Question 1

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate. Which of the following statements is true?

Accepted Answer

When a company gains significant influence over an investee, it switches from the fair-value method to the equity method prospectively, meaning the change is applied going forward without adjusting prior periods.

Question 2

Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method.What journal entry will be recorded at the end of 2021 to defer the recognition of the investor's share of the intra-entity gross profits?

Accepted Answer

The answer of Chase Incorporated sold $260,000 of its inventory...

Question 3

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The balance in the Investment in Harley account at December 31, 2021, is

Accepted Answer

The correct answer is A. The balance in the Investment in Harley account at December 31, 2021, is $119,500.Explanation:The initial investment is $100,000.The share of Harley's net income for 2020 is $50,000 x 30% = $15,000.The share of Harley's net income for 2021 is $75,000 x 30% = $22,500.The share of Harley's dividends for 2020 is $20,000 x 30% = $6,000.The share of Harley's dividends for 2021 is $30,000 x 30% = $9,000.The adjustment for the patent is $40,000 - $10,000 = $30,000.The amortization of the patent for 2020 is $30,000 / 6 = $5,000.The amortization of the patent for 2021 is $30,000 / 6 = $5,000.The balance in the Investment in Harley account at December 31, 2021, is $100,000 + $15,000 + $22,500 - $6,000 - $9,000 + $30,000 - $5,000 - $5,000 = $119,500.

Question 4

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The equity in income of Harley for 2020, is

Accepted Answer

Archer's share of Harley's net income for 2020 is 30% of $50,000, which is $15,000. However, the excess amortization of the patent ($30,000 excess value over 6 years) is $5,000 per year. Therefore, the equity in income is $15,000 - $5,000 = $10,000.

Question 5

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

Accepted Answer

The answer of When applying the equity method, how is...

Question 6

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The equity in income of Harley for 2021, is

Accepted Answer

The answer of On January 1, 2020, Archer, Incorporated, paid...

Question 7

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

Accepted Answer

When a company no longer has significant influence, it must change from the equity method to another method, such as the cost method or fair value method, and this change is accounted for prospectively.

Question 8

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The amount allocated to goodwill at January 1, 2020, is

Accepted Answer

The answer of On January 1, 2020, Archer, Incorporated, paid...

Question 9

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

Accepted Answer

Goodwill is not amortized but is instead tested for impairment annually.

Question 10

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The income reported by Jones for 2021 with regard to the Anderson investment is

Accepted Answer

The correct answer is A because the income reported by Jones for 2021 with regard to the Anderson investment is $80,000. This is calculated as follows:Equity in Anderson's net income for 2021: 40% x $200,000 = $80,000

Question 11

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

Accepted Answer

The recognized gain or loss from the sale of shares is calculated as the difference between the selling price and the carrying value of the shares.

Question 12

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

Accepted Answer

The answer of Which statement is true concerning unrecognized profits...

Question 13

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.Which of the following is true regarding the change from the fair-value method to the equity method?

Accepted Answer

The answer of Jones, Incorporated acquires 15% of Anderson Corporation...

Question 14

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The income reported by Jones for 2020 with regard to the Anderson investment is

Accepted Answer

Under the fair-value method, Jones would recognize dividend income from Anderson. For 2020, Jones would recognize 15% of the dividends paid by Anderson, which is 15% of $50,000, equaling $7,500.

Question 15

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The balance in the Investment in Harley account at December 31, 2020, is

Accepted Answer

Archer's investment is initially recorded at cost ($100,000). Archer's share of Harley's net income for 2020 is 30% of $50,000, which is $15,000. Archer's share of dividends is 30% of $20,000, which is $6,000. The investment account is increased by the share of net income and decreased by the share of dividends. Therefore, the balance is $100,000 + $15,000 - $6,000 = $109,000. However, we must also account for the amortization of the excess patent value. The excess value is $30,000 ($40,000 - $10,000), and Archer's share is 30%, which is $9,000. Amortized over 6 years, the annual amortization is $1,500. Thus, the balance is $109,000 - $1,500 = $107,500.

Question 16

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

Accepted Answer

The investor must defer downstream ending inventory profits because these profits are not realized until the inventory is sold to an outside party. Under the equity method, the investor recognizes its share of the investee's profits, but must defer its share of any profits from intra-entity sales until the inventory is sold externally.

Question 17

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

Accepted Answer

A permanent loss in value of an investment using the equity method should be treated as a loss in the same manner as a loss in value of other long-term assets, meaning it should be recognized in the income statement.

Question 18

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The balance in the investment account at December 31, 2021, is

Accepted Answer

The initial investment in 2020 was $105,000. In 2021, Jones purchased an additional 25% for $200,000, making a total investment of $305,000. Under the equity method, Jones recognizes its share of Anderson's net income and dividends. For 2021, Jones's share of Anderson's net income is 40% of $200,000 = $80,000. Jones's share of dividends is 40% of $75,000 = $30,000. The investment account is adjusted by adding the share of net income and subtracting the share of dividends: $305,000 + $80,000 - $30,000 = $355,000.

Question 19

When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI)?

Accepted Answer

The answer of When an investor appropriately applies the equity...

Question 20

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?

Accepted Answer

Under the equity method, if the investor's share of losses equals its investment and there is no obligation to fund further losses, the investor suspends applying the equity method until future profits offset the unrecorded losses.

Quiz 1: The Equity Method of Accounting for Investments

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate. Which of the following statements is true?

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

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

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

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

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

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

When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI) ?

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?