Advance Accounting: the Equity Method of Accounting for Investments
Chapter 01
The Equity Method of Accounting for Investments
Multiple Choice Questions
1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?
A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, how much income should Yaro recognize related to this investment?
A. $24,000.
B. $75,000.
C. $99,000.
D. $51,000.
E. $80,000.
3. On January 1, 2011, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2011 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2011?
A. $2,040,500.
B. $2,212,500.
C. $2,260,500.
D. $2,171,500.
E. $2,071,500.
4. A company 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 another company's stock.
C. it has a controlling interest (more than 50%) of another company'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, 2009, Dermot Company purchased 15% of
The Equity Method of Accounting for Investments
Multiple Choice Questions
1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?
A. $16,500.
B. $9,000.
C. $25,500.
D. $7,500.
E. $50,000.
2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, how much income should Yaro recognize related to this investment?
A. $24,000.
B. $75,000.
C. $99,000.
D. $51,000.
E. $80,000.
3. On January 1, 2011, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2011 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2011?
A. $2,040,500.
B. $2,212,500.
C. $2,260,500.
D. $2,171,500.
E. $2,071,500.
4. A company 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 another company's stock.
C. it has a controlling interest (more than 50%) of another company'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, 2009, Dermot Company purchased 15% of