Question 1

The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

Accepted Answer

The equity method is typically used when an investor has significant influence over the investee, which is generally presumed when owning 20%-50% of the outstanding stock.

Question 2

Under the equity method of accounting for investments,dividends paid by the investee are recorded by the investor as:

Accepted Answer

Under the equity method of accounting for investments, the investor records its share of the investee's earnings as an increase to its Investment account. Similarly, dividends paid by the investee are credited to the investor's Investment account to reflect the reduction in the investee's retained earnings. Therefore, the correct answer is a credit to the Investment account of the investor company.

Question 3

January 1,2016 Orange Tree Spa invests in $100,000 worth of Apple Spa shares to hold as a short term investment.On December 31,2016,this investment now has a market value of $105,000.
On May 1,2017 Orange Tree Spa sells their Apple Spa shares for $95,000.Prepare the required entries for Orange Tree Spa.

Accepted Answer

The answer of January 1,2016 Orange Tree Spa invests in...

Question 4

Retail Energy Corporation paid $1,300,000 on January 1,2017,to purchase 32% of the outstanding shares of Natural Gas Limited.In 2017 Natural Gas Limited reported $450,000 of net income and paid $100,000 in dividends.If this investment is accounted for using the equity method of accounting,what will be the impact on the books of Retail Energy Corporation?

Accepted Answer

Using the equity method, Retail Energy Corporation would record its share of Natural Gas Limited's net income, which is 32% of $450,000 or $144,000. The dividends paid by Natural Gas Limited do not affect the investment account. Therefore, income of $144,000 will be recorded on the books of Retail Energy Corporation for 2017.

Question 5

On January 1,2013 Blue Cat Corporation purchased 1,000 shares (5%)of Mike Mouse Co.for $10,000 as a long term investment.On March 31,2014 Mike Mouse pays Blue Cat a $5,000 dividend.At year end December 31,2014 Mike Mouse shares are trading at $12 per share.Blue Cat then sells their investment in Mike Mouse Co for $11,500 on February 4,2015.Prepare Blue Cat's journal entries for 2013,2014 and 2015.

Accepted Answer

The answer of On January 1,2013 Blue Cat Corporation purchased...

Question 6

Companies with investments accounted for by the equity method often refer to the investee as a(n):

Accepted Answer

Companies with investments accounted for by the equity method typically refer to the investee as an affiliated company, as they have a significant degree of influence over the investee but do not have majority ownership. Wholly-owned and subsidiary companies imply complete ownership, while trading partner does not accurately describe the relationship between the two companies.

Question 7

Vance Corporation purchases UXB shares on May 10 for $120,000.On October 15^th Vance receives a cash dividend of $1,200 from UXB.On December 31^st the value of Vance Corporation's investment in UXB has increased in value to $150,000. Prepare journal entries needed on May 10,October 15,and December 31,2014.

Accepted Answer

The answer of Vance Corporation purchases UXB shares on May...

Question 8

Prepare journal entries for the following transactions.Note that each item falls under the at fair value through other comprehensive income classification.
  (Yellow-Snow Corporation had no prior investments to the investment in Dog-Dish Corporation)

Accepted Answer

The answer of Prepare journal entries for the following transactions.Note...

Question 9

The equity method of accounting for a stock investment should generally be used when the investor owns 20%-50% of the investee's stock,because that level of stock ownership:

Accepted Answer

The equity method of accounting is used when the investor has significant influence over the investee. Significant influence is presumed to exist when the investor owns between 20% and 50% of the voting stock of the investee. Therefore, choice D is the correct answer. Choice A is incorrect because owning 20-50% of a company does not necessarily indicate a plan to acquire a controlling interest. Choice B is also incorrect because notifying the government of plans to acquire a controlling interest is required when the investor intends to acquire a 50% or greater ownership interest in the investee. Finally, choice C is incorrect because owning 20-50% of a company does not constitute a controlling interest.

Question 10

Why is understanding the extent to which ATCO Ltd.influences another company important for accounting purposes? What impact does the degree of influence ATCO Ltd.has over another company have on accounting?

Accepted Answer

The answer of Why is understanding the extent to which...

Question 11

Olive Corporation purchases Branch Inc shares on June 21 for $220,000.On October 1 Olive receives a cash dividend of $2,500 from Branch Inc.On December 31^st the value of Olive Corporation's investment in Branch has decreased in value to $210,000. Prepare journal entries needed on June 21,October 1,and December 31,2014.

Accepted Answer

The answer of Olive Corporation purchases Branch Inc shares on...

Question 12

Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting.The investment was made on January 1,2017,at a cost of $625,000.Pipeline Corporation reported net income of $85,000 for the year ended December 31,2017,and paid total dividends of $20,000 during 2017.On December 31,2017,after making all appropriate entries,the balance in Barking Power Company's Long-Term Investment account will equal:

Accepted Answer

Under the equity method, the investment is initially recorded at cost. Barking Power Company will increase its investment account by 35% of Pipeline Corporation's net income and decrease it by 35% of the dividends received. Therefore, the balance will be $625,000 + (0.35 * $85,000) - (0.35 * $20,000) = $647,750.

Question 13

Under the equity method of accounting,the investor will:

Accepted Answer

Under the equity method of accounting, the investor reduces the Investment account for investee dividends and increases the Investment account to record investee income. This reflects the investor's share of the investee's earnings and dividends. Therefore, choice A is the correct answer.

Question 14

On January 1,2015 Blue Cat Corporation purchased 1,000 shares (5%)of Mike Mouse Co.for $14,000 as a long term investment.On May 31,2016 Mike Mouse pays a $0.70 dividend.At year end December 31,2014 Mike Mouse shares are trading at $15 per share.Blue Cat then sells their investment in Mike Mouse Co for $13,500 on February 20,2017.Prepare Blue Cat's journal entries for 2015,2016 and 2017.

Accepted Answer

The answer of On January 1,2015 Blue Cat Corporation purchased...

Question 15

Prepare journal entries to record the following transactions associated with at fair value through other comprehensive income investments purchased by Spark Spread Corporation during 2015 Spark Spread Corporation had no investments prior to 2015.
a.Purchased 1,500 shares of Mercury Coal Corporation common shares for $27.50 per share.
b.Mercury Coal Corporation pays a $1.25 per share dividend to all common shareholders.
c.On December 31,2015,the market price of Mercury Coal Corporation stock is $28.00 per share.

Accepted Answer

The answer of Prepare journal entries to record the following...

Question 16

Investments accounted for using the equity method are initially recorded at:

Accepted Answer

Investments accounted for using the equity method are initially recorded at cost, which is the amount paid to acquire the investment.

Question 17

If an investor company owns between 20% and 50% of the common shares of another business,cash dividends received from the investee company are generally recorded by the investor company by:

Accepted Answer

The answer of If an investor company owns between 20%...

Question 18

Power Generation Corp.owns 38% of Electric Limited.Net income for Electric Limited for the year ending December 31,2017,is $450,000.The journal entry prepared by Power Generation Corp.on December 31,2017,includes a:

Accepted Answer

Power Generation Corp. owns 38% of Electric Limited, which means that the portion of the net income that belongs to Power Generation Corp. is $450,000 x 38% = $171,000. Therefore, Power Generation Corp. would debit its Long-Term Investment account for $171,000 to reflect its share of Electric Limited's net income.

Question 19

Brighton Beach Limited owns 40% of Alberta Based Inc.Total cash dividends paid by Alberta Based Inc.for the year ending December 31,2017,amount to $47,919.The journal entry prepared by Brighton Beach Limited on December 31,2017,includes a:

Accepted Answer

The answer of Brighton Beach Limited owns 40% of Alberta...

Question 20

A gain or loss on sale of a long-term investment using the equity method is determined by comparing the cash received with the:

Accepted Answer

When using the equity method, the investor records its share of the investee's net income and dividends received. Thus, the cost of the investment is adjusted for these amounts. The gain or loss on the sale of the investment is determined by comparing the cash received with this adjusted cost. The market value or lower-of-cost-or-market values are not relevant for determining the gain or loss on the sale of the investment using the equity method.

Quiz 7: Investments and the Time Value of Money