45 test bank for advanced accounting 12th edition

45 Test Bank for Advanced Accounting 12th Edition
by Hoyle
Multiple Choice Questions
Which statement is true concerning unrealized profits in intraentity inventory transfers when an investor uses the equity
method?
1.

A) The investor and investee make reciprocal entries to defer and realize
inventory profits.

2.

B) The same adjustments are made for upstream and downstream
transfers.

3.

C) Different adjustments are made for upstream and downstream transfers.

4.

D) No adjustments are necessary.

5.

E) Adjustments will be made only when profits are known upon sale to
outsiders.

A company has been using the equity method to account for its
investment. The company sells shares and does not continue to
have significant control. Which of the following statements is

true?
1.

A) A cumulative effect change in accounting principle must occur.

2.

B) A prospective change in accounting principle must occur.

3.

C) A retrospective change in accounting principle must occur.

4.

D) The investor will not receive future dividends from the investee.

5.

E) Future dividends will continue to reduce the investment account.

An investee company incurs an extraordinary loss during the
period. The investor appropriately applies the equity method.
Which of the following statements is true?
1.

A) Under the equity method, the investor only recognizes its share of
investee’s income from continuing operations.

2.

B) The extraordinary loss would reduce the value of the investment.

3.

C) The extraordinary loss should increase equity in investee income.

4.

D) The extraordinary loss would not appear on the income statement but
would be a component of comprehensive income.

5.

E) The loss would be ignored but shown in the investor’s notes to the
financial statements.

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 unrealized intercompany profit
must be deferred by Luffman?
1.

A) $ 0.

2.

B) $ 8,400.

3.

C) $28,000.

4.

D) $52,000.

5.

E) $80,000.

On January 1, 2013, 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 2013 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, 2013?
1.

A) $2,040,500.

2.

B) $2,212,500.

3.

C) $2,260,500.

4.

D) $2,171,500.


5.

E) $2,071,500.

On January 1, 2013, 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 2013,
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, 2013?
1.

A) $950,800.

2.

B) $958,000.

3.

C) $836,000.

4.

D) $990,100.

5.

E) $956,400.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1,
2012, for $90,000 when the book value of Stanley was
$1,000,000. During 2012, Stanley reported net income of
$215,000 and paid dividends of $50,000. On January 1, 2013,
Renfroe purchased an additional 30% of Stanley for $325,000.
Any excess of cost over book value is attributable to goodwill with
an indefinite life. During 2013, Renfroe reported net income of
$320,000 and paid dividends of $50,000. How much is the
adjustment to the Investme
1.

A) A debit of $16,500.

2.

B) A debit of $21,500.

3.

C) A debit of $90,000.

4.

D) A debit of $165,000.

5.

E) There is no adjustment.

On January 1, 2013, Anderson Company purchased 40% of the
voting common stock of Barney Company for $2,000,000, which
approximated book value. During 2013, Barney paid dividends of


$30,000 and reported a net loss of $70,000. What is the balance
in the investment account on December 31, 2013?
1.

A) $1,900,000.

2.

B) $1,960,000.

3.

C) $2,000,000.

4.

D) $2,016,000.

5.

E) $2,028,000.

On January 4, 2012, 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 2012, Bike reported net income of
$500,000. For 2013, Bike reported net income of $800,000.
Dividends of $300,000 were paid in each of these two years.How
much i
1.

A) $120,000.

2.

B) $200,000.

3.

C) $300,000.

4.

D) $320,000.

5.

E) $500,000.

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 2013 and
paid dividends of $60,000 on October 1, 2013. How much income
should Gaw recognize on this investment in 2013?
1.

A) $16,500.

2.

B) $ 9,000.


3.

C) $25,500.

4.

D) $ 7,500.

5.

E) $50,000.

After allocating cost in excess of book value, which asset or
liability would not be amortized over a useful life?
1.

A) Cost of goods sold.

2.

B) Property, plant, & equipment.

3.

C) Patents.

4.

D) Goodwill.

5.

E) Bonds payable.

Club Co. appropriately uses the equity method to account for its
investment in Chip Corp. As of the end of 2013, 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?
1.

A) Club should switch to the fair-value method.

2.

B) No accounting because the decline in fair value is temporary.

3.

C) Club should decrease the balance in the investment account to the
current value and recognize a loss on the income statement.

4.

D) Club should not record its share of Chip’s 2013 earnings until the decline
in the fair value of the stock has been recovered.

5.

E) Club should decrease the balance in the investment account to the
current value and recognize an unrealized loss on the balance sheet.

All of the following statements regarding the investment account
using the equity method are true except:
1.

A) The investment is recorded at cost.

2.

B) Dividends received are reported as revenue.

3.

C) Net income of investee increases the investment account.

4.

D) Dividends received reduce the investment account.

5.

E) Amortization of fair value over cost reduces the investment account.

All of the following would require use of the equity method for
investments except:
1.

A) material intra-entity transactions.

2.

B) investor participation in the policy-making process of the investee.

3.

C) valuation at fair value.

4.

D) technological dependency.

5.

E) significant control.

Which of the following results in a decrease in the Equity in
Investee Income account when applying the equity method?
1.

A) Dividends paid by the investor.

2.

B) Net income of the investee.

3.

C) Unrealized gain on intra-entity inventory transfers for the current year.

4.

D) Unrealized gain on intra-entity inventory transfers for the prior year.

5.

E) Extraordinary gain of the investee.

Which of the following results in an increase in the investment
account when applying the equity method?

1.

A) Unrealized gain on intra-entity inventory transfers for the prior year.

2.

B) Unrealized gain on intra-entity inventory transfers for the current year.

3.

C) Dividends paid by the investor.

4.

D) Dividends paid by the investee.

5.

E) Sale of a portion of the investment during the current year.


Which statement is true concerning unrealized profits in intraentity inventory transfers when an investor uses the equity
method?
1.

A) The investee must defer upstream ending inventory profits.

2.

B) The investee must defer upstream beginning inventory profits.

3.

C) The investor must defer downstream ending inventory profits.

4.

D) The investor must defer downstream beginning inventory profits.

5.

E) The investor must defer upstream beginning inventory profits.

A company has been using the fair-value method to account for
its investment. The company now has the ability to significantly
control the investee and the equity method has been deemed
appropriate. Which of the following statements is true?
1.

A) A cumulative effect change in accounting principle must occur.

2.

B) A prospective change in accounting principle must occur.

3.

C) A retrospective change in accounting principle must occur.

4.

D) The investor will not receive future dividends from the investee.

5.

E) Future dividends will continue to be recorded as revenue.

How should a permanent loss in value of an investment using the
equity method be treated?
1.

A) The equity in investee income is reduced.

2.

B) A loss is reported the same as a loss in value of other long-term assets.

3.

C) The investor’s stockholders’ equity is reduced.

4.

D) No adjustment is necessary.

5.

E) An extraordinary loss would be reported.

A company should always use the equity method to account for

an investment if:


1.

A) It has the ability to exercise significant influence over the operating
policies of the investee.

2.

B) It owns 30% of another company’s stock.

3.

C) It has a controlling interest (more than 50%) of another company’s stock.

4.

D) The investment was made primarily to earn a return on excess cash.

5.

E) It does not have the ability to exercise significant influence over the
operating policies of the investee.

Which of the following results in a decrease in the investment
account when applying the equity method?
1.

A) Dividends paid by the investor.

2.

B) Net income of the investee.

3.

C) Net income of the investor.

4.

D) Unrealized gain on intra-entity inventory transfers for the current year.

5.

E) Purchase of additional common stock by the investor during the current
year.

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.
1.

A) Entries 1 and 2.

2.

B) Entries 2 and 3.

3.

C) Entry 1 only.

4.

D) Entry 2 only.

5.

E) Entry 3 only.


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 intraentity inventory profit must be deferred by Tower?
1.

A) $ 6,480.

2.

B) $ 3,240.

3.

C) $10,800.

4.

D) $16,200.

5.

E) $ 6,610.

When applying the equity method, how is the excess of cost over
book value accounted for?
1.

A) The excess is allocated to the difference between fair value and book
value multiplied by the percent ownership of current assets.

2.

B) The excess is allocated to the difference between fair value and book
value multiplied by the percent ownership of total assets.

3.

C) The excess is allocated to the difference between fair value and book
value multiplied by the percent ownership of net assets.

4.

D) The excess is allocated to goodwill.

5.

E) The excess is ignored.

On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp.
Jordan used the equity method to account for the investment. On
January 1, 2014, 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?
1.

A) Jordan should continue to use the equity method to maintain
consistency in its financial statements.


2.

B) Jordan should restate the prior years’ financial statements and change
the balance in the investment account as if the fair-value method had been
used since 2013.

3.

C) Jordan has the option of using either the equity method or the fair-value
method for 2013 and future years.

4.

D) Jordan should report the effect of the change from the equity to the fairvalue method as a retrospective change in accounting principle.

5.

E) Jordan should use the fair-value method for 2014 and future years but
should not make a retrospective adjustment to the investment account.

On January 4, 2012, 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 2012, Bike reported net income of
$500,000. For 2013, Bike reported net income of $800,000.
Dividends of $300,000 were paid in each of these two years.
What was
1.

A) $2,400,000.

2.

B) $2,480,000.

3.

C) $2,500,000.

4.

D) $2,600,000.

5.

E) $2,680,000.

Under the equity method, when the company’s share of
cumulative losses equals its investment and the company has no
obligation or intention to fund such additional losses, which of the
following statements is true?
1.

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

2.

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


3.

C) 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.

4.

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

5.

E) The investor should report these losses as extraordinary items.

Which of the following results in an increase in the Equity in
Investee Income account when applying the equity method?
1.
2.

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.

3.

C) Extraordinary gain of the investor.

4.

D) Unrealized gain on intra-entity inventory transfers for the prior year.

5.

E) Sale of a portion of the investment at a loss.

An upstream sale of inventory is a sale:
1.

A) between subsidiaries owned by a common parent.

2.

B) with the transfer of goods scheduled by contract to occur on a specified
future date.

3.

C) in which the goods are physically transported by boat from a subsidiary
to its parent.

4.

D) made by the investor to the investee.

5.

E) made by the investee to the investor.

On January 1, 2011, Dermot Company purchased 15% of the
voting common stock of Horne Corp. On January 1, 2013, 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?
1.

A) It must use the equity method for 2013 but should make no changes in
its financial statements for 2012 and 2011.

2.

B) It should prepare consolidated financial statements for 2013.

3.

C) It must restate the financial statements for 2012 and 2011 as if the
equity method had been used for those two years.

4.

D) It should record a prior period adjustment at the beginning of 2013 but
should not restate the financial statements for 2012 and 2011.

5.

E) It must restate the financial statements for 2012 as if the equity method
had been used then.

On January 3, 2013, 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: What is the amount of
goodwill associated with the investment?
1.

A) $500,000.

2.

B) $200,000.

3.

C) $0.

4.

D) $300,000.

5.

E) $400,000.

On January 4, 2012, 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 2012, Bike reported net income of
$500,000. For 2013, Bike reported net income of $800,000.
Dividends of $300,000 were paid in each of these two years. How
much
1.

A) $120,000.

2.

B) $200,000.


3.

C) $300,000.

4.

D) $320,000. E) $500,000.

On January 3, 2013, 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 2013, Thomas reported income of $300,000
and paid dividends of $100,000. On January 4, 2014, Roberts
sold 15,000 shares for $800,000. What is the balance in the
investment account after the sale of the 15,000 shares?
1.

A) $750,000.

2.

B) $760,000.

3.

C) $780,000.

4.

D) $790,000.

5.

E) $800,000.

Yaro Company owns 30% of the common stock of Dew Co. and
uses the equity method to account for the investment. During
2013, Dew reported income of $250,000 and paid dividends of
$80,000. There is no amortization associated with the investment.
During 2013, how much income should Yaro recognize related to
this investment?
1.

A) $24,000.

2.

B) $75,000.

3.

C) $99,000.

4.

D) $51,000.

5.

E) $80,000.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1,
2012, for $90,000 when the book value of Stanley was
$1,000,000. During 2012, Stanley reported net income of


$215,000 and paid dividends of $50,000. On January 1, 2013,
Renfroe purchased an additional 30% of Stanley for $325,000.
Any excess of cost over book value is attributable to goodwill with
an indefinite life. During 2013, Renfroe reported net income of
$320,000 and paid dividends of $50,000. What is the balance in
the Investment in S
1.

A) $415,000.

2.

B) $512,500.

3.

C) $523,000.

4.

D) $539,500.

5.

E) $544,500.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At that
time, the book value and fair value of Hefly’s net assets was
$1,400,000. The investment gave Mason the ability to exercise
significant influence over the operations of Hefly. During 2013,
Hefly reported income of $150,000 and paid dividends of
$40,000. On January 2, 2014, Mason sold 10,000 shares for
$150,000. What is the gain/loss on the sale of the 10,000
shares?
1.

A) $20,000 gain.

2.

B) $10,000 gain.

3.

C) $1,000 gain.

4.

D) $1,000 loss.

5.

E) $10,000 loss.

On January 3, 2013, 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 2013, Thomas reported income of $300,000


and paid dividends of $100,000. On January 4, 2014, Roberts
sold 15,000 shares for $800,000. What was the balance in the
investment account before the shares were sold?
1.

A) $1,560,000.

2.

B) $1,600,000.

3.

C) $1,700,000.

4.

D) $1,800,000.

5.

E) $1,860,000.

On January 3, 2013, 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 2013, Thomas reported income of $300,000
and paid dividends of $100,000. On January 4, 2014, Roberts
sold 15,000 shares for $800,000. What is the gain/loss on the
sale of the 15,000 shares?
1.

A) $ 0

2.

B) $10,000 gain.

3.

C) $12,000 loss.

4.

D) $15,000 loss.

5.

E) $20,000 gain.

On January 4, 2013, 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
2013, Adams reported income of $200,000 and paid dividends of
$80,000. On January 2, 2014, Watts sold 5,000 shares for
$125,000. What was the balance in the investment account after
the shares had been sold?


1.

A) $848,000.

2.

B) $742,000.

3.

C) $723,000.

4.

D) $761,000.

5.

E) $925,000.

On January 3, 2013, 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 2013, what is the total
amount of excess amortization for Austin’s 25% investment in
Gainsville?
1.

A) $ 27,500.

2.

B) $ 20,000.

3.

C) $ 30,000.

4.

D) $120,000.

5.

E) $ 70,000.

When an investor sells shares of its investee company, which of
the following statements is true?
1.

A) A realized gain or loss is reported as the difference between selling price
and original cost.

2.

B) An unrealized gain or loss is reported as the difference between selling
price and original cost.

3.

C) A realized gain or loss is reported as the difference between selling price
and carrying value.

4.

D) An unrealized gain or loss is reported as the difference between selling
price and carrying value.

5.

E) Any gain or loss is reported as part as comprehensive income.

On January 1, 2013, Anderson Company purchased 40% of the
voting common stock of Barney Company for $2,000,000, which
approximated book value. During 2013, Barney paid dividends of
$30,000 and reported a net loss of $70,000. What amount of
equity income would Anderson recognize in 2013 from its
ownership interest in Barney?
1.

A) $12,000 income.

2.

B) $12,000 loss.

3.

C) $16,000 loss.

4.

D) $28,000 income.

5.

E) $28,000 loss.

On January 4, 2012, 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 2012, Bike reported net income of
$500,000. For 2013, Bike reported net income of $800,000.
Dividends of $300,000 were paid in each of these two years.
What was
1.

A) $880,000.

2.

B) $2,400,000.

3.

C) $2,480,000.

4.

D) $2,600,000.

5.

E) $2,900,000.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At that
time, the book value and fair value of Hefly’s net assets was
$1,400,000. The investment gave Mason the ability to exercise
significant influence over the operations of Hefly. During 2013,

Hefly reported income of $150,000 and paid dividends of
$40,000. On January 2, 2014, Mason sold 10,000 shares for
$150,000. What is the balance in the investment account after the
sale of the 10,000
1.

A) $390,000.

2.

B) $420,000.

3.

C) $453,000.

4.

D) $454,000.

5.

E) $465,000.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At that
time, the book value and fair value of Hefly’s net assets was
$1,400,000. The investment gave Mason the ability to exercise

significant influence over the operations of Hefly. During 2013,
Hefly reported income of $150,000 and paid dividends of
$40,000. On January 2, 2014, Mason sold 10,000 shares for
$150,000. What was the balance in the investment account
before the shares were sold?
1.

A) $520,000.

2.

B) $544,000.

3.

C) $560,000.

4.

D) $604,000.

5.

E) $620,000.