Question

On January 1, 20X7, Poke Corporation acquired 25 percent of the outstanding shares of Shove Corporation for $100,000 cash. Shove Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Poke was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

If Poke could not exercise significant influence over the investee, by what amount will Poke's 20X7 income increase due to its investment in Shove?

a) $11,250

b)

$7,500

c)

$17,500

d)

$12,500 A change from carrying securities at fair value to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires: a) that the investor begins accruing income earned by the investee under the equity method at the date of acquisition of the new shares b) retroactive restatement as if the investor always had used the equity method c) that the cumulative amount of the change be shown as a line item on the income statement, net of tax d) only a footnote disclosure

Answer 1

1)

If Pokes does not have the ability to significantly influence the operating and financial policies of Shove, the equity method should not be applied regardless of the level of ownership.
Poke's Income = 30,000x25%	$                                                        7,500.00

2)

b)	retroactive restatement as if the investor always had used the equity method