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| 1 | |
The equity method is used for external reporting when the investor exercises little influence over the operating and financial policies of the investee. |
| | A) | True |
| | B) | False |
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| 2 | |
The equity method is intended to reflect the investor's changing equity or interest in the investee. |
| | A) | True |
| | B) | False |
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| 3 | |
If the investee disposes of any asset to which a differential relates, the investor need not remove that portion of the differential from the investment account on its books. |
| | A) | True |
| | B) | False |
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| 4 | |
When an investor makes a subsequent acquisition of an investee's stock that gives the investor the ability to significantly influence the investee, a change from the cost method to the equity method is required. |
| | A) | True |
| | B) | False |
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| 5 | |
Interperiod tax allocation is required of the investor under the cost method but not under the equity method. |
| | A) | True |
| | B) | False |
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| 6 | |
Which method of accounting for one company's investment in another is used most often when the investment is between 20 and 50 percent of the investee's common stock? |
| | A) | Cost method |
| | B) | Equity method |
| | C) | Fair market method |
| | D) | Consolidation |
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| 7 | |
Assume that P Company acquires 10 percent of S Company's common stock for $75,000 at the beginning of the year. During the year, S has net income of $25,000 and pays dividends of $10,000.
The entry recorded by P for the acquisition of S' common stock includes which of the following: |
| | A) | A credit to Cash for $75,000 |
| | B) | A debit to Cash for $75,000 |
| | C) | A credit to Investment in S Company Common Stock for $75,000 |
| | D) | A debit to Cash for $10,000 |
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| 8 | |
Assume that P Company acquires 10 percent of S Company's common stock for $75,000 at the beginning of the year. During the year, S has net income of $25,000 and pays dividends of $10,000.
The entry recorded by P for the receipt of dividend income
from S Company includes which of the following: |
| | A) | A debit to Cash for $10,000 |
| | B) | A debit to Dividend Income for $1,000 |
| | C) | A debit to Cash for $1,000 |
| | D) | A credit to Cash for $1,000 |
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| 9 | |
When a dividend declared by a company is a liquidating dividend representing a return of capital, how does an investor treat its share of the dividend on its books? |
| | A) | The investment account balance is reduced by that amount. |
| | B) | The investment account balance is increased by that amount. |
| | C) | The dividend income account balance is reduced by that amount. |
| | D) | The dividend income account balance is increased by that amount. |
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| 10 | |
If the investee reports net income, what effect does this have on the investor's accounts under the equity method? |
| | A) | Record loss from investee, increase investment account |
| | B) | Record income from investee, increase investment account |
| | C) | Record income from investee, decrease investment account |
| | D) | Record asset, increase investment account |
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| 11 | |
When the investee declares dividends, what effect does this have on the investor's accounts under the equity method? |
| | A) | Record income from investee, increase investment account |
| | B) | Record loss from investee, decrease investment account |
| | C) | Record liability, decrease investment account |
| | D) | Record asset, decrease investment account |
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| 12 | |
B Company acquires 35 percent of Y Company's common stock for $200,000 at the beginning of the year, thereby acquiring significant influence over Y Company. Y reports $100,000 in net income for the year, and pays dividends amounting to $30,000. B accounts for its investment in Y using the equity method.
The entry recorded by B Company for its share of dividends paid by Y would include: |
| | A) | A credit to Investment in Y Company Stock for $10,500 |
| | B) | A debit to Cash for $35,000 |
| | C) | A credit to Investment in Y Company Stock for $35,000 |
| | D) | A credit to Cash for $10,500 |
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| 13 | |
B Company acquires 35 percent of Y Company's common stock for $200,000 at the beginning of the year, thereby acquiring significant influence over Y Company. Y reports $100,000 in net income for the year, and pays dividends amounting to $30,000. B accounts for its investment in Y using the equity method.
The carrying amount of B's investment in Y Company at the end of the year is: |
| | A) | $175,500 |
| | B) | $235,000 |
| | C) | $224,500 |
| | D) | $200,000 |
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| 14 | |
Company A uses the cost method of accounting for its investment in common stock of Company B. Subsequent acquisition of additional shares of Company B necessitates a switch to the equity method. This requires: |
| | A) | only a footnote disclosure. |
| | B) | that the cumulative amount of the change be shown as a line item on the income statement, net of tax. |
| | C) | that the change be accounted for as an unrealized gain included in other comprehensive income. |
| | D) | retroactive restatement as if the investor always had used the equity method. |
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| 15 | |
Under the cost method of accounting for a stock investment, the differential: |
| | A) | is written off. |
| | B) | is amortized. |
| | C) | is written down if related to limited-life assets. |
| | D) | is not amortized or written off. |
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