Question 1

Pyming Corporation accounts for its 40% investment in Sillabog Company using the equity method.On the date of the original investment,fair values were equal to the book values except for a patent,which cost Pyming an additional $40,000.The patent had an estimated life of 10 years.Sillabog has a steady net income of $20,000 per year and consistently pays out 40% of its net income as dividends to its shareholders.Which one of the following statements is correct?

Accepted Answer

The net change in the investment account is calculated by taking Pyming's share of Sillabog's net income (40% of $20,000 = $8,000) and subtracting the amortization of the patent ($40,000/10 years = $4,000). Therefore, the net change is $8,000 - $4,000 = $4,000. However, since Sillabog pays out 40% of its net income as dividends, Pyming receives 40% of $8,000 = $3,200 in dividends, which reduces the investment account. Thus, the net change is $4,000 - $3,200 = $800 debit.

Question 2

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

Accepted Answer

Under the cost method, dividends received from the investment are recognized as dividend income in full. The investment account is not adjusted for dividends received; instead, they are recorded as income when received.

Question 3

In reference to the determination of goodwill impairment,which of the following statements is correct?

Accepted Answer

Goodwill impairment testing under ASC 350 involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill is considered unimpaired, indicating no impairment loss is necessary.

Question 4

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

Accepted Answer

If one company purchases less than 20% of the outstanding stock of another company, the investor company does not have significant influence or control over the investee company. Therefore, either the fair value method or the equity method may be used, depending upon the relationship between the companies. If the investor company intends to hold the investment for a short period, the fair value method may be used, and if the investor company intends to hold the investment for a long period, the equity method may be used. The acquisition method is used when the investor company acquires control or majority stake in the investee company.

Question 5

Bart Company purchased a 30% interest in Simpson Corporation on January 1,2013,and Bart accounted for its investment in Simpson under the equity method for the next 3 years.On January 1,2016,Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson.Bart should

Accepted Answer

When Bart sold half of its interest in Simpson, reducing its ownership to 15%, it could no longer exercise significant influence over Simpson. Therefore, Bart should switch from the equity method to the cost method for accounting for its remaining investment, using the balance immediately after the sale as the new cost basis.

Question 6

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

Accepted Answer

When a company purchases between 20% to 50% of the outstanding stock of another company, it is generally considered to have significant influence over the investee. According to Generally Accepted Accounting Principles (GAAP), the equity method is prescribed for such investments, reflecting the investor's proportional share of the investee's net income or loss in its own financial statements.

Question 7

Use the following information to answer the question(s) below.

On January 1, 2013, Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings. Book values of Sunflower's net assets equaled their fair values on this date. Sunflower's net income and dividends for 2013 through 2015 were as follows:

-Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was

Accepted Answer

11ea84d4_8718_482e_83dc_73b75d611cbc_TB3014_00 adjustments:
 11ea84d4_8718_6f3f_83dc_29ce9f5ff554_TB3014_00

Question 8

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

Accepted Answer

Under the equity method, Pinkerton would recognize its share of Sable's net earnings, increasing the investment account and its net earnings. However, dividends received would reduce the investment account but not affect net earnings. Since Pinkerton owns only 10% and presumably does not have significant influence, it should have used the cost method, under which dividends received increase net earnings and have no effect on the investment account. Thus, using the equity method instead of the cost method leads to an overstatement of both the investment account (due to recognizing 10% of Sable's net earnings) and net earnings (since dividends under the equity method do not count as net earnings, but under the cost method, they would).

Question 9

Pond Corporation uses the fair value method of accounting for its investment in Swan Company.Which one of the following events would not affect the Investment in Swan Co.account?

Accepted Answer

Under the fair value method, the investment account is adjusted for the investee's performance (A), dividend payments (B), and changes in fair value such as share price fluctuations (C). Unrealized gains and losses from the available-for-sale securities classification (D) are not relevant to the fair value method, as this classification is part of a different accounting treatment for investments.

Question 10

Sadie Corporation's stockholders' equity at December 31,2013 included the following:  Pilga Corporation purchased a 30% interest in Sadie's common stock from other shareholders on January 1,2014 for $5,800,000.What was the book value of Pilga's investment in Sadie on January 1,2014?

Accepted Answer

11ea84d4_8717_abe8_83dc_d38e1b763427_TB3014_00

Question 11

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

Accepted Answer

Under the equity method, the investment account is reduced to zero if the investee incurs losses, but it cannot go negative. Once it reaches zero, it will not be reduced further even if the investee continues to incur losses.

Question 12

Pelican Corporation acquired a 25% interest in Seafare Incorporated at book value several years ago.Seafare declared $100,000 dividends in 2013 and reported its income for the year as follows:  Pelican's Investment in Seafare account for 2013 should increase by

Accepted Answer

The answer of Pelican Corporation acquired a 25% interest in...

Question 13

Panda Corporation purchased 100,000 previously unissued shares of Skunk Company's $10 par value common stock directly from Skunk for $2,200,000.Skunk's stockholders' equity immediately before the investment by Panda consisted of $3,000,000 of common stock and $4,800,000 in retained earnings.What is Panda's book value of equity in the net assets of Skunk?

Accepted Answer

The net assets acquired by Panda are $4,800,000 (retained earnings) + $1,000,000 (par value of 100,000 shares at $10 each) = $5,800,000. However, Panda only paid $2,200,000 for the 100,000 shares, so its book value of equity in the net assets of Skunk is $2,200,000 + $3,600,000 (the excess of $5,800,000 over the purchase price) = $5,800,000. This book value of equity is then divided by the number of shares purchased by Panda (100,000) to arrive at a per-share book value of equity of $58. Therefore, Panda's book value of equity in the net assets of Skunk is $2,200,000 (the amount paid for the 100,000 shares) + $5,800,000 (Panda's share of the net assets acquired) × (100,000 shares / 300,000 total shares outstanding) = $2,500,000.

Question 14

Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1,2013,but was not able to exercise significant influence over Lilypad.During 2014,Jacana reported income of $120,000,excluding its income from Lilypad,and paid dividends of $50,000.Lilypad reported net income of $40,000 during 2014 and paid dividends of $20,000.Jacana should report net income for 2014 in the amount of

Accepted Answer

Since Jacana Corporation cannot exercise significant influence over Lilypad Corporation, the investment is accounted for using the cost method. Under this method, Jacana recognizes income from Lilypad only to the extent of dividends received. Jacana's share of Lilypad's dividends is 25% of $20,000, which is $5,000. Therefore, Jacana's net income for 2014 is its own income of $120,000 plus the $5,000 from Lilypad's dividends, totaling $125,000.

Question 15

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

Accepted Answer

Amortization expense of goodwill is not systematically used to reduce investment income on a periodic basis as it represents a non-cash expense and is not directly related to the operations of Falcon Co. The other three options (B, C, and D) all represent tangible assets that are subject to depreciation or amortization and would therefore be systematically used to reduce investment income on a periodic basis.

Question 16

Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1,2013 for $300,000.This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31,2015 was $440,000.The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year.In 2016,Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May.If Jabiru sold one-half of its investment in Fish on August 1,2016 for $500,000,how much gain was recognized on this transaction?

Accepted Answer

11ea84d4_8717_d2f9_83dc_97dc1f332396_TB3014_00 Jabiru's interest in Fish's income from Jan 1-July 31:
 11ea84d4_8717_d2fa_83dc_ebc508586eae_TB3014_00 Less: Seven months of patent amortization:
 11ea84d4_8717_fa0b_83dc_c144b18070bf_TB3014_00 11ea84d4_8717_fa0c_83dc_07fe51990830_TB3014_00

Question 17

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

Accepted Answer

The equity method is used when an investor has significant influence over the investee, typically indicated by ownership of 20% to 50%. If ownership is diverse, Griffon likely has significant influence, justifying the equity method.

Question 18

The income from an equity method investee is reported on one line of the investor company's income statement except when

Accepted Answer

When the investee has extraordinary items, these items are reported separately on the investor's income statement, affecting how the income from the investee is presented.

Question 19

In reference to intercompany transactions between an investor and an investee,when the investor can significantly influence the investee,which of the following statements is correct,assuming that the investor is using the equity method?

Accepted Answer

When an investor can significantly influence the investee, intercompany transactions must be eliminated in reporting the investor's share of earnings and losses of the investee until they are realized. This is required under the equity method of accounting. Choice A is incorrect because there is no such presumption. Choice B is also incorrect as additional disclosures are required when intercompany transactions exist between related parties. Choice D is incorrect as the correct answer is C.

Question 20

Use the following information to answer the question(s) below.

On January 1, 2013, Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings. Book values of Sunflower's net assets equaled their fair values on this date. Sunflower's net income and dividends for 2013 through 2015 were as follows:

-Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was

Accepted Answer

The answer of Use the following information to answer the...

Quiz 2: Stock Investments - Investor Accounting and Reporting