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Multiple Choice Quiz
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1

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend.

Barger elects to use the equity method of accounting. What is the balance in the Investment in Booker account in the records of Barger Company at December 31, of the current year?
A)$1,200,000
B)$1,247,500
C)$1,772,500
D)$1,900,000
E)$1,152,500
2

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend.

Using the equity method of accounting, what is the journal entry to record the receipt of dividends during the current year?

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A)A
B)B
C)C
D)D
E)E
3

On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly influence operating and financing decisions. At the time of the acquisition, Booker had a total book value of $4,800,000. During the current year, Booker reported net income of $700,000 and paid a $.85 per share dividend.

Using the equity method of accounting, what is the journal entry to accrue the current year earnings?

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A)A
B)B
C)C
D)D
E)E
4
Tara Company owns 30% of Hawkins, Inc. and applies the equity method. During the current year, Hawkins buys inventory costing $400,000 and sells it to Tara for $500,000. At the end of the year, only 25% of this merchandise is still being held by Tara. What amount of unrealized gain must be deferred by Hawkins in reporting on the equity method?
A)$937.50
B)$30,000.00
C)$25,000.00
D)$7,500.00
E)$100,000.00
5
What is a downstream sale?
A)A sale from an investor to its investee
B)A sale from a producer to its outside supplier
C)A sale from an investee to its investor
D)A sale from one manufacturer to another
E)A sale from a small company to a large one
6
What is an upstream sale?
A)A sale from an investor to its investee
B)A sale from a producer to its outside supplier
C)A sale from an investee to its investor
D)A sale from one manufacturer to another
E)A sale from a small company to a large one
7
TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This acquisition gives TunaCo the ability to apply significant influence to Stanley's operating and financing policies and TunaCo elects to use the equity method of accounting. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a book value of $100,000 and a fair market value of $400,000. During the current year, Stanley reports net income of $140,000 while paying dividends of $70,000. What is the Investment in Stanley account balance in TunaCo's accounting records at the end of the current year?
A)$500,000
B)$517,500
C)$530,000
D)$460,000
E)$512,500
8
Smith Company holds 20% of the outstanding shares of Leef Greeting Cards and applies the equity method of accounting. For the current year, Leef reports earnings of $100,000 and pays cash dividends of $22,000. During the current year, Leef acquired inventory for $80,000, which was then sold to Smith for $100,000. At the end of the current year, Smith continues to hold merchandise with a transfer price of $40,000. Assuming no amortization expense related to this investment, what Equity in Investee Income should Smith report in the current year?
A)$18,400
B)$-0-
C)$12,000
D)$14,000
E)$7,600
9
Norbin Company uses the equity method to account for its investment in Stice Company's common stock. After the acquisition date, the investment account reported on Norbin's balance sheet would:
A)be increased by Norbin's share of Stice's earnings and decreased by Norbin's share of Stice's losses.
B)be increased by Norbin's share of Stice's earnings but not be affected by Norbin's share of Stice's losses.
C)not be affected by Norbin's share of Stice's earnings and losses.
D)not be affected by Norbin's share of Stice's earnings but be decreased by Norbin's share of Stice's losses.
E)be decreased by Norbin's share of Stice's earnings and increased by Norbin's share of Stice's losses.
10
Emmy Company buys 30% of Soupy, Inc's common stock on January 1 of the current year for $440,000. The equity method of accounting is used. Soupy's net assets on that date totaled $1,100,000. Soupy immediately begins selling inventory to Emmy as follows:


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Inventory held at the end of one year is sold at the beginning of the next. Soupy reports net income of $110,000 in the first year and $150,000 in the second year while paying $50,000 in dividends each year. What should Emmy Company report as Equity in Soupy's Income at the end of the second year?
A)$45,000
B)$33,000
C)$37,200
D)$49,200
E)$52,800
11
A permanent decline in the investee's market value is recorded as a(n):
A)Reduction of the Equity in Subsidiary Income account.
B)Extraordinary Loss on the Investor's Income Statement.
C)Reduction in the Investment Account.
D)Increase to the Investment Account.
E)No entry is made for market value declines.
12
B. Atman, Inc. acquires 19% of S. Uperman, Inc. and owns the highest percentage of stock of any other stockholder. The C.E.O. of B. Atman is on the Board of Directors of S. Uperman. Material intercompany transactions exist between these two companies. B. Atman intends to hold this investment for at least two years. B. Atman will report this investment:
A)As trading securities.
B)As available-for-sale securities.
C)As a consolidated entity.
D)Using the equity method.
E)As a special purpose entity.
13
A company acquires a 25% investment in another corporation. The reporting of this investment depends primarily on:
A)The percentage of ownership.
B)The length of time that the investor intends to own the investment.
C)Technology dependency.
D)Material intercompany transactions.
E)The degree of influence that the investor has over the investee.
14
The FASB provides a fair-value reporting option for investments. Which of the following investments generally requires the use of the equity method of accounting?
A)Available for sale securities
B)Held-to-maturity securities
C)20-50% ownership in investments
D)More than 50% ownership in investment
E)Variable interests
15
Which of the following statements are true?
A)Firms that employ the equity method to account for an investment may switch to fair value and have the option to switch back to the equity method.
B)The fair value option in reporting investments will probably increase the volatility in earnings that results from using different measurement attributes in reporting related financial assets and financial liabilities.
C)Changes in fair value are reported within comprehensive income.
D)Fair values for financial assets and liabilities provide more relevant and interpretable information than cost or cost-based measures.





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