Test bank for advanced accounting 11th edition by hoyle

Test Bank for Advanced Accounting 11th Edition by
Hoyle
Multiple Choice Questions - Page 1
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.

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 2
1.

A. $401,136.

2.

B. $413,872.

3.

C.$418,840.

4.

D.$412,432.

5.

E. $410,148.

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?
1.

A. $6,480.


2.

B. $3,240.

3.

C.$10,800.

4.

D.$16,200.

5.

E. $6,610.

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?
1.

A. It must use the equity method for 2011 but should make no changes in its financial
statements for 2010 and 2009.

2.

B. It should prepare consolidated financial statements for 2011.

3.

C.It must restate the financial statements for 2010 and 2009 as if the equity method
had been used for those two years.

4.

D.It should record a prior period adjustment at the beginning of2011 but should not
restate the financial statements for 2010 and 2009.

5.

E. It must restate the financial statements for 2010 as if the equity method had been
used then.

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 shareof 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.


When an investor sells shares of its investee company, which
ofthe 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 betweenselling price and
carrying value.

5.

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

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
theequity 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.

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.

In a situation where the investor exercises significant influence
over the investee, which of the following entries is
notactually 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.

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-forsale 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 boo
1.

A. $139,560.

2.

B. $143,400.


3.

C.$310,130.

4.

D.$186,080.

5.

E. $182,250.

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 orother 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?

1.

A. $848,000.

2.

B. $742,000.

3.

C.$723,000.

4.

D.$761,000.

5.

E. $925,000.

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.

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.

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?
1.

A. $950,800.

2.

B. $958,000.

3.

C.$836,000.

4.

D.$990,100.

5.

E. $956,400.

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?
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, 2011, Deuce Inc. acquired 15% of Wiz Co.'s
outstanding common stock for $62,400 and categorized
the investment as an available-forsale 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 boo
1.

A. $30,000.

2.

B. $16,420.

3.

C.$38,340.

4.

D.$18,000.

5.

E. $32,840.

All of the following would require use of the equity method
forinvestments 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.

On January 1, 2010, Dawson, Incorporated, paid $100,000 for a
30% interest in Sacco Corporation. This investee had
assets with a book value of $550,000 and liabilities of
$300,000. A patent held by Sacco having a book value of
$10,000 was actually worth $40,000 with a six year
remaining life. Any goodwill associated with this

acquisition is considered to have an indefinite life. During
2010, Sacco reported income of $50,000 and paid
dividends of $20,000 while in 2011 it reported income of
$75,000 and divide
1.

A. $25,000.


2.

B. $13,000

3.

C.$9,000.

4.

D.$16,000.

5.

E. $10,000.

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.

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?
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 2011 earnings untilthe 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.

A company should always use the equity method to account for
aninvestment 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.

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?
1.

A. $24,000.

2.

B. $75,000.

3.

C.$99,000.

4.

D.$51,000.

5.

E. $80,000.

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
2011 and paid dividends of $60,000 on October 1, 2011.
How much income should Gaw recognize on this
investment in 2011?
1.

A. $16,500.

2.

B. $9,000.

3.

C.$25,500.

4.

D.$7,500.

5.

E. $50,000.

An upstreamsale 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.

When applying the equity method, how is the excess of cost
overbook 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.

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 2
1.

A. $19,792.

2.

B. $27,640.

3.

C.$22,672.

4.

D.$24,400.

5.

E. $21,748.


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?
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 andchange the balance in
the investment account as if the fair-value method had been used since 2011.

3.

C.Jordan has the option of using either the equity method or thefair-value method for
2011 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 2012 and future years but should not
make a retrospective adjustment to the investment account.

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 $7
1.

A. $1,609,000.

2.

B. $1,485,000.

3.

C.$1,685,000.

4.

D.$1,647,000.

5.

E. $1,054,300.


Under the equity method, when the company's share of
cumulativelosses 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 notrecord 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.

59 Free Test Bank for Advanced Accounting 11th Edition
by Hoyle Multiple Choice Questions - Page 2
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
investmentaccount 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 of the following results in an increase in the Equity in
Investee Income account when applying the equity
method?
1.

A. Amortizations of purchase price over book value on date of purchase.

2.

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.

On January 1, 2010, Dawson, Incorporated, paid $100,000 for a
30% interest in Sacco Corporation. This investee had
assets with a book value of $550,000 and liabilities of
$300,000. A patent held by Sacco having a book value of
$10,000 was actually worth $40,000 with a six year
remaining life. Any goodwill associated with this
acquisition is considered to have an indefinite life. During
2010, Sacco reported income of $50,000 and paid
dividends of $20,000 while in 2011 it reported income of
$75,000 and divide
1.

A. $9,000.

2.

B. $13,500.

3.

C.$15,000.

4.

D.$7,500.

5.

E. $50,000.


On January 4, 2010, Trycker, Inc.acquired 40% of the
outstanding common stock of Inkblot Co. for $2,400,000.
This investment gave Trycker the ability to exercise
significant influence over Inkblot. Inkblot's assets on that
date were recorded at $8,000,000 with liabilities of
$2,000,000. There were no other differences between book
and fair values. During 2010, Inkblot reported net income
of $500,000 and paid dividends of $300,000. The fair value
of Inkblot at December 31, 2010 is $7,000,000. Trycker
elects
1.

A. $2,400,000.

2.

B. $2,280,000.

3.

C.$2,480,000.

4.

D.$2,800,000.

5.

E. $7,000,000.

On January 1, 2011, Anderson Company purchased 40% of the
voting common stock of Barney Company for $2,000,000,
which approximated book value. During 2011, 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, 2011?
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, 2010, 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 thatdate
were recorded at $10,500,000 with liabilities of $4,500,000.
There were no other differences between book and fair
values. During 2010, Bike reported net income of
$500,000. For 2011, Bike reported net income of $800,000.
Dividends of $300,000 were paid in eachof these two
years. How much incom
1.

A. $120,000.

2.

B. $200,000.

3.

C.$300,000.

4.

D.$320,000.

5.

E. $500,000.

Dodge, Incorporated acquires 15% of Gates Corporation on
January 1, 2011, for $105,000 when the book value of
Gates was $600,000. During 2011 Gates reported net
income of $150,000 and paid dividends of $50,000. On
January 1, 2012, Dodge purchased an additional 25% of
Gates for $200,000. Any excess cost over book value is
attributable to goodwill with an indefinite life. The
fairvalue method was used during 2011 but Dodge has
deemed it necessary to change to the equity method after
the second purchase. Durin
1.

A. $370,000.

2.

B. $355,000.

3.

C.$305,000.

4.

D.$400,000.

5.

E. $105,000.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At
that time, thebook 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 2011, Hefly reported income of
$150,000 and paid dividends of $40,000. On January 2,
2012, Mason sold 10,000 shares for $150,000. What is the
balance in the investment account after the sale ofthe
10,000 share
1.

A. $390,000.

2.

B. $420,000.

3.

C.$453,000.

4.

D.$454,000.

5.

E. $465,000.

On January 3, 2011, Roberts Company purchased 30% of the
100,000 shares of common stock of Thomas Corporation,
paying $1,500,000. Therewas no goodwill or other cost
allocation associated with the investment. Roberts has
significant influence over Thomas. During 2011, Thomas
reportedincome of $300,000 and paid dividends of
$100,000. On January 4, 2012, Roberts sold 15,000 shares
for $800,000. What is the balance in the investment
account after the sale ofthe 15,000 shares?
1.

A. $750,000.

2.

B. $760,000.

3.

C.$780,000.

4.

D.$790,000.

5.

E. $800,000.

Renfroe, Inc. acquires 10% of Stanley Corporation on January
1,2010, for $90,000 when the book value of Stanley was
$1,000,000. During 2010, Stanley reported net income of
$215,000 and paid dividends of $50,000. On January 1,
2011, Renfroe purchased an additional 30% of Stanley for
$325,000. Any excess of cost over book value is
attributable to goodwill withan indefinite life. During 2011,
Renfroe reported net income of $320,000 and paid
dividends of $50,000. How much is the adjustment to the
Investment in
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.

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.

On January 3, 2011, Roberts Company purchased 30% of the
100,000 shares of common stock of Thomas Corporation,
paying $1,500,000. Therewas no goodwill or other cost
allocation associated with the investment. Roberts has
significant influence over Thomas. During 2011, Thomas
reportedincome of $300,000 and paid dividends of

$100,000. On January 4, 2012, 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, 2010, 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 thatdate
were recorded at $10,500,000 with liabilities of $4,500,000.
There were no other differences between book and fair

values. During 2010, Bike reported net income of
$500,000. For 2011, Bike reported net income of $800,000.
Dividends of $300,000 were paid in eachof these two
years. How much incom
1.

A. $120,000.

2.

B. $200,000.

3.

C.$300,000.

4.

D.$320,000.

5.

E. $500,000.

Dodge, Incorporated acquires 15% of Gates Corporation on
January 1, 2011, for $105,000 when the book value of
Gates was $600,000. During 2011 Gates reported net
income of $150,000 and paid dividends of $50,000. On
January 1, 2012, Dodge purchased an additional 25% of
Gates for $200,000. Any excess cost over book value is

attributable to goodwill with an indefinite life. The
fairvalue method was used during 2011 but Dodge has
deemed it necessary to change to the equity method after
the second purchase. Durin
1.

A. $80,000.

2.

B. $30,000.

3.

C.$50,000.

4.

D.$15,000.

5.

E. $75,000.


On January 4, 2011, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At
that time, thebook 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 2011, Hefly reported income of
$150,000 and paid dividends of $40,000. On January 2,
2012, 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.

On January 1, 2010, Dawson, Incorporated, paid $100,000 for a
30% interest in Sacco Corporation. This investee had
assets with a book value of $550,000 and liabilities of
$300,000. A patent held by Sacco having a book value of
$10,000 was actually worth $40,000 with a six year

remaining life. Any goodwill associated with this
acquisition is considered to have an indefinite life. During
2010, Sacco reported income of $50,000 and paid
dividends of $20,000 while in 2011 it reported income of
$75,000 and divide
1.

A. $119,500.

2.

B. $125,500.

3.

C.$116,500.

4.

D.$118,000.

5.

E. $100,000.


On January 4, 2010, 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 thatdate

were recorded at $10,500,000 with liabilities of $4,500,000.
There were no other differences between book and fair
values. During 2010, Bike reported net income of
$500,000. For 2011, Bike reported net income of $800,000.
Dividends of $300,000 were paid in eachof these two
years. What was the r
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 3, 2011, Roberts Company purchased 30% of the
100,000 shares of common stock of Thomas Corporation,
paying $1,500,000. Therewas no goodwill or other cost
allocation associated with the investment. Roberts has

significant influence over Thomas. During 2011, Thomas
reportedincome of $300,000 and paid dividends of
$100,000. On January 4, 2012, 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.


Dodge, Incorporated acquires 15% of Gates Corporation on
January 1, 2011, for $105,000 when the book value of
Gates was $600,000. During 2011 Gates reported net
income of $150,000 and paid dividends of $50,000. On

January 1, 2012, Dodge purchased an additional 25% of
Gates for $200,000. Any excess cost over book value is
attributable to goodwill with an indefinite life. The
fairvalue method was used during 2011 but Dodge has
deemed it necessary to change to the equity method after
the second purchase. Durin
1.

A. $7,500.

2.

B. $22,500.

3.

C.$15,000.

4.

D.$100,000.

5.

E. $150,000.

On January 4, 2010, Trycker, Inc.acquired 40% of the
outstanding common stock of Inkblot Co. for $2,400,000.
This investment gave Trycker the ability to exercise
significant influence over Inkblot. Inkblot's assets on that

date were recorded at $8,000,000 with liabilities of
$2,000,000. There were no other differences between book
and fair values. During 2010, Inkblot reported net income
of $500,000 and paid dividends of $300,000. The fair value
of Inkblot at December 31, 2010 is $7,000,000. Trycker
elects
1.

A. Reduce investment in Inkblot by $280,000.

2.

B. Increase Investment in Inkblot by $280,000.

3.

C.Reduce Investment in Inkblot by $120,000.

4.

D.Increase Investment in Inkblot by $120,000.

5.

E. Increase Dividend Income by $120,000.


On January 1, 2011, Anderson Company purchased 40% of the
voting common stock of Barney Company for $2,000,000,
which approximated book value. During 2011, Barney paid

dividends of $30,000 and reported a net loss of
$70,000.What amount of equity income would Anderson
recognize in 2011 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.

Renfroe, Inc. acquires 10% of Stanley Corporation on January
1,2010, for $90,000 when the book value of Stanley was
$1,000,000. During 2010, Stanley reported net income of
$215,000 and paid dividends of $50,000. On January 1,
2011, Renfroe purchased an additional 30% of Stanley for
$325,000. Any excess of cost over book value is
attributable to goodwill withan indefinite life. During 2011,

Renfroe reported net income of $320,000 and paid
dividends of $50,000. What is the balance in the
Investment in Stanley
1.

A. $415,000.

2.

B. $512,500.

3.

C.$523,000.

4.

D.$539,500.

5.

E. $544,500.


Dodge, Incorporated acquires 15% of Gates Corporation on
January 1, 2011, for $105,000 when the book value of
Gates was $600,000. During 2011 Gates reported net
income of $150,000 and paid dividends of $50,000. On
January 1, 2012, Dodge purchased an additional 25% of
Gates for $200,000. Any excess cost over book value is

attributable to goodwill with an indefinite life. The
fairvalue method was used during 2011 but Dodge has
deemed it necessary to change to the equity method after
the second purchase. Durin
1.

A. A debit to additional paid-in capital for $15,000.

2.

B. A credit to additional paid-in capital for $15,000.

3.

C. A debit to retained earnings for $15,000.

4.

D.A credit to retained earnings for $15,000.

5.

E. A credit to a gain on investment.

On January 1, 2010, Dawson, Incorporated, paid $100,000 for a
30% interest in Sacco Corporation. This investee had
assets with a book value of $550,000 and liabilities of
$300,000. A patent held by Sacco having a book value of
$10,000 was actually worth $40,000 with a six year
remaining life. Any goodwill associated with this

acquisition is considered to have an indefinite life. During
2010, Sacco reported income of $50,000 and paid
dividends of $20,000 while in 2011 it reported income of
$75,000 and divide
1.

A. $100,000.

2.

B. $112,000.

3.

C.$106,000.

4.

D.$107,500.

5.

E. $140,000.


On January 1, 2010, Dawson, Incorporated, paid $100,000 for a
30% interest in Sacco Corporation. This investee had
assets with a book value of $550,000 and liabilities of
$300,000. A patent held by Sacco having a book value of
$10,000 was actually worth $40,000 with a six year

remaining life. Any goodwill associated with this
acquisition is considered to have an indefinite life. During
2010, Sacco reported income of $50,000 and paid
dividends of $20,000 while in 2011 it reported income of
$75,000 and divide
1.

A. $22,500.

2.

B. $21,000.

3.

C.$12,000.

4.

D.$13,500.

5.

E. $75,000.

On January 4, 2011, Mason Co. purchased 40,000 shares (40%)
of the common stock of Hefly Corp., paying $560,000. At
that time, thebook 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 2011, Hefly reported income of
$150,000 and paid dividends of $40,000. On January 2,
2012, 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 4, 2010, 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 thatdate
were recorded at $10,500,000 with liabilities of $4,500,000.

There were no other differences between book and fair
values. During 2010, Bike reported net income of
$500,000. For 2011, Bike reported net income of $800,000.
Dividends of $300,000 were paid in eachof these two
years. What was the r
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.

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.

Free Text Questions
What is the primary objective of the equity method of
accounting for an investment?
Answer Given