Accounting Chapter 1 1 GAW Company Owns 15 The Common Stock

1. Gaw Company owns 15% of the common stock of Trace Corporation and used

the fair-value method to account for this investment. Trace reported net income of

$110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much

income should Gaw recognize on this investment in 2011?

2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity

method to account for the investment. During 2011, Dew reported income of $250,000

and paid dividends of $80,000. There is no amortization associated with the

investment. During 2011, how much income should Yaro recognize related to this

investment?

3. On January 1, 2011, Pacer Company paid $1,920,000 for 60,000 shares of

Lennon Co.’s voting common stock which represents a 45% investment. No allocation

to goodwill or other specific account was made. Significant influence over Lennon

was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share

during 2011 and reported net income of $670,000. What was the balance in the

Investment in Lennon Co. account found in the financial records of Pacer as of

December 31, 2011?

4. A company should always use the equity method to account for an investment

if:

5. On January 1, 2009, Dermot Company purchased 15% of the voting common

stock of Horne Corp. On January 1, 2011, Dermot purchased 28% of Horne’s voting

common stock. If Dermot achieves significant influence with this new investment,

how must Dermot account for the change to the equity method?

6. During January 2010, Wells, Inc. acquired 30% of the outstanding common

stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise

significant influence over Wilton. Wilton’s assets on that date were recorded at

$6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of

Wells’ investment was attributed to unrecorded patents having a remaining useful life

of ten years.

In 2010, Wilton reported net income of $600,000. For 2011, Wilton reported net

income of $750,000. Dividends of $200,000 were paid in each of these two years.

What was the reported balance of Wells’ Investment in Wilson Co. at December 31,

2011?

7. On January 1, 2011, Bangle Company purchased 30% of the voting common

stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned

to goodwill. During 2011, Sleat paid dividends of $24,000 and reported a net loss of

$140,000. What is the balance in the investment account on December 31, 2011?

8. On January 1, 2011, Jordan Inc. acquired 30% of Nico Corp. Jordan used the

equity method to account for the investment. On January 1, 2012, Jordan sold two–

thirds of its investment in Nico. It no longer had the ability to exercise significant

influence over the operations of Nico. How should Jordan have accounted for this

change?

9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the

current year, Tower bought inventory costing $66,000 and then sold it to Yale for

$120,000. At year-end, only $24,000 of merchandise was still being held by Yale.

What amount of intra-entity inventory profit must be deferred by Tower?

10. On January 4, 2011, Watts Co. purchased 40,000 shares (40%) of the common

stock of Adams Corp., paying $800,000. There was no goodwill or other cost

allocation associated with the investment. Watts has significant influence over Adams.

During 2011, Adams reported income of $200,000 and paid dividends of $80,000. On

January 2, 2012, Watts sold 5,000 shares for $125,000. What was the balance in the

investment account after the shares had been sold?

11. On January 3, 2011, Austin Corp. purchased 25% of the voting common stock

of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to

account for this investment. At the time of the investment, Gainsville’s total

stockholders’ equity was $8,000,000. Austin gathered the following information about

Gainsville’s assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of

cost over fair value was attributed to goodwill, which has not been impaired.

What is the amount of goodwill associated with the investment?

12. On January 3, 2011, Austin Corp. purchased 25% of the voting common stock

of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to

account for this investment. At the time of the investment, Gainsville’s total

stockholders’ equity was $8,000,000. Austin gathered the following information about

Gainsville’s assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of

cost over fair value was attributed to goodwill, which has not been impaired.

For 2011, what is the total amount of excess amortization for Austin’s 25% investment

in Gainsville?

13. Club Co. appropriately uses the equity method to account for its investment in

Chip Corp. As of the end of 2011, Chip’s common stock had suffered a significant

decline in fair value, which is expected to be recovered over the next several months.

How should Club account for the decline in value?

14. An upstream sale of inventory is a sale:

15. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co.

and has the ability to significantly influence the investee’s operations and decision

making. On January 1, 2011, the balance in the Investment in Ticker Co. account was

$402,000. Amortization associated with the purchase of this investment is $8,000 per

year. During 2011, Ticker earned income of $108,000 and paid cash dividends of

$36,000. Previously in 2010, Ticker had sold inventory costing $28,800 to Atlarge for

$48,000. All but 25% of this merchandise was consumed by Atlarge during 2010. The

remainder was used during the first few weeks of 2011. Additional sales were made to

Atlarge in 2011; inventory costing $33,600 was transferred at a price of $60,000. Of

this total, 40% was not consumed until 2012.

What amount of equity income would Atlarge have recognized in 2011 from its

ownership interest in Ticker?

16. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co.