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On April 1, 2009, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick’s identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2009, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2009, and paid a total of $10,000 of dividends to shareholders. BigBen’s investment in LittleTick will affect BigBen’s 2009 net income by: A. a loss of $10,500.B. earnings of $4,500.C. earnings of $1,125.D. earnings of $3,450.Gerken Company concluded at the beginning of 2009 that the company’s ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared, A. net income and retained earnings will be higher by $25,000.B. net income will be unchanged, and retained earnings will be higher by $25,000.C. net income and retained earnings will be higher by $75,000.D. the accounts will be unchanged, because no adjustment is necessary.. If the fair value of an available-for-sale investment declines for a reason that is viewed as “other than temporary”, A. the investment is not written down to fair value.B. the investment is written down to fair value, and the impairment loss is recognized in net income.C. the investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.D. the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.
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