DEVRY ACCT559 MIDTERM EXAM

(TCO A) A company should always use the equity method to account for an investment if

it has the ability to exercise significant influence and control over the operating policies of the investee.

it has a controlling interest (more than 50%) of another company's stock.

it owns 30% of another company's stock.

the investment was made primarily to earn a return on excess cash.

it does not have the ability to exercise significant influence over the operating policies of the investee.

Question 2. Question :

(TCO A) Hill Company owns 30% of the common stock of Davidson Co. and uses the equity method to account for the investment. During 20X2, Davidson reported income of $200,000 and paid dividends of $80,000. There is no amortization associated with the investment.

During 20X2, how much income should Hill recognize related to this investment?

$80,000

$99,000

$60,000

IN $51,000

$24,000

Question 3. Question :

(TCO A) Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation to fund such additional losses, which of the following statements is true?

The investor should change to the fair-value method to account for its investment.

The investor should report these losses as extraordinary items.

The investor should suspend applying the equity method until the investee reports income.

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.

The cumulative losses should be reported as a prior period adjustment.

Instructor Explanation: Chapter 1. The investor suspension is temporary until the shares of future profits increase in a sufficent fashion or recoup the prior losses that were not recorded in the prior periods.

Points Received: 5 of 5

Comments:

Question 4. Question :

(TCO B) Using the purchase method, goodwill is generally defined as the

cost of the investment less the subsidiary's fair value at acquisition date.

cost of the investment less the subsidiary's fair value at the beginning of the year.

cost of the investment less the subsidiary's book value at the acquisition date.

cost of the investment less the subsidiary's book value at the beginning of the year.

It is no longer allowed under federal law.

Question 5. Question :

(TCO B) What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation?

If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values.

If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition.

If the subsidiary is dissolved, it will not be operated as a separate division.

If the subsidiary is dissolved, assets and liabilities are consolidated at their book values.

Question 6. Question :

(TCO C) Which of the following accounts would not appear on the consolidated financial statements at the end of the first fiscal period of the combination?

Common Stock

Additional Paid-in Capital

Investment in Subsidiary

Goodwill

Equipment

Question 7. Question :

(TCO C) Under the partial equity method, the parent recognizes income when

the related contract is signed by the subsidiary.

dividends are declared by the investee.

dividends are received from the investee.

the related expense has been incurred.

it is earned by the subsidiary.

Question 8. Question :

(TCO C) Which of the following will result in the recognition of an impairment loss on goodwill?

Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

The fair value of a reporting unit falls below the original consideration transferred for the acquisition.

The fair value of the entity declines significantly.

Goodwill amortization is to be recognized annually on a systematic and rational basis.

The entity is investigated by the SEC and its reputation has been severely damaged.

Question 9. Question :

(TCO A) Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

.

Question 10. Question :

(TCO B) What is the primary difference between recording an acquisition when the subsidiary is dissolved after acquisition versus when a separate incorporation is maintained?

Question 11. Question :

(TCO C) Jewels Co. acquired Diamond Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $430,000. Describe in words how this balance was derived.

Question 12. Question :

(TCO C) Why is push-down accounting a popular reporting technique internally for a parent corporation?

10

Comments:

Question 13. Question :

(TCO A) On January 2, 20X1, Heinreich Co. paid $500,000 for 24% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 20X1, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life.

Required:

-1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones.

-2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 20X1.

Question 14. Question :

(TCO A) Nathan Inc. sold $180,000 in inventory to Miller Co. during 20X0 for $250,000. Miller resold $108,000 of this merchandise in 20X0 with the remainder to be disposed of during 20X1.

Assume Nathan owns 25% of Miller and applies the equity method.

Required:

-1) Determine Nathan's share of the unrealized gain at the end of 20X0.

-2) Prepare the journal entry Nathan should record at the end of 20X0 to defer the unrealized intra-entity inventory profit.

Question 15. Question :

(TCO A) Jasper Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 20X1, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 20X1, Kinson acquired inventory for $62,400, which was then sold to Jasper for $96,000. At the end of 20X1, Jasper still held some of this inventory at its transfer price of $50,000.

Required:

-1) Determine the amount of intra-entity profit at the end of 20X1.

-2) Determine the amount of Equity in Investee Income that Jasper should have reported for 20X1.

Question 16. Question :

(TCO B) The financial statements for Jobe Inc. and Lake Corp., just prior to their combination, for the year ending December 31, 20X2, follow. Lake's buildings were undervalued on its financial records by $60,000.

Jobe Inc.

Lake Corp.

Revenues

$1,300,000

$500,000

Expenses

(1,180,000)

(290,000)

Net income

$120,000

$210,000

Retained earnings, January 1, 20X2

700,000

500,000

Net income (above)

120,000

210,000

Dividends paid

(110,000)

(110,000)

Retained earnings, December 31, 20X2

$710,000

$600,000

Cash

$160,000

$120,000

Receivables and inventory

240,000

240,000

Buildings (net)

700,000

350,000

Equipment (net)

700,000

600,000

Total assets

$1,800,000

$1,310,000

Liabilities

$250,000

$195,000

Common stock

750,000

430,000

Additional paid-in capital

90,000

85,000

Retained earnings, December 31, 20X2 (above)

710,000

600,000

Total liabilities and stockholders' equity

$1,800,000

$1,310,000

On December 31, 20X2, Jobe issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lake. Jobe's shares had a fair value on that date of $35 per share. Jobe paid $34,000 to an investment bank for assisting in the arrangements. Jobe also paid $24,000 in stock issuance costs to effect the acquisition of Lake. Lake will retain its incorporation.

-1) Prepare the journal entry to record the issuance of common stock by Jobe.

-2) Prepare the journal entry to record the payment of combination costs.

-3) Determine consolidated net income for the year ended December 31, 20x2.

-4) Determine consolidated additional paid-in capital at December 31, 20x2.

Question 17. Question :

(TCO B) The financial statements for Metzger Inc. and Ortiz Corp., just prior to their combination, for the year ending December 31, 20X2, follow. Ortiz's buildings were undervalued on its financial records by $80,000.

Metzger Inc.

Ortiz Corp.

Revenues

$1,800,000

$700,000

Expenses

(1,580,000)

(590,000)

Net income

$220,000

$110,000

Retained earnings, January 1, 2012

800,000

600,000

Net income (above)

220,000

110,000

Dividends paid

(130,000)

(80,000)

Retained earnings, December 31, 2012

$890,000

$630,000

Cash

$240,000

$160,000

Receivables and inventory

270,000

260,000

Buildings (net)

850,000

500,000

Equipment (net)

800,000

490,000

Total assets

$2,160,000

$1,410,000

Liabilities

$310,000

$155,000

Common stock

850,000

530,000

Additional paid-in capital

110,000

95,000

Retained earnings, December 31, 20X2 (above)

890,000

630,000

Total liabilities and stockholders' equity

$2,160,000

$1,410,000

On December 31, 20X2, Metzger issued 58,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Ortiz. Metzger's shares had a fair value on that date of $40 per share. Metzger paid $38,000 to an investment bank for assisting in the arrangements. Metzger also paid $28,000 in stock issuance costs to effect the acquisition of Ortiz. Ortiz will retain its incorporation.

-1) Prepare the journal entry to record the issuance of common stock by Metzger.

-2) Prepare the journal entry to record the payment of combination costs.

-3) Determine consolidated net income for the year ended December 31, 20X2.

-4) Determine consolidated additional paid-in capital at December 31, 20X2.