Accounting 404 Advanced Accounting MC

1. When an investor uses the equity method to account for investments in common stock, the

investor’s share of cash dividends from the investee should be recorded as

a. A deduction from the investor’s share of the investee’s profits.

b. Dividend income.

c. A deduction from the stockholders’ equity account, Dividends to Stockholders.

d. A deduction from the investment account.

(AICPA adapted)

2. Which of the following does not indicate an investor company’s ability to significantly influence an investee?

a. Material intra-entity transactions.

b. The investor owns 30 percent of the investee but another owner holds the remaining

70 percent.

c. Interchange of personnel.

d. Technological dependency.

3. Sisk Company has owned 10 percent of Maust, Inc., for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently, Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report? change?

a. A cumulative effect of an accounting change is shown in the current income statement.

b. No change is recorded; the equity method is used from the date of the new acquisition.

c. A retrospective adjustment is made to restate all prior years presented using the equity method.

d. Sisk will report the change as a component of accumulated other comprehensive income.

5. When an equity method investment account is reduced to a zero balance

a. The investor should establish a negative investment account balance for any future losses

reported by the investee.

b. The investor should discontinue using the equity method until the investee begins paying

dividends.

c. Future losses are reported as unusual items in the investor’s income statement.

d. The investment retains a zero balance until subsequent investee profits eliminate all unrecognized

losses.

6. On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison’s voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison declared a $2 per share dividend during the year and reported net income of $560,000. What is the balance in the Investment in Harrison account found in Puckett’s financial records as of December 31?

a. $1,724,000.

b. $1,784,000.

c. $1,844,000.

d. $1,884,000.

7. Martes, Inc., 20% for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes. Martes’s assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2014, Martes reported net income of $170,000. In 2015, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2015?

a. $728,000.

b. $748,000.

c. $756,000.

d. $776,000.

8. Franklin purchases 40 percent of Johnson Company on January 1 for $500,000. Although

Franklin did not use it, this acquisition gave Franklin the ability to apply significant

influence to Johnson’s operating and financing policies. Johnson reports assets on that

date of $1,400,000 with liabilities of $500,000. One building with a 7-year remaining

life is undervalued on Johnson’s books by $140,000. Also, Johnson’s book value for its

trademark (10-year remaining life) is undervalued by $210,000. During the year, Johnson

reports net income of $90,000 while declaring dividends of $30,000. What is the Investment

in Johnson Company balance (equity method) in Franklin’s financial records as of

December 31?

a. $504,000.

b. $507,600.

c. $513,900.

d. $516,000.

9. Evan Company reports net income of $140,000 each year and declares an annual cash dividend

of $50,000. The company holds net assets of $1,200,000 on January 1, 2014. On that

date, Shalina purchases 40 percent of the outstanding stock for $600,000, which gives it the

ability to significantly influence Evan. At the purchase date, the excess of Shalina’s cost over

its proportionate share of Evan’s book value was assigned to goodwill. On December 31,

2016, what is the Investment in Evan Company balance (equity method) in Shalina’s financial

records?

a. $600,000.

b. $660,000.

c. $690,000.

d. $708,000.

1. Which of the following does not represent a primary motivation for business combinations?

a. Combinations as a vehicle for achieving rapid growth and competitiveness.

b. Cost savings through elimination of duplicate facilities and staff.

c. Quick entry for new and existing products into markets.

d. Larger firms being less likely to fail.

2. Which of the following is the best theoretical justification for consolidated financial statements?

a. In form the companies are one entity; in substance they are separate.

b. In form the companies are separate; in substance they are one entity.

c. In form and substance the companies are one entity.

d. In form and substance the companies are separate.

3. What is a statutory merger?