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Solutions for Ch 2 LS - Advanced Financial Accounting 1st edition by Nathalie Johnstone
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Solutions for Ch 2 LS - Advanced Financial Accounting 1st edition by Nathalie Johnstone
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Solutions for Ch 2 LS - AdvancedFinancial Accounting 1st edition by
Nathalie Johnstone
Which of the following are reasons for eliminating the investment account with the basic
consolidation entry? - ANSThe amount represented in the investment account is recorded
separately as net assets of the subsidiary;
From a single entity viewpoint, a company cannot hold an investment in itself;
In case of one-line consolidation, subsidiary's stockholders' equity accounts are eliminated
because: - ANSSubsidiary's stock is held entirely;
Claims by outsiders are nil;
The sale of all or part of an investment in common stock carried under the equity method is
treated the same as the sale of any ______ asset. - ANSnoncurrent
Power Devices, Inc. acquired 20% of Yates Zone Corp.'s common stock for $500,000 on
January 1, 20X1. During the acquisition year, Yates reported net income of $200,000, and
declared dividends of $90,000. The carrying amount of the investment is ______ under the
equity method. - ANSCarrying Amount = Original Cost + Share of Net Income - Share of
Dividends = $500,000 + ($200,000 * 20%) - ($90,000 * 20%) = $500,000 + $40,000 - $18,000 =
$522,000
Under the ______ method for accounting for investments, the investor recognizes income from
the investment when the investee declares dividends. - ANScost
Alpha Corp. purchased 100% of the common stock of Omega Inc. on January 1, 20X1, for
$250,000 when Omega had a balance of $150,000 in Common Stock and $100,000 in Retained
Earnings. For 20X1, Alpha reported net income of $120,000 and Omega reported net income of
$50,000. Also during 20X1, Alpha declared dividends of $30,000 and Omega declared
dividends of $15,000. If Alpha uses the cost method to account for the investment in Omega,
which of the following represents the dividend consolidation entry at the end of 20X1? -
ANSDebit Dividend Income for $15,000;
Credit Dividends Declared for $15,000
Which of the following is the investment consolidation entry recorded in the second year of
ownership under the cost method? - ANSDebit Common Stock and Debit Retained Earnings;
Credit Investment in Investee Company
, Which of the following is a method that a parent company may choose to account for an
investment that is to be consolidated? - ANSThe Cost Method
Which of the following are true of a dividend declared by an investee under the equity method of
accounting for an investment? - ANSIt will decrease the balance of the investment account;
It will be recorded as an asset on the books of an investor;
Under the equity method of accounting for an investment, an investor records its investment at
the ______ cost. - ANSoriginal
Under the equity method, the investor's income statement will include what amount of the
investee's income or loss for the period? - ANSThe investor's proportionate share of the
investee's income or loss
Which of the following is the journal entry made by an investor company to record its share of
the income from an investee company? - ANSDebit Investment in Investee Company Stock;
Credit Income from Investee Company
The investee's ______ are viewed as distributions of previously recognized income that already
has been capitalized in the carrying amount of the investment. - ANSdividends
Bertie corp. invested in 25% shares of Keegan corp. for $120,000 on first day of current year.
Keegan corp. reports net income of $40,000, and it declared dividend of $12,000 during the
year. Calculate the ending balance of Investment in Keegan corp. - ANS$127,000
An investment in common stock that was previously accounted for with a method other than the
equity method may become qualified for use of the equity method by - ANSan increase in the
level of ownership.
Sergeant Corp. acquired 30% of the common stock of Corporal Inc. on July 1, 20X1 for
$500,000. Corporal earned net income of $100,000 evenly throughout the year. Calculate
Sergeant's share of Corporal's net income for 20X1 under the equity method. - ANSSergeant's
portion of Corporal's Net Income * Sergeant's share in the common stock * 6 months / 12
months = $100,000 * 30% * (1/2) = $15,000
Which of the following accurately describes the effect of a stock dividend, split, or reverse stock
split by an investee company on the parent's investment in investee account under the equity
method? - ANSThey are not recorded in the books of the investor company.
In which of the following situations will the equity method most likely be used for reporting
investments in common stock? - ANSThe investor holds 20% or more of the investee's voting
stock;
The investor has the ability to exercise significant influence over the investee;
The investment is a corporate joint venture.
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