Question 1

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 sells shares and no longer has significant influence, it must change from the equity method to the fair value method of accounting for that investment. The change is prospective, meaning it is applied to future financial statements, and not retroactive. Therefore, choice B is the correct answer. The other options are incorrect because there is no need for a cumulative effect change in accounting principle, the investor may still receive future dividends, and future dividends will no longer reduce the investment account since the equity method is no longer used.

Question 2

The equity in income of Sacco for 2018, is

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Question 3

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 over a useful life but is subjected to impairment testing annually or when certain events occur, such as a significant change in business strategy or economic conditions. The remaining options, including cost of goods sold, property, plant and equipment, patents, and bonds payable, would typically be amortized over their useful lives.

Question 4

The income reported by Dodge for 2018 with regard to the Gates investment is

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Question 5

The balance in the Investment in Sacco account at December 31, 2017, is

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Question 6

All of the following statements regarding the investment account using the equity method are true except:

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Question 7

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

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Question 8

The income reported by Dodge for 2017 with regard to the Gates investment is

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Question 9

Which of the following is true regarding the change from the fair-value method to the equity method?

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Question 10

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

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Question 11

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

When the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, 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. This is because recording these losses as equity method losses in its income statement could result in negative equity balances which are not allowed under GAAP. Therefore, option C is the correct choice.

Question 12

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

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Question 13

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

Accepted Answer

When an investor sells shares of its investee company, a recognized gain or loss is reported as the difference between the selling price and carrying value. The carrying value of the investment is the original cost plus any adjustments for equity method accounting or impairment. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect because they mention unrealized or unrecognized gains or losses, which are not reported when an investor sells its shares. Choice E is also incorrect because gains or losses from selling investments are reported in the income statement, not as part of comprehensive income.

Question 14

The balance in the Investment in Sacco account at December 31, 2018, is

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Question 15

The balance in the investment account at December 31, 2018, is

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Question 16

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

Accepted Answer

When an investor uses the equity method, the same adjustments are made for upstream and downstream sales. This includes recognizing any unrecognized profits in intra-entity inventory sales. The investor and investee both make reciprocal entries to defer and recognize inventory profits. No adjustments are made only when profits are known upon sale to outsiders.

Question 17

The equity in income of Sacco for 2017, is

Accepted Answer

The equity in income is calculated as the excess of total revenue over total expenses. The income statement in the question shows that the total revenue for 2017 was $177,000 and the total expenses were $163,500. The equity in income is therefore $13,500 ($177,000 - $163,500).

Question 18

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?

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Question 19

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

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Question 20

The amount allocated to goodwill at January 1, 2017, is

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Quiz 1: A: the Equity Method of Accounting for Investments

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?

The equity in income of Sacco for 2018, is

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

The income reported by Dodge for 2018 with regard to the Gates investment is

The balance in the Investment in Sacco account at December 31, 2017, is

All of the following statements regarding the investment account using the equity method are true except:

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

The income reported by Dodge for 2017 with regard to the Gates investment is

Which of the following is true regarding the change from the fair-value method to the equity method?

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

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?

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

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

The balance in the Investment in Sacco account at December 31, 2018, is

The balance in the investment account at December 31, 2018, is

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

The equity in income of Sacco for 2017, is

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

The amount allocated to goodwill at January 1, 2017, is