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52. For each of the following situations, select the best 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. Unrealized inventory profits using the equity method.
53. Jarmon Company owns twenty-three percent 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
54. 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?
55. 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?
56. 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?
57. How does the use of the equity method affect the investor’s financial statements?
58. What is the primary objective of the equity method of accounting for an investment?
59. What is the justification for the timing of recognition of income under the equity method?
60. What argument could be made against the equity method?
61. How would a change be made from the equity method to the fair value method?
62. Why did the APB and the FASB require an investor to accrue a liability for future income taxes when using the equity method?
63. Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2002, the balance in the investment account was $624,000. During 2002, Turf Services reported net income of $120,000 and paid dividends of $30,000.
What is the balance in the investment account as of December 31, 2002?
64. Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2002, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000.
During 2002, how much income should Tinker recognize related to this investment?
65. Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill.
Make the journal entry to record the investment.
66. On January 2, 2002, 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 market value of $1,800,000. During 2002, Jones incurred a net loss of $60,000 and paid dividends of $100,000.
What is the balance in Heinreich’s investment account at December 31, 2002?
67. On January 3, 2002, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar’s balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2002, Bolivar reported net income of $312,000 and paid cash dividends of $96,000.
At December 31, 2002, what should Jenkins report as its Investment in Bolivar Co.?
68. On January 1, 2002, 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 2002, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2002 for $50,000. Cranston used all of this merchandise in its operations during 2002.
Make all of Spark’s journal entries for 2002 to apply the equity method to this investment.
69. Wathan Inc. sold $180,000 in inventory to Miller Co. during 2002, for $270,000. Miller resold $126,000 of this merchandise in 2000 with the remainder to be disposed of during 2003.
Assuming Wathan owns 25% of Miller and applies the equity method, what journal entry should have been recorded at the end of 2003 to defer the unrealized gain.
70. 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 2002, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2002, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2002, Jager continued to hold merchandise with a transfer price of $50,000.
What amount of Equity in Investee Income should Jager have reported for 2002?
71. On January 2, 2002, 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 2003, the balance in the investment account was $620,000. On January 2, 2004, Hull sold 10,000 shares of Oliver stock for $12 per share. For 2004, Oliver reported income of $118,000 and paid dividends of $30,000.
A. Make the journal entry to record the sale of the 8,000 shares.
B. After the sale has been recorded, what is the balance in the investment account?
C. 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?
D. Make Hull’s journal entries related to the investment for the rest of 2004.
72. On January 1, 2004, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000, and a building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. Jolly uses a perpetual inventory system.
During 2002, Tige sold to Jolley inventory costing $60,000, at a markup 50% on cost. At the end of the year, Jolley still owned goods with a transfer price of $33,000.
Tige reported net income of $200,000 during 2002. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000.
Make Jolley’s journal entries for 2002, assuming the equity method is appropriate, rounding amounts to the nearest dollar.
73. Dotes Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.
What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.
74. On January 1, 2002, 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 2002 and a loss of $120,000 in 2003. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders.
During 2002, 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 2002 and the remainder was sold during 2003. In 2003, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2003 and the rest during 2004.
For 2002 and then for 2003, calculate the equity income to be reported by Pond for external reporting purposes.
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