D) $540,000.
E) $211,250.
47. What was the balance in the investment account at April 1, 2019 just before the sale of shares?
A) $447,500.
B) $468,750.
C) $535,875.
D) $555,000.
E) $624,375.
48. How much of Cook’s net income did Mehan report for the year 2019?
A) $61,750.
B) $81,250.
C) $72,500.
D) $59,250.
E) $75,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-22
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: (First Quarter Income × 40%) + (2nd thru 4th Qtr Income × 30%) = ($250,000/4 × 40%) +
[($250,000/4 × 30%) × 3] = $25,000 + ($18,750 × 3) = $25,000 + $56,250 = $81,250
REFERENCE: 01-08
On January 4, 2017, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for
$2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s
assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other
differences between book and fair values.
During 2017, Bike reported net income of $500,000. For 2018, Bike reported net income of $800,000.
Dividends of $300,000 were paid in each of these two years.
[QUESTION]
REFER TO: 01-08
49. How much income did Harley report from Bike for 2017?
A) $120,000.
B) $200,000.
C) $300,000.
D) $320,000.
E) $500,000.
50. How much income did Harley report from Bike for 2018?
A) $120,000.
B) $200,000.
C) $300,000.
D) $320,000.
E) $500,000.
51. What was the reported balance of Harley’s Investment in Bike Co. at December 31, 2017?
A) $880,000.
B) $2,400,000.
C) $2,480,000.
D) $2,600,000.
E) $2,900,000.
52. What was the reported balance of Harley’s Investment in Bike Co. at December 31, 2018?
A) $2,400,000.
B) $2,480,000.
C) $2,500,000.
D) $2,600,000.
E) $2,680,000.
53. What is the balance in the investment account on December 31, 2018?
A) $1,900,000.
B) $1,960,000.
C) $2,000,000.
D) $2,016,000.
E) $2,028,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-24
Learning Objective: 01-02
Topic: Equity method―Investment account balance
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $2,000,000 – $28,000 – $12,000 = $1,960,000
[QUESTION]
REFER TO: 01-09
54. What amount of equity income would Anderson recognize in 2018 from its ownership interest in
Barney?
A) $12,000 income.
B) $12,000 loss.
C) $16,000 loss.
D) $28,000 income.
E) $28,000 loss.
55. Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current
year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of
the merchandise had been sold by Luffman to other customers. What amount of gross profit on intra-
entity sales must be deferred by Luffman?
A) $ 0.
B) $ 8,400.
C) $28,000.
D) $52,000.
E) $80,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-25
On January 3, 2018, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas
Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the
investment. Roberts has significant influence over Thomas. During 2018, Thomas reported net income of
$300,000 and paid dividends of $100,000. On January 4, 2019, Roberts sold 15,000 shares for $800,000.
[QUESTION]
REFER TO: 01-10
56. What was the balance in the investment account before the shares were sold?
A) $1,560,000.
B) $1,600,000.
C) $1,700,000.
D) $1,800,000.
E) $1,860,000.
57. What is the gain/loss on the sale of the 15,000 shares?
A) $ 0
B) $10,000 gain.
C) $12,000 loss.
D) $15,000 loss.
E) $20,000 gain.
58. What is the balance in the investment account after the sale of the 15,000 shares?
A) $750,000.
B) $760,000.
C) $780,000.
D) $790,000.
E) $800,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-26
Answer: C
Learning Objective: 01-05d
Topic: Report sale of equity investment
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $1,560,000 × (15,000 / 30,000) = $780,000 Cost of shares Sold
$1,560,000 – $780,000 Cost of Shares Sold = $780,000 Balance in the Investment Account
[QUESTION]
REFER TO: 01-10
59. What is the appropriate journal entry to record the sale of the 15,000 shares?
A)
Cash
800,000
Investment in Thomas
800,000
B)
Cash
800,000
Investment in Thomas
780,000
Gain on sale of investment
20,000
C)
Cash
800,000
Loss on investment
12,000
Investment in Thomas
812,000
D)
Cash
800,000
Investment in Thomas
790,000
Gain on sale of investment
10,000
E)
Cash
800,000
Loss on sale of investment
15,000
Investment in Thomas
815,000
A) A Above.
B) B Above.
C) C Above.
D) D Above.
E) E Above.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-27
2018, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2019, Mason sold
10,000 shares for $150,000.
[QUESTION]
REFER TO: 01-11
60. What was the balance in the investment account before the shares were sold?
A) $520,000.
B) $544,000.
C) $560,000.
D) $604,000.
E) $620,000.
61. What is the gain/loss on the sale of the 10,000 shares?
A) $20,000 gain.
B) $10,000 gain.
C) $1,000 gain.
D) $1,000 loss.
E) $10,000 loss.
62. What is the balance in the investment account after the sale of the 10,000 shares?
A) $390,000.
B) $420,000.
C) $453,000.
D) $454,000.
E) $465,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-28
Topic: Report sale of equity investment
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $604,000 – $151,000 = $453,000
[QUESTION]
REFER TO: 01-11
63. What is the appropriate journal entry to record the sale of the 10,000 shares?
A) A
Above
B) B Above
C) C Above
D) D Above
E) E Above
Book Value
Fair Value
Buildings (20-year life)
$1,000,000
$1,800,000
Equipment (5-year life)
1,500,000
2,000,000
A)
Cash
150,000
Investment in Hefly
150,000
B)
Cash
150,000
Investment in Hefly
130,000
Gain on sale of investment
20,000
C)
Cash
150,000
Loss on investment
1,000
Investment in Hefly
151,000
D)
Cash
150,000
Investment in Hefly
149,000
Gain on sale of investment
1,000
E)
Cash
150,000
Loss on sale of investment
10,000
Investment in Hefly
160,000
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-29
Franchises (10-year life)
0
700,000
Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co.
reported net income of $400,000 for 2018, and paid dividends of $200,000 during that year.
[QUESTION]
REFER TO: 01-12
64. What is the amount of the excess of purchase price over book value?
A) $(2,000,000).
B) $ 800,000.
C) $1,000,000.
D) $2,000,000.
E) $3,000,000.
65. How much goodwill is associated with this investment?
A) $(500,000).
B) $ 0.
C) $ 100,000.
D) $ 200,000.
E) $2,000,000.
66. What is the amount of excess amortization expense for Bailey’s investment in Emery for the first
year?
A) $ 0.
B) $ 84,000.
C) $100,000.
D) $160,000.
E) $400,000.
67. What is the amount of the excess of purchase price over book value?
A) $(1,000,000.)
B) $ 400,000.
C) $ 800,000.
D) $ 1,000,000.
E) $ 1,100,000.
68. How much goodwill is associated with this investment?
A) $(500,000.)
B) $ 0.
C) $ 650,000.
D) $1,000,000.
E) $2,000,000.
69. What is the amount of excess amortization expense for Jackie Corp’s investment in Rob Co. for year
2018?
A) $ 0.
B) $30,000.
C) $40,000.
D) $55,000.
E) $60,000.
70. What is the balance in Jackie Corp’s Investment in Rob Co. account at December 31, 2018?
A) $2,000,000.
B) $2,005,000.
C) $2,060,000.
D) $2,090,000.
E) $2,200,000.
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $2,000,000 + ($300,000 × 30%) – ($100,000 × 30%) – $55,000 = $2,005,000
REFERENCE: 01-14
Acker Inc. bought 40% of Howell Co. on January 1, 2017 for $576,000. The equity method of accounting
was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker
began supplying inventory to Howell as follows:
Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in
dividends each year.
[QUESTION]
REFER TO: 01-14
71. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December
31, 2017?
A) $ 1,600.
B) $ 4,000.
C) $ 8,000.
D) $15,000.
E) $20,000.
72. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December
31, 2018?
A) $ 1,600.
B) $ 8,000.
C) $15,000.
D) $20,000.
E) $40,000
Cost to
Transfer
Amount Held by
Year
Acker
Price
Howell at Year-End
2017
$55,000
$ 75,000
$15,000
2018
$70,000
$110,000
$55,000
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-33
Topic: Intra–entity sales of inventory
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $110,000 – $70,000 = $40,000 × ($55,000 / $110,000) = $20,000 × 40% = $8,000 Deferred
intra-entity gross profit
[QUESTION]
REFER TO: 01-14
73. What is the Equity in Howell Income that should be reported by Acker in 2017?
A) $10,000.
B) $24,000.
C) $36,000.
D) $38,400.
E) $40,000.
74. What is the balance in Acker’s Investment in Howell account at December 31, 2017?
A) $576,000.
B) $598,400.
C) $614,400.
D) $606,000.
E) $616,000.
75. What is the Equity in Howell Income that should be reported by Acker in 2018?
A) $32,000.
B) $41,600.
C) $48,000.
D) $49,600.
E) $50,600.
76. What is the balance in Acker’s Investment in Howell account at December 31, 2018?
A) $624,000.
B) $636,000.
C) $646,000.
D) $656,000.
E) $666,000.
77. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on
December 31, 2018?
A) $ 900.
B) $3,000.
C) $4,500.
D) $6,000.
E) $9,000.
78. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on
December 31, 2019?
A) $1,500.
B) $2,400.
C) $3,600.
D) $4,000.
E) $8,000.
79. What is the Equity in Maya Income that should be reported by Cayman in 2018?
A) $17,100.
B) $18,000.
C) $25,500.
D) $29,100.
E) $30,900.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-36
AICPA: FN Measurement
Feedback: $100,000 × 30% = $30,000 – $900 Share of Deferred gross profit on intra-entity inventory
sales = $29,100
[QUESTION]
REFER TO: 01-15
80. What is the balance in Cayman’s Investment in Maya account at December 31, 2018?
A) $463,500.
B) $467,100.
C) $468,000.
D) $468,900.
E) $480,000.
81. What is the Equity in Maya Income that should be reported by Cayman in 2019?
A) $34,200.
B) $34,800.
C) $34,500.
D) $36,000.
E) $37,800.
82. What is the balance in Cayman’s Investment in Maya account at December 31, 2019?
A) $488,700.
B) $489,600.
C) $492,000.
D) $494,400.
E) $514,500.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-37
Topic: Intra–entity sales of inventory
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback: $467,100 + $34,500 – $12,000 = $489,600
[QUESTION]
83. Which of the following results in a decrease in the investment account when applying the equity
method?
A) Dividends paid by the investor.
B) Net income of the investee.
C) Net income of the investor.
D) Share of gross profit on intra-entity inventory sales for the current year.
E) Purchase of additional common stock by the investor during the current year.
84. Which of the following results in an increase in the investment account when applying the equity
method?
A) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
B) Investor’s share of gross profit from intra-entity inventory sales for the current year.
C) Dividends paid by the investor.
D) Dividends paid by the investee.
E) Sale of a portion of the investment during the current year.
85. Which of the following results in a decrease in the Equity in Investee Income account when applying
the equity method?
A) Dividends paid by the investor.
B) Net income of the investee.
C) Investor’s share of gross profit from intra-entity inventory sales for the current year.
D) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
E) Other Comprehensive Income of the investee.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 1-38
Learning Objective: 01-06
Topic: Intra–entity sales of inventory
Difficulty: 1 Easy
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
86. Which of the following results in an increase in the Equity in Investee Income account when applying
the equity method?
A) Amortizations of purchase price over book value on date of purchase.
B) Amortizations, since date of purchase, of purchase price over book value on date of purchase.
C) Sale of a portion of the investment at a gain to the investor.
D) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
E) Sale of a portion of the investment at a loss.
87. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-
value method to the equity method on January 1, 2018?
A) A debit of $16,500.
B) A debit of $21,500.
C) A debit of $90,000.
D) A debit of $165,000.
E) There is no adjustment.
88. What is the balance in the Investment in Stanley Corporation on December 31, 2018?
A) $415,000.
B) $512,500.
C) $523,000.
D) $539,500.
E) $544,500.
89. How are dividends received from Inkblot reflected in Trycker’s accounting records for 2017?
A) Reduce investment in Inkblot by $280,000.
B) Increase Investment in Inkblot by $280,000.
C) Reduce Investment in Inkblot by $120,000.
D) Increase Investment in Inkblot by $120,000.
E) Increase Dividend Income by $120,000.