Question 1. Which of the following results in an increase in the investment account using the equity method?
Unrealized gain on intercompany inventory transfers for the current year
Sale of a portion of the investment during the current year
Dividends paid by the investee
Dividends paid by the investor
Unrealized gain on intercompany inventory transfers for the prior year

Question 2. Rome Inc. owns 30% of Amber Co. and applies the equity method. During the current year, Rome bought inventory costing $66,000 and then sold it to Amber for $120,000. At year-end, only $24,000 of merchandise was still being held by Amber.
What amount of intercompany inventory profit must be deferred by Rome
$6,610
$16,200
$10,800
$3,240
$6,480

Question 3. Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation to fund such additional losses, which of the following statements is true?
The investor should change to the fair-value method to account for its investment.
The investor should report these losses as extraordinary items.
The investor should suspend applying the equity method until the investee reports income.
The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.
The cumulative losses should be reported as a prior period adjustment.

Question 4. Using the purchase method, goodwill is generally defined as the
cost of the investment less the subsidiary's fair value at acquisition date.
cost of the investment less the subsidiary's fair value at the beginning of the year.
cost of the investment less the subsidiary's book value at the acquisition date.
cost of the investment less the subsidiary's book value at the beginning of the year.
It is no longer allowed under federal law.

Question 5. Which of the following statements is true regarding a statutory consolidation?
The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
The acquiring company acquires the stock of the acquired company as an investment.
The original companies dissolve while remaining as separate divisions of a newly created company.
Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
A statutory consolidation is no longer a legal option.

Question 6. Push-down accounting is associated with the
impact of the purchase on the subsidiary's financial statements.
impact of the purchase on the separate financial statements of the parent.
correct consolidation of the financial statements.
recognition of goodwill by the parent.
recognition of dividends received from the subsidiary.

Question 7. Under the partial equity method of accounting for an investment,
amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.
dividends received are recorded as revenue.
the investment account remains at initial value.
amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account.
dividends received increase the investment account.

Question 8. According to SFAS 142, which of the following statements is true?
Goodwill recognized in consolidation can never be written off.
Goodwill recognized in consolidation must be expensed in the period of acquisition.
Goodwill recognized in consolidation will not be amortized but will be subjected to an annual test for impairment.
Goodwill recognized in consolidation must be amortized over 20 years.
Goodwill recognized in consolidation must be amortized over 40 years.

Question 9. Jason Company owns 24% of the voting common stock of Kalco Corp. Jason does not have the ability to exercise significant influence over the operations of Kalco. What method should Jason use to account for its investment in Kalco?

Question 10. Describe how, contingent considerations, and a bargain purchase are reflected in recording an acquisition investment.

Question 11. Jewels Co. acquired Diamond Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $430,000. Describe in words how this balance was derived.

The beginning balance in the investment account is the acquisition value implied by the fair value of the entity acquired (Not including consideration paid for costs to effect the combination).

After the acquisition, the balance in the investment account is increased by the parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary

Question 12. Sand Co. acquired Fence Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?

Question 13. On January 2, 20X1, Heinreich Co. paid $500,000 for 24% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 20X1, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life.

Required:

1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones.

2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 20X1.

Question 14. Nathan Inc. sold $180,000 in inventory to Miller Co. during 20X0 for $250,000. Miller resold $108,000 of this merchandise in 20X0 with the remainder to be disposed of during 20X1.

Assume Nathan owns 25% of Miller and applies the equity method.

Required:

1) Determine Nathan's share of the unrealized gain at the end of 20X0.

2) Prepare the journal entry Nathan should record at the end of 20X0 to defer the unrealized intra-entity inventory profit.

Question 15. Jasper 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 20X1, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 20X1, Kinson acquired inventory for $62,400, which was then sold to Jasper for $96,000. At the end of 20X1, Jasper still held some of this inventory at its transfer price of $50,000.

Required:

1) Determine the amount of intra-entity profit at the end of 20X1.
2) Determine the amount of Equity in Investee Income that Jasper should have reported for 20X1.

Question 16. The financial statements for Jobe Inc. and Lake Corp., just prior to their combination, for the year ending December 31, 20X2, follow. Lake's buildings were undervalued on its financial records by $60,000.

On December 31, 20X2, Jobe issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lake. Jobe's shares had a fair value on that date of $35 per share. Jobe paid $34,000 to an investment bank for assisting in the arrangements. Jobe also paid $24,000 in stock issuance costs to effect the acquisition of Lake. Lake will retain its incorporation.

1) Prepare the journal entry to record the issuance of common stock by Jobe.

2) Prepare the journal entry to record the payment of combination costs.

3) Determine consolidated net income for the year ended December 31, 20x2.

4) Determine consolidated additional paid-in capital at December 31, 20x2.

Question 17. The financial statements for Metzger Inc. and Ortiz Corp., just prior to their combination, for the year ending December 31, 20X2, follow. Ortiz's buildings were undervalued on its financial records by $80,000.

On December 31, 20X2, Metzger issued 58,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Ortiz. Metzger's shares had a fair value on that date of $40 per share. Metzger paid $38,000 to an investment bank for assisting in the arrangements. Metzger also paid $28,000 in stock issuance costs to effect the acquisition of Ortiz. Ortiz will retain its incorporation.

1) Prepare the journal entry to record the issuance of common stock by Metzger.

2) Prepare the journal entry to record the payment of combination costs.

3) Determine consolidated net income for the year ended December 31, 20X2.

4) Determine consolidated additional paid-in capital at December 31, 20X2.