Ch.1 – Test Bank Docx – The Equity Method of Accounting for

Student name:__________

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.
1) Baker Company owns 15% of the common stock of Charlie Corporation and used the fair-value method to account for this investment. Charlie reported net income of $120,000 for 2021 and paid dividends of $70,000 on October 1, 2021. How much income should Baker recognize on this investment in 2021?

A) $18,000.
B) $10,500.
C) $28,500.
D) $7,500.
E) $50,000.

2) Loeffler Company owns 35% of the common stock of Tetter Co. and uses the equity method to account for the investment. During 2021, Tetter reported income of $260,000 and paid dividends of $90,000. There is no amortization associated with the investment. During 2021, how much income should Loeffler recognize related to this investment?

A) $90,000.
B) $91,000.
C) $122,500.
D) $31,500.
E) $59,500.

3) On January 1, 2021, Lee Company paid $1,870,000 for 80,000 shares of Thomas Co.’s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant influence over Thomas was achieved by this acquisition. Thomas distributed a dividend of $2.00 per share during 2021 and reported net income of $720,000. What was the balance in the Investment in Thomas Co. account found in the financial records of Lee as of December 31, 2021?

A) $2,114,000.
B) $2,194,000.
C) $2,354,000.
D) $2,158,000.
E) $2,034,000.

4) An investor should always use the equity method to account for an investment if:

A) It has the ability to exercise significant influence over the operating policies of the investee.
B) It owns 30% of an investee’s stock.
C) It has a controlling interest (more than 50%) of an investee’s stock.
D) The investment was made primarily to earn a return on excess cash.
E) It does not have the ability to exercise significant influence over the operating policies of the investee.

5) On January 1, 2019, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2021, 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?

A) It must use the equity method for 2021 but should make no changes in its financial statements for 2020 and 2019.
B) It should prepare consolidated financial statements for 2021.
C) It must restate the financial statements for 2020 and 2019 as if the equity method had been used for those two years.
D) It should record a prior period adjustment at the beginning of 2021 but should not restate the financial statements for 2020 and 2019.
E) It must restate the financial statements for 2020 as if the equity method had been used then.

6) During January 2020, Nelson, Inc. acquired 30% of the outstanding common stock of Fuel Co. for $1,600,000. This investment gave Nelson the ability to exercise significant influence over Fuel. Fuel’s assets on that date were recorded at $7,200,000 with liabilities of $3,400,000. Any excess of cost over book value of Nelson’s investment was attributed to unrecorded patents having a remaining useful life of ten years.In 2020, Fuel reported net income of $650,000. For 2021, Fuel reported net income of $800,000. Dividends of $250,000 were paid in each of these two years. What was the reported balance of Nelson’s Investment in Fuel Co. at December 31, 2021?

A) $1,793,000.
B) $1,885,000.
C) $1,943,000.
D) $1,977,000.
E) $1,054,300.

7) On January 1, 2021, 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 2021, 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, 2021?

A) $950,800.
B) $958,000.
C) $836,000.
D) $990,100.
E) $956,400.

8) On January 1, 2021, Halpert Inc. acquired 30% of Schrute Corp. Halpert used the equity method to account for the investment. On January 1, 2022, Halpert sold two-thirds of its investment in Schrute. It no longer had the ability to exercise significant influence over the operations of Schrute. How should Halpert account for this change?

A) Halpert should continue to use the equity method to maintain consistency in its financial statements.
B) Halpert 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 2021.
C) Halpert has the option of using either the equity method or the fair-value method for 2021 and future years.
D) Halpert should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.
E) Halpert should use the fair-value method for 2022 and future years, but should not make a retrospective adjustment to the investment account.

9) Kane Inc. owns 30% of Woodhouse Co. and applies the equity method. During the current year, Kane bought inventory costing $71,500 and then sold it to Woodhouse for $130,000. At year-end, only $30,000 of merchandise was still being held by Woodhouse. What amount of intra-entity gross profit must be deferred by Kane?

A) $9,000.
B) $4,050.
C) $13,500.
D) $17,550.
E) $5,600.

10) On January 4, 2021, Snow Co. purchased 40,000 shares (40%) of the common stock of Walker Corp., paying $900,000. There was no goodwill or other cost allocation associated with the investment. Snow has significant influence over Walker. During 2021, Walker reported income of $240,000 and paid dividends of $75,000. On January 2, 2022, Snow sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

A) $871,500.
B) $845,250.
C) $761,250.
D) $897,250.
E) $950,250.

11) On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison gathered the following information about Huntsville’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?

A) $600,000.
B) $264,000.
C) $0.
D) $336,000.
E) $480,000.

12) On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison gathered the following information about Huntsville’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 2021, what is the total amount of excess amortization for Madison’s 30% investment in Huntsville?

A) $36,000.
B) $20,000.
C) $40,000.
D) $120,000.
E) $60,000.

13) Town Co. appropriately uses the equity method to account for its investment in Country Corp. As of the end of 2021, Country’s common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Town account for the decline in value?

A) Town should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Town should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
D) Town should not record its share of Country’s 2021 earnings until the decline in the fair value of the stock has been recovered.
E) Town should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

14) An upstream sale of inventory is a sale:

A) Between subsidiaries owned by a common parent.
B) With the transfer of goods scheduled by contract to occur on a specified future date.
C) In which the goods are physically transported by boat from a subsidiary to its parent.
D) Made by the investor to the investee.
E) Made by the investee to the investor.

15) Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee’s operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022.What amount of equity income would Borgin have recognized in 2021 from its ownership interest in Burkes?

A) $19,792.
B) $27,640.
C) $22,672.
D) $24,400.
E) $21,748.

16) Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee’s operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022.What was the balance in the Investment in Burkes Co. account at the end of 2021?

A) $401,136.
B) $413,872.
C) $418,840.
D) $412,432.
E) $410,148.

17) On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine’s investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.’s book values approximated fair values and attributed any excess cost to goodwill.On Corzine’s December 31, 2022 balance sheet, what balance was reported for the Investment in Hammon Co. account?

A) $117,000.
B) $143,400.
C) $152,000.
D) $134,400.
E) $141,200.

18) On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine’s investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.’s book values approximated fair values and attributed any excess cost to goodwill.What amount of equity income should Corzine have reported for 2022?

A) $30,000.
B) $16,420.
C) $38,340.
D) $18,000.
E) $32,840.

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?(I) Debit to the Investment account, and a Credit to the Equity in Investee Income account.(II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income account.(III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable.

A) Entries I and II.
B) Entries II and III.
C) Entry I only.
D) Entry II only.
E) Entry III only.

20) All of the following would require use of the equity method for investments except:

A) Material intra-entity transactions.
B) Investor participation in the policy-making process of the investee.
C) Valuation at fair value.
D) Technological dependency.
E) Interchange of managerial personnel.

21) All of the following statements regarding the investment account using the equity method are true except:

A) The investment is recorded at cost.
B) Dividends received are reported as revenue.
C) Net income of investee increases the investment account.
D) Dividends received reduce the investment account.
E) Amortization of fair value over cost reduces the investment account.

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

A) A cumulative effect change in accounting principle must occur.
B) A prospective change in accounting principle must occur.
C) A retrospective change in accounting principle must occur.
D) The investor will not receive future dividends from the investee.
E) Future dividends will continue to be recorded as revenue.

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

A) A cumulative effect change in accounting principle must occur.
B) A prospective change in accounting principle must occur.
C) A retrospective change in accounting principle must occur.
D) The investor will not receive future dividends from the investee.
E) Future dividends will continue to reduce the investment account.

24) When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI)?

A) Under the equity method, the investor only recognizes its share of investee’s income from continuing operations.
B) The OCI would reduce the investment.
C) The OCI would increase the investment.
D) The OCI would not appear on the investor’s income statement but would be a component of comprehensive income.
E) The OCI would be ignored but shown in the investor’s notes to the financial statements.

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

A) The equity in investee income is reduced.
B) A loss is reported in the same manner as a loss in value of other long-term assets.
C) The investor’s stockholders’ equity is reduced.
D) No adjustment is necessary.
E) Record an offset to cash.

26) 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?

A) The investor should change to the fair-value method to account for its investment.
B) The investor should suspend applying the equity method until the investee reports income.
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.
D) The cumulative losses should be reported as a prior period adjustment.
E) The investor should report these as equity method losses in its income statement.

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

A) A recognized gain or loss is reported as the difference between selling price and original cost.
B) A recognized gain or loss is reported as the difference between carrying value and original cost.
C) A recognized gain or loss is reported as the difference between selling price and carrying value.
D) An unrealized gain or loss is reported as the difference between selling price and carrying value.
E) Any gain or loss is reported as part of comprehensive income.

28) When applying the equity method, how is the excess of cost over book value calculated and accounted for?

A) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets.
B) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets.
C) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.
D) The excess is allocated to goodwill.
E) The excess is ignored.

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

A) Cost of goods sold.
B) Property, plant, & equipment.
C) Patents.
D) Goodwill.
E) Bonds payable.

30) Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

A) The investee must defer upstream ending inventory profits.
B) The investee must defer upstream beginning inventory profits.
C) The investor must defer downstream ending inventory profits.
D) The investor must defer downstream beginning inventory profits.
E) The investor must defer upstream beginning inventory profits.

31) Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

A) The investor and investee make reciprocal entries to defer and recognize inventory profits.
B) The same adjustments are made for upstream and downstream sales.
C) Different adjustments are made for upstream and downstream sales.
D) No adjustments are necessary.
E) Adjustments will be made only when profits are known upon sale to outsiders.

32) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley 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 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The amount allocated to goodwill at January 1, 2020, is

A) $25,000.
B) $13,000.
C) $9,000.
D) $16,000.
E) $10,000.

33) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley 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 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The equity in income of Harley for 2020, is

A) $9,000.
B) $13,500.
C) $15,000.
D) $7,500.
E) $50,000.

34) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley 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 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The equity in income of Harley for 2021, is

A) $22,500.
B) $21,000.
C) $12,000.
D) $13,500.
E) $75,000.

35) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley 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 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The balance in the Investment in Harley account at December 31, 2020, is

A) $100,000.
B) $112,000.
C) $106,000.
D) $107,500.
E) $140,000.

36) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley 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 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley.The balance in the Investment in Harley account at December 31, 2021, is

A) $119,500.
B) $125,500.
C) $116,500.
D) $118,000.
E) $100,000.

37) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The income reported by Jones for 2020 with regard to the Anderson investment is

A) $7,500.
B) $22,500.
C) $15,000.
D) $100,000.
E) $150,000.

38) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The income reported by Jones for 2021 with regard to the Anderson investment is

A) $80,000.
B) $30,000.
C) $50,000.
D) $15,000.
E) $75,000.

39) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.Which of the following is true regarding the change from the fair-value method to the equity method?

A) Jones must record a debit to additional paid-in capital for $200,000.
B) Jones must record a debit to additional paid-in capital for $15,000.
C) Jones must retrospectively apply the equity method to interests reported under the fair-value method.
D) Jones must record a debit of $200,000 to the Investment in Anderson Account.
E) Jones must record a credit of $15,000 to the Investment in Anderson Account.

40) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000.The balance in the investment account at December 31, 2021, is

A) $335,000.
B) $355,000.
C) $400,000.
D) $412,500.
E) $480,000.

41) Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method.What journal entry will be recorded at the end of 2021 to defer the recognition of the investor’s share of the intra-entity gross profits?

A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) No entry is necessary.

42) Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method.What journal entry will be recorded in 2022 to recognize its share of the intra-entity gross profit that was deferred in 2021?

A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) No entry is necessary.

43) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.What is the balance in the investment account for the 15% ownership interest, at January 1, 2021?

A) $150,000.
B) $172,500.
C) $180,000.
D) $157,500.
E) $170,000.

44) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.How much income did Mehan report from Cook during 2020?

A) $30,000.
B) $22,500.
C) $7,500.
D) $0.
E) $50,000.

45) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.How much income did Mehan report from Cook during 2021?

A) $90,000.
B) $110,000.
C) $67,500.
D) $87,500.
E) $78,750.

46) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.What was the balance in the investment account at December 31, 2021?

A) $517,500.
B) $537,500.
C) $520,000.
D) $540,000.
E) $211,250.

47) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.What was the balance in the investment account at April 1, 2022 just before the sale of shares?

A) $447,500.
B) $468,750.
C) $535,875.
D) $555,000.
E) $624,375.

48) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.How much of Cook’s net income did Mehan report for the year 2022?

A) $61,750.
B) $81,250.
C) $72,500.
D) $59,250.
E) $75,000.

49) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values.During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years.How much income did Baxter report from Anchor for 2020?

A) $140,000.
B) $220,000.
C) $240,000.
D) $360,000.
E) $600,000.

50) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values.During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years.How much income did Baxter report from Anchor for 2021?

A) $150,000.
B) $220,000.
C) $240,000.
D) $360,000.
E) $600,000.

51) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values.During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years.What was the reported balance of Baxter’s Investment in Anchor Co. at December 31, 2020?

A) $2,420,000.
B) $2,800,000.
C) $2,900,000.
D) $3,040,000.
E) $3,180,000.

52) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values.During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years.What was the reported balance of Baxter’s Investment in Anchor Co. at December 31, 2021?

A) $2,400,000.
B) $2,800,000.
C) $2,900,000.
D) $3,120,000.
E) $3,260,000.

53) On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, 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, 2021?

A) $1,900,000.
B) $1,960,000.
C) $2,000,000.
D) $2,016,000.
E) $2,028,000.

54) On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000.What amount of equity income would Anderson recognize in 2021 from its ownership interest in Barney?

A) $12,000 income.
B) $12,000 loss.
C) $16,000 loss.
D) $28,000 income.
E) $28,000 loss.

55) 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 gross profit on intra-entity sales must be deferred by Luffman?

A) $0.
B) $8,400.
C) $28,000.
D) $52,000.
E) $80,000.

56) On January 3, 2021, 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 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What was the balance in the investment account before the shares were sold?

A) $1,560,000.
B) $1,600,000.
C) $1,700,000.
D) $1,800,000.
E) $1,860,000.

57) On January 3, 2021, 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 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What is the gain/loss on the sale of the 15,000 shares?

A) $0.
B) $10,000 gain.
C) $12,000 loss.
D) $15,000 loss.
E) $20,000 gain.

58) On January 3, 2021, 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 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What is the balance in the investment account after the sale of the 15,000 shares?

A) $750,000.
B) $760,000.
C) $780,000.
D) $790,000.
E) $800,000.

59) On January 3, 2021, 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 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What is the appropriate journal entry to record the sale of the 15,000 shares?

A) A Above.
B) B Above.
C) C Above.
D) D Above.
E) E Above.

60) On January 4, 2021, 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 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000.What was the balance in the investment account before the shares were sold?

A) $520,000.
B) $544,000.
C) $560,000.
D) $604,000.
E) $620,000.

61) On January 4, 2021, 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 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000.What is the gain/loss on the sale of the 10,000 shares?

A) $20,000 gain.
B) $10,000 gain.
C) $1,000 gain.
D) $1,000 loss.
E) $10,000 loss.

62) On January 4, 2021, 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 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000.What is the balance in the investment account after the sale of the 10,000 shares?

A) $390,000.
B) $420,000.
C) $453,000.
D) $454,000.
E) $465,000.

63) On January 4, 2021, 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 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000.What is the appropriate journal entry to record the sale of the 10,000 shares?

A) A Above
B) B Above
C) C Above
D) D Above
E) E Above

64) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year.What is the amount of the excess of purchase price over book value?

A) $(2,000,000).
B) $800,000.
C) $1,000,000.
D) $2,000,000.
E) $3,000,000.

65) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year.How much goodwill is associated with this investment?

A) $(500,000).
B) $0.
C) $100,000.
D) $200,000.
E) $2,000,000.

66) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year.What is the amount of excess amortization expense for Barley’s investment in Wheat for the first year?

A) $0.
B) $84,000.
C) $100,000.
D) $160,000.
E) $400,000.

67) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year.What is the amount of the excess of purchase price over book value?

A) $(1,000,000.)
B) $400,000.
C) $800,000.
D) $1,000,000.
E) $1,100,000.

68) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year.How much goodwill is associated with this investment?

A) $(500,000.)
B) $0.
C) $650,000.
D) $1,000,000.
E) $2,000,000.

69) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year.What is the amount of excess amortization expense for Jackie Corp’s investment in Rob Co. for year 2021?

A) $0.
B) $30,000.
C) $40,000.
D) $55,000.
E) $60,000.

70) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year.What is the balance in Jackie Corp’s Investment in Rob Co. account at December 31, 2021?

A) $2,000,000.
B) $2,005,000.
C) $2,060,000.
D) $2,090,000.
E) $2,200,000.

71) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2020?

A) $1,600.
B) $4,000.
C) $8,000.
D) $15,000.
E) $20,000.

72) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2021?

A) $1,600.
B) $8,000.
C) $15,000.
D) $20,000.
E) $40,000.

73) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is the Equity in Howell Income that should be reported by Acker in 2020?

A) $10,000.
B) $24,000.
C) $36,000.
D) $38,400.
E) $40,000.

74) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is the balance in Acker’s Investment in Howell account at December 31, 2020?

A) $576,000.
B) $598,400.
C) $614,400.
D) $606,000.
E) $616,000.

75) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is the Equity in Howell Income that should be reported by Acker in 2021?

A) $32,000.
B) $41,600.
C) $48,000.
D) $49,600.
E) $50,600.

76) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year.What is the balance in Acker’s Investment in Howell account at December 31, 2021?

A) $624,000.
B) $636,000.
C) $646,000.
D) $656,000.
E) $666,000.

77) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2021?

A) $900.
B) $3,000.
C) $4,500.
D) $6,000.
E) $9,000.

78) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2022?

A) $1,500.
B) $2,400.
C) $3,600.
D) $4,000.
E) $8,000.

79) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the Equity in Maya Income that should be reported by Cayman in 2021?

A) $17,100.
B) $18,000.
C) $25,500.
D) $29,100.
E) $30,900.

80) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the balance in Cayman’s Investment in Maya account at December 31, 2021?

A) $463,500.
B) $467,100.
C) $468,000.
D) $468,900.
E) $480,000.

81) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the Equity in Maya Income that should be reported by Cayman in 2022?

A) $34,200.
B) $34,800.
C) $34,500.
D) $36,000.
E) $37,800.

82) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the balance in Cayman’s Investment in Maya account at December 31, 2022?

A) $488,700.
B) $489,600.
C) $492,000.
D) $494,400.
E) $514,500.

83) Which of the following results in a decrease in the investment account when applying the equity method?

A) Dividends paid by the investor.
B) Net income of the investee.
C) Net income of the investor.
D) Share of gross profit on intra-entity inventory sales for the current year.
E) Purchase of additional common stock by the investor during the current year.

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

A) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
B) Investor’s share of gross profit from intra-entity inventory sales for the current year.
C) Dividends paid by the investor.
D) Dividends paid by the investee.
E) Sale of a portion of the investment during the current year.

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

A) Dividends paid by the investor.
B) Net income of the investee.
C) Investor’s share of gross profit from intra-entity inventory sales for the current year.
D) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
E) Other Comprehensive Income of the investee.

86) Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

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.
C) Sale of a portion of the investment at a gain to the investor.
D) Investor’s share of gross profit from intra-entity inventory sales for the prior year.
E) Sale of a portion of the investment at a loss.

87) Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, 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 2021, Renfroe reported net income of $320,000 and paid dividends of $50,000.How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2021?

A) A debit of $16,500.
B) A debit of $21,500.
C) A debit of $90,000.
D) A debit of $165,000.
E) There is no adjustment.

88) Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, 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 2021, Renfroe reported net income of $320,000 and paid dividends of $50,000.What is the balance in the Investment in Stanley Corporation on December 31, 2021?

A) $415,000.
B) $512,500.
C) $523,000.
D) $539,500.
E) $544,500.

89) On January 3, 2020, 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 2020, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2020 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot.How are dividends received from Inkblot reflected in Trycker’s accounting records for 2020?

A) Reduce investment in Inkblot by $280,000.
B) Increase Investment in Inkblot by $280,000.
C) Reduce Investment in Inkblot by $120,000.
D) Increase Investment in Inkblot by $120,000.
E) Increase Dividend Income by $120,000.

90) On January 3, 2020, 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 2020, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2020 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot.At what amount will Inkblot be reflected in Trycker’s December 31, 2020 balance sheet?

A) $2,400,000.
B) $2,280,000.
C) $2,480,000.
D) $2,800,000.
E) $7,000,000.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
91) Franklin Co. owns 40% of the voting common stock of Academic Services Inc. Franklin uses the equity method to account for its investment. On January 1, 2021, the balance in the investment account was $726,000. During 2021, Academic Services reported net income of $150,000 and paid dividends of $40,000. Any excess of fair value over book value is attributable to goodwill with an indefinite life.What is the balance in the investment account as of December 31, 2021?

92) Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2021, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years, which was undervalued by $80,000 at the time that Tinker bought its shares of Harbor’s common stock.Required:Prepare a schedule to show the equity income Tinker should recognize for 2021 related to this investment.

93) Farah Corp. purchased 35% of the common stock of Dastan Co. by paying $625,000. Of this amount, $45,000 is associated with goodwill.Required: Prepare the journal entry to record Farah’s investment.

94) On January 3, 2021, Heinreich Co. paid $500,000 for 25% 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 2021, 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, 2021.

95) On January 4, 2021, Colton Corp. acquired 30% of the outstanding common stock of Hicks Co. for $1,300,000. This acquisition gave Colton the ability to exercise significant influence over the investee. The book value of the acquired shares was $1,175,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on Hicks’s balance sheet. This copyright has a remaining useful life of ten years. For the year ended December 31, 2021, Hicks reported net income of $368,000 and paid cash dividends of $107,000.Required:Prepare a schedule to show the balance Colton should report as its Investment in Hicks Co. at December 31, 2021.

96) On January 1, 2021, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston’s balance sheet disclosed net assets of $430,000. During 2021, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2021 for $50,000. Cranston used all of this merchandise in its operations during 2021. Any excess cost over fair value is attributable to an unamortized trademark with a 20-year remaining life.Required:Prepare all of Spark’s journal entries for 2021 to apply the equity method to this investment.

97) Wathan Inc. sold $180,000 in inventory to Miller Co. during 2020, for $270,000. Miller resold $108,000 of this merchandise in 2020 with the remainder to be disposed of during 2021.Required:Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2020 to defer gross profit on intra-entity inventory sales.

98) Jager 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 2021, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2021, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2021, Jager still held some of this inventory at its intra-entity selling price of $50,000.Required:Determine the amount of Equity in Investee Income that Jager should have reported for 2021.

99) On January 4, 2020, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2020, the balance in the investment account was $620,000. On January 3, 2021, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2021, Oliver reported net income of $118,000 and paid dividends of $30,000.Required:(A) Prepare the journal entry to record the sale of the 12,000 shares.(B) After the sale has been recorded, what is the balance in the investment account?(C) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares?(D) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull’s accounting for the investment?(E) Prepare Hull’s journal entries related to the investment for the rest of 2021.

100) On January 2, 2021, Jolley Corp. paid $250,000 for 25% of the voting common stock of Wonder Co. On that date, the book value of Wonder was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Wonder owned a trademark valued at $90,000 over cost that was to be amortized over 20 years.During 2021, Wonder sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000. Jolly uses a perpetual inventory system.Wonder reported net income of $200,000 during 2021. This amount included a gain of $35,000. Wonder paid dividends totaling $40,000.Required:Prepare all of Jolley’s journal entries for 2021 in relation to Wonder Co. Assume the equity method is appropriate for use.

101) On January 2, 2020, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis.Ramp generated net income of $300,000 in 2020 and a loss of $120,000 in 2021. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.During 2020, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2020 and the remainder was sold during 2021. In 2021, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2021 and the rest during 2022.Required: For 2020 and then for 2021, calculate the equity income to be reported by Pond for external reporting purposes.

102) Pursley, Inc. acquires 10% of Ritz Corporation on January 2, 2020, for $80,000 when the book value of Ritz was $800,000. Pursley adjusted the investment to its fair value of $162,500 at December 31, 2020. During 2020 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 7, 2021, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 7, 2021?

103) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What amount of gross profit on 2020 intra-entity sales should Steven defer at December 31, 2020?

104) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What amount of gross profit on 2021 intra-entity sales should Steven defer at December 31, 2021?

105) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What amount of equity income would Steven have recognized in 2021 from its ownership interest in Nicholas?

106) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What was the balance in the Investment in Nicholas Corp. account at December 31, 2021?

107) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000.In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021.What amount of gross profit on 2020 intra-entity sales should Nelson defer at December 31, 2020?

108) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000.In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021.What amount of gross profit on 2021 intra-entity sales should Nelson defer at December 31, 2021?

109) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000.In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021.Prepare all of Nelson’s journal entries for 2020 to apply the equity method.

110) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000.In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021.Prepare all of Nelson’s journal entries for 2021 to apply the equity method.

111) How does the equity method of accounting for investments under International Accounting Standard (IAS) 28 differ from those prescribed by the FASB ASC?

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
112) For each of the following numbered situations below, select the best letter answer concerning accounting for investments:(A) Increase the investment account.(B) Decrease the investment account.(C) Increase dividend revenue.(D) No adjustment necessary.(1.) Income reported by 40% owned investee.(2.) Income reported by 10% owned investee.(3.) Loss reported by 40% owned investee.(4.) Loss reported by 10% investee.(5.) Change from fair-value method to equity method. Prior income exceeded dividends.(6.) Change from fair-value method to equity method. Prior income was less than dividends.(7.) Change from equity method to fair-value method. Prior income exceeded dividends.(8.) Change from equity method to fair-value method. Prior income was less than dividends.(9.) Dividends received from 40% investee.(10.) Dividends received from 10% investee.(11.) Purchase of additional shares of investee.(12.) Investor’s share of gross profit from intra-entity inventory sales when using the equity method.

113) Jarmon Company owns twenty-three percent (23%) of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?

114) Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

115) 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?

116) You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

117) How does the use of the equity method affect the investor’s financial statements?

118) What is the primary objective of the equity method of accounting for an investment?

119) What is the justification for the timing of recognition of income under the equity method?

120) What argument could be made against the equity method?

121) How would a change be made from the equity method to the fair value method of accounting for investments?

122) How should an investor account for, and report, an investee’s other comprehensive income (or loss)?

123) When should an investor not use the equity method for an investment of 21% in another corporation?

124) What is the primary objective of the fair value method of accounting for an investment?

125) How would a change be made from the fair value method to the equity method of accounting for investments?

126) When the fair value option is elected for application to an investment in which the investor has significant influence over the investee, how would the investor reflect the use of the fair value option in its balance sheet and in its income statement?