease in the Equity in Investee Income account when

applying the equity method?

1. A) Dividends paid by the investor. 2. B) Net income of the investee. 3. C) Unrealized gain on intra-entity inventory transfers for the current year. 4. D) Unrealized gain on intra-entity inventory transfers for the prior year. 5. E) Extraordinary gain of the investee.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What was the balance in the

investment account before the shares were sold?

1. A) $1,560,000. 2. B) $1,600,000. 3. C) $1,700,000. 4. D) $1,800,000.

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5. E) $1,860,000.

On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the

operations of Nico. How should Jordan have accounted for this change?

1. A) Jordan should continue to use the equity method to maintain consistency in its financial statements.

2. B) Jordan should restate the prior years’ financial statements and change the balance in the investment account as if the fair-value method had been used since 2013.

3. C) Jordan has the option of using either the equity method or the fair-value method for 2013 and future years.

4. D) Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.

5. E) Jordan should use the fair-value method for 2014 and future years but should not make a retrospective adjustment to the investment account.

Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw

recognize on this investment in 2013?

1. A) $16,500. 2. B) $ 9,000. 3. C) $25,500. 4. D) $ 7,500. 5. E) $50,000.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000

and paid dividends of $50,000. How much is the adjustment to the Investme

1. A) A debit of $16,500. 2. B) A debit of $21,500.

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3. C) A debit of $90,000. 4. D) A debit of $165,000. 5. E) There is no adjustment.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000.

Dividends of $300,000 were paid in each of these two years. What was

1. A) $2,400,000. 2. B) $2,480,000. 3. C) $2,500,000. 4. D) $2,600,000. 5. E) $2,680,000.

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What is the balance in the

investment account on December 31, 2013?

1. A) $1,900,000. 2. B) $1,960,000. 3. C) $2,000,000. 4. D) $2,016,000. 5. E) $2,028,000.

An upstream sale of inventory is a sale:

1. A) between subsidiaries owned by a common parent. 2. B) with the transfer of goods scheduled by contract to occur on a specified future date. 3. C) in which the goods are physically transported by boat from a subsidiary to its parent. 4. D) made by the investor to the investee. 5. E) made by the investee to the investor.

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All of the following statements regarding the investment account using the equity method

are true except:

1. A) The investment is recorded at cost. 2. B) Dividends received are reported as revenue. 3. C) Net income of investee increases the investment account. 4. D) Dividends received reduce the investment account. 5. E) Amortization of fair value over cost reduces the investment account.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000.

What is the balance in the investment account after the sale of the 10,000

1. A) $390,000. 2. B) $420,000. 3. C) $453,000. 4. D) $454,000. 5. E) $465,000.

On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville’s total stockholders’ equity was $8,000,000. Austin gathered the following information about Gainsville’s assets and

liabilities: What is the amount of goodwill associated with the investment?

1. A) $500,000. 2. B) $200,000. 3. C) $0. 4. D) $300,000. 5. E) $400,000.

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

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stock. If Dermot achieves significant influence with this new investment, how must Dermot

account for the change to the equity method?

1. A) It must use the equity method for 2013 but should make no changes in its financial statements for 2012 and 2011.

2. B) It should prepare consolidated financial statements for 2013. 3. C) It must restate the financial statements for 2012 and 2011 as if the equity method had been

used for those two years. 4. D) It should record a prior period adjustment at the beginning of 2013 but should not restate

the financial statements for 2012 and 2011. 5. E) It must restate the financial statements for 2012 as if the equity method had been used then.

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During

2013, how much income should Yaro recognize related to this investment?

1. A) $24,000. 2. B) $75,000. 3. C) $99,000. 4. D) $51,000. 5. E) $80,000.

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

1. A) Under the equity method, the investor only recognizes its share of investee’s income from continuing operations.

2. B) The extraordinary loss would reduce the value of the investment. 3. C) The extraordinary loss should increase equity in investee income. 4. D) The extraordinary loss would not appear on the income statement but would be a

component of comprehensive income. 5. E) The loss would be ignored but shown in the investor’s notes to the financial statements.

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account; 2) Debit to

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Cash (for dividends received from the investee), and a Credit to Dividend Revenue;3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.

1. A) Entries 1 and 2. 2. B) Entries 2 and 3. 3. C) Entry 1 only. 4. D) Entry 2 only. 5. E) Entry 3 only.

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following

statements is true?

1. A) A cumulative effect change in accounting principle must occur. 2. B) A prospective change in accounting principle must occur. 3. C) A retrospective change in accounting principle must occur. 4. D) The investor will not receive future dividends from the investee. 5. E) Future dividends will continue to reduce the investment account.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000.

Dividends of $300,000 were paid in each of these two years. How much

1. A) $120,000. 2. B) $200,000. 3. C) $300,000. 4. D) $320,000. E) $500,000.

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity

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income would Anderson recognize in 2013 from its ownership interest in Barney?

1. A) $12,000 income. 2. B) $12,000 loss. 3. C) $16,000 loss. 4. D) $28,000 income. 5. E) $28,000 loss.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000.

Dividends of $300,000 were paid in each of these two years.How much i

1. A) $120,000. 2. B) $200,000. 3. C) $300,000. 4. D) $320,000. 5. E) $500,000.

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?

1. A) $2,040,500. 2. B) $2,212,500. 3. C) $2,260,500. 4. D) $2,171,500. 5. E) $2,071,500.

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A company should always use the equity method to account for an investment if:

1. A) It has the ability to exercise significant influence over the operating policies of the investee. 2. B) It owns 30% of another company’s stock. 3. C) It has a controlling interest (more than 50%) of another company’s stock. 4. D) The investment was made primarily to earn a return on excess cash. 5. E) It does not have the ability to exercise significant influence over the operating policies of the

investee.

Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity

inventory profit must be deferred by Tower?

1. A) $ 6,480. 2. B) $ 3,240. 3. C) $10,800. 4. D) $16,200. 5. E) $ 6,610.

On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2013, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares

had been sold?

1. A) $848,000. 2. B) $742,000. 3. C) $723,000. 4. D) $761,000. 5. E) $925,000.

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How should a permanent loss in value of an investment using the equity method be

treated?

1. A) The equity in investee income is reduced. 2. B) A loss is reported the same as a loss in value of other long-term assets. 3. C) The investor’s stockholders’ equity is reduced. 4. D) No adjustment is necessary. 5. E) An extraordinary loss would be reported.

Which of the following results in an increase in the investment account when applying the

equity method?

1. A) Unrealized gain on intra-entity inventory transfers for the prior year. 2. B) Unrealized gain on intra-entity inventory transfers for the current year. 3. C) Dividends paid by the investor. 4. D) Dividends paid by the investee. 5. E) Sale of a portion of the investment during the current year.

When an investor sells shares of its investee company, which of the following statements is

true?

1. A) A realized gain or loss is reported as the difference between selling price and original cost. 2. B) An unrealized gain or loss is reported as the difference between selling price and original cost. 3. C) A realized gain or loss is reported as the difference between selling price and carrying value. 4. D) An unrealized gain or loss is reported as the difference between selling price and carrying

value. 5. E) Any gain or loss is reported as part as comprehensive income.

Which of the following results in an increase in the Equity in Investee Income account

when applying the equity method?

1. A) Amortizations of purchase price over book value on date of purchase. 2. B) Amortizations, since date of purchase, of purchase price over book value on date of purchase. 3. C) Extraordinary gain of the investor.

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4. D) Unrealized gain on intra-entity inventory transfers for the prior year. 5. E) Sale of a portion of the investment at a loss.

Which of the following results in a decrease in the investment account when applying the

equity method?

1. A) Dividends paid by the investor. 2. B) Net income of the investee. 3. C) Net income of the investor. 4. D) Unrealized gain on intra-entity inventory transfers for the current year. 5. E) Purchase of additional common stock by the investor during the current year.

All of the following would require use of the equity method for investments except:

1. A) material intra-entity transactions. 2. B) investor participation in the policy-making process of the investee. 3. C) valuation at fair value. 4. D) technological dependency. 5. E) significant control.

Which statement is true concerning unrealized profits in intra-entity inventory transfers

when an investor uses the equity method?

1. A) The investor and investee make reciprocal entries to defer and realize inventory profits. 2. B) The same adjustments are made for upstream and downstream transfers. 3. C) Different adjustments are made for upstream and downstream transfers. 4. D) No adjustments are necessary. 5. E) Adjustments will be made only when profits are known upon sale to outsiders.

On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville’s total stockholders’ equity was $8,000,000. Austin gathered the following information about Gainsville’s assets and

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liabilities: For 2013, what is the total amount of excess amortization for Austin’s 25%

investment in Gainsville?

1. A) $ 27,500. 2. B) $ 20,000. 3. C) $ 30,000. 4. D) $120,000. 5. E) $ 70,000.

When applying the equity method, how is the excess of cost over book value accounted for?

1. A) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets.

2. B) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets.

3. C) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.

4. D) The excess is allocated to goodwill. 5. E) The excess is ignored.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000

and paid dividends of $50,000. What is the balance in the Investment in S

1. A) $415,000. 2. B) $512,500. 3. C) $523,000. 4. D) $539,500. 5. E) $544,500.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and

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paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000.

What was the balance in the investment account before the shares were sold?

1. A) $520,000. 2. B) $544,000. 3. C) $560,000. 4. D) $604,000. 5. E) $620,000.

After allocating cost in excess of book value, which asset or liability would not be amortized

over a useful life?

1. A) Cost of goods sold. 2. B) Property, plant, & equipment. 3. C) Patents. 4. D) Goodwill. 5. E) Bonds payable.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas.During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the

gain/loss on the sale of the 15,000 shares?

1. A) $ 0 2. B) $10,000 gain. 3. C) $12,000 loss. 4. D) $15,000 loss. 5. E) $20,000 gain.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, Chip’s common stock had suffered a significant decline in fair value,

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which is expected to be recovered over the next several months. How should Club account

for the decline in value?

1. A) Club should switch to the fair-value method. 2. B) No accounting because the decline in fair value is temporary. 3. C) Club should decrease the balance in the investment account to the current value and

recognize a loss on the income statement. 4. D) Club should not record its share of Chip’s 2013 earnings until the decline in the fair value of

the stock has been recovered. 5. E) Club should decrease the balance in the investment account to the current value and

recognize an unrealized loss on the balance sheet.

Under the equity method, when the company’s share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses,

which of the following statements is true?

1. A) The investor should change to the fair-value method to account for its investment. 2. B) The investor should suspend applying the equity method until the investee reports income. 3. C) The investor should suspend applying the equity method and not record any equity in income

of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.

4. D) The cumulative losses should be reported as a prior period adjustment. 5. E) The investor should report these losses as extraordinary items.

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers.

What amount of unrealized intercompany profit must be deferred by Luffman?

1. A) $ 0. 2. B) $ 8,400. 3. C) $28,000. 4. D) $52,000. 5. E) $80,000.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s assets on that date were recorded at $10,500,000 with liabilities of

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$4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000.

Dividends of $300,000 were paid in each of these two years. What was

1. A) $880,000. 2. B) $2,400,000. 3. C) $2,480,000. 4. D) $2,600,000. 5. E) $2,900,000.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000.

What is the gain/loss on the sale of the 10,000 shares?

1. A) $20,000 gain. 2. B) $10,000 gain. 3. C) $1,000 gain. 4. D) $1,000 loss. 5. E) $10,000 loss.

Total Points: 0 correct out of 45