Solved by verified expert :(TCO A) A company should always use the equity method to
account for an investment if
it has the ability to exercise
significant influence and control over the operating policies of the investee.
it
has a controlling interest (more than 50%) of another company’s stock.
it
owns 30% of another company’s stock.
the
investment was made primarily to earn a return on excess cash.
it
does not have the ability to exercise significant influence over the operating
policies of the investee.
Question 2. Question
:
(TCO A) Hill Company owns 30% of the common stock of
Davidson Co. and uses the equity method to account for the investment. During
20X2, Davidson reported income of $200,000 and paid dividends of $80,000. There
is no amortization associated with the investment.
During 20X2, how much income should Hill recognize related
to this investment?
$80,000
$99,000
$60,000
IN $51,000
$24,000
Question 3. Question
:
(TCO A) Under the equity method, when the company’s share of
cumulative losses equals its investment and the company has no obligation to
fund such additional losses, which of the following statements is true?
The
investor should change to the fair-value method to account for its investment.
The
investor should report these losses as extraordinary items.
The
investor should suspend applying the equity method until the investee reports
income.
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.
The
cumulative losses should be reported as a prior period adjustment.
Instructor Explanation: Chapter 1. The investor suspension is temporary
until the shares of future profits increase in a sufficent fashion or recoup
the prior losses that were not recorded in the prior periods.
Points Received: 5 of 5
Comments:
Question 4. Question
:
(TCO B) Using the purchase method, goodwill is generally
defined as the
cost
of the investment less the subsidiary’s fair value at acquisition date.
cost
of the investment less the subsidiary’s fair value at the beginning of the
year.
cost
of the investment less the subsidiary’s book value at the acquisition date.
cost
of the investment less the subsidiary’s book value at the beginning of the
year.
It
is no longer allowed under federal law.
Question 5. Question
:
(TCO B) What is the primary accounting difference between
accounting for when the subsidiary is dissolved and when the subsidiary retains
its incorporation?
If
the subsidiary retains its incorporation, assets and liabilities are consolidated
at their book values.
If
the subsidiary retains its incorporation, the consolidation is not formally
recorded in the accounting records of the acquiring company.
If
the subsidiary retains its incorporation, there will be no goodwill associated
with the acquisition.
If
the subsidiary is dissolved, it will not be operated as a separate division.
If
the subsidiary is dissolved, assets and liabilities are consolidated at their
book values.
Question 6. Question
:
(TCO C) Which of the following accounts would not appear on
the consolidated financial statements at the end of the first fiscal period of
the combination?
Common
Stock
Additional
Paid-in Capital
Investment
in Subsidiary
Goodwill
Equipment
Question 7. Question
:
(TCO C) Under the partial equity method, the parent
recognizes income when
the
related contract is signed by the subsidiary.
dividends
are declared by the investee.
dividends
are received from the investee.
the
related expense has been incurred.
it
is earned by the subsidiary.
Question 8. Question
:
(TCO C) Which of the following will result in the
recognition of an impairment loss on goodwill?
Both
the fair value of a reporting unit and its associated implied goodwill fall
below their respective carrying values.
The
fair value of a reporting unit falls below the original consideration
transferred for the acquisition.
The
fair value of the entity declines significantly.
Goodwill amortization is to be
recognized annually on a systematic and rational basis.
The
entity is investigated by the SEC and its reputation has been severely damaged.
Question 9. Question
:
(TCO A) Which types of transactions, exchanges, or events
would indicate that an investor has the ability to exercise significant
influence over the operations of an investee?
.
Question 10. Question
:
(TCO B) What is the primary difference between recording an
acquisition when the subsidiary is dissolved after acquisition versus when a
separate incorporation is maintained?
Question 11. Question
:
(TCO C) Jewels Co. acquired Diamond Co. in an acquisition
transaction. Yules decided to use the partial equity method to account for the
investment. The current balance in the investment account is $430,000. Describe
in words how this balance was derived.
Question 12. Question
:
(TCO C) Why is push-down accounting a popular reporting
technique internally for a parent corporation?
10
Comments:
Question 13. Question
:
(TCO A) On January 2, 20X1, Heinreich Co. paid $500,000 for
24% of the voting common stock of Jones Corp. At the time of the investment,
Jones had net assets with a book value and fair value of $1,800,000. During
20X1, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any
excess cost over book value is attributable to goodwill with an indefinite
life.
Required:
-1) Prepare a schedule to show the amount of goodwill from
Heinrich’s investment in Jones.
-2) Prepare a schedule to show the balance in Heinreich’s
investment account at December 31, 20X1.
Question 14. Question
:
(TCO A) Nathan Inc. sold $180,000 in inventory to Miller Co.
during 20X0 for $250,000. Miller resold $108,000 of this merchandise in 20X0
with the remainder to be disposed of during 20X1.
Assume Nathan owns 25% of Miller and applies the equity
method.
Required:
-1) Determine Nathan’s share of the unrealized gain at the
end of 20X0.
-2) Prepare the journal entry Nathan should record at the
end of 20X0 to defer the unrealized intra-entity inventory profit.
Question 15. Question
:
(TCO A) Jasper Inc. holds 30% of the outstanding voting
shares of Kinson Co. and appropriately applies the equity method of accounting.
Amortization associated with this investment equals $11,000 per year. For 20X1,
Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During
20X1, Kinson acquired inventory for $62,400, which was then sold to Jasper for
$96,000. At the end of 20X1, Jasper still held some of this inventory at its
transfer price of $50,000.
Required:
-1) Determine the amount of intra-entity profit at the end
of 20X1.
-2) Determine the amount of Equity in Investee Income that
Jasper should have reported for 20X1.
Question 16. Question
:
(TCO B) The financial statements for Jobe Inc. and Lake
Corp., just prior to their combination, for the year ending December 31, 20X2,
follow. Lake’s buildings were undervalued on its financial records by $60,000.
Jobe Inc.
Lake Corp.
Revenues
$1,300,000
$500,000
Expenses
(1,180,000)
(290,000)
Net income
$120,000
$210,000
Retained earnings, January 1, 20X2
700,000
500,000
Net income (above)
120,000
210,000
Dividends paid
(110,000)
(110,000)
Retained earnings, December 31, 20X2
$710,000
$600,000
Cash
$160,000
$120,000
Receivables and inventory
240,000
240,000
Buildings (net)
700,000
350,000
Equipment (net)
700,000
600,000
Total assets
$1,800,000
$1,310,000
Liabilities
$250,000
$195,000
Common stock
750,000
430,000
Additional paid-in capital
90,000
85,000
Retained earnings, December 31, 20X2 (above)
710,000
600,000
Total liabilities and stockholders’ equity
$1,800,000
$1,310,000
On December 31, 20X2, Jobe issued 54,000 new shares of its
$10 par value stock in exchange for all the outstanding shares of Lake. Jobe’s
shares had a fair value on that date of $35 per share. Jobe paid $34,000 to an
investment bank for assisting in the arrangements. Jobe also paid $24,000 in
stock issuance costs to effect the acquisition of Lake. Lake will retain its
incorporation.
-1) Prepare the journal entry to record the issuance of
common stock by Jobe.
-2) Prepare the journal entry to record the payment of
combination costs.
-3) Determine consolidated net income for the year ended
December 31, 20×2.
-4) Determine consolidated additional paid-in capital at
December 31, 20×2.
Question 17. Question
:
(TCO B) The financial statements for Metzger Inc. and Ortiz
Corp., just prior to their combination, for the year ending December 31, 20X2,
follow. Ortiz’s buildings were undervalued on its financial records by $80,000.
Metzger Inc.
Ortiz Corp.
Revenues
$1,800,000
$700,000
Expenses
(1,580,000)
(590,000)
Net income
$220,000
$110,000
Retained earnings, January 1, 2012
800,000
600,000
Net income (above)
220,000
110,000
Dividends paid
(130,000)
(80,000)
Retained earnings, December 31, 2012
$890,000
$630,000
Cash
$240,000
$160,000
Receivables and inventory
270,000
260,000
Buildings (net)
850,000
500,000
Equipment (net)
800,000
490,000
Total assets
$2,160,000
$1,410,000
Liabilities
$310,000
$155,000
Common stock
850,000
530,000
Additional paid-in capital
110,000
95,000
Retained earnings, December 31, 20X2 (above)
890,000
630,000
Total liabilities and stockholders’ equity
$2,160,000
$1,410,000
On December 31, 20X2, Metzger issued 58,000 new shares of
its $10 par value stock in exchange for all the outstanding shares of Ortiz.
Metzger’s shares had a fair value on that date of $40 per share. Metzger paid
$38,000 to an investment bank for assisting in the arrangements. Metzger also
paid $28,000 in stock issuance costs to effect the acquisition of Ortiz. Ortiz
will retain its incorporation.
-1) Prepare the journal entry to record the issuance of
common stock by Metzger.
-2) Prepare the journal entry to record the payment of
combination costs.
-3) Determine consolidated net income for the year ended
December 31, 20X2.
-4) Determine consolidated additional paid-in capital at
December 31, 20X2.
