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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.
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 was the balance in the Investment in Ticker Co. account at the end of 2011?
17. On January 1, 2011, Deuce Inc. acquired 15% of Wiz Co.'s outstanding
common stock for $62,400 and categorized the investment as an available-for-sale
security. Wiz earned net income of $96,000 in 2011 and paid dividends of $36,000. On
January 1, 2012, Deuce bought an additional 10% of Wiz for $54,000. This second
purchase gave Deuce the ability to significantly influence the decision making of Wiz.
During 2012, Wiz earned $120,000 and paid $48,000 in dividends. As of December
31, 2012, Wiz reported a net book value of $468,000. For both purchases, Deuce
concluded that Wiz Co.'s book values approximated fair values and attributed any
excess cost to goodwill.
On Deuce's December 31, 2012 balance sheet, what balance was reported for the
Investment in Wiz Co. account?
18. On January 1, 2011, Deuce Inc. acquired 15% of Wiz Co.'s outstanding
common stock for $62,400 and categorized the investment as an available-for-sale
security. Wiz earned net income of $96,000 in 2011 and paid dividends of $36,000. On
January 1, 2012, Deuce bought an additional 10% of Wiz for $54,000. This second
purchase gave Deuce the ability to significantly influence the decision making of Wiz.
During 2012, Wiz earned $120,000 and paid $48,000 in dividends. As of December
31, 2012, Wiz reported a net book value of $468,000. For both purchases, Deuce
concluded that Wiz Co.'s book values approximated fair values and attributed any
excess cost to goodwill.
What amount of equity income should Deuce have reported for 2012?
19. In a situation where the investor exercises significant influence over the
investee, which of the following entries is not actually posted to the books of the
investor?
1) Debit to the Investment account, and a Credit to the Equity in Investee Income
account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend
Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the
Investment account.
