Question

Multiple Choice Questions 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A. $16,500 Noinfluence B.$9,000 C. $25,500 (If company makes a loss or Profit doesn't D. $7,500 E. $50,000 60,000 X 15.. 2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2008, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2008, how much income should Yaro recognize related to this investment? A. $24,000 B. $75,000 C. $99,000 D. $51,000 E. $80,000 Only Inflerence on 60,000 r one 45% on January 1, 2008, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2008 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2008? Co A. $2,040,500 B. $2,212,500 C. $2,260,500 D. $2,171,500 E. $2,071,500 4. A company should always use the equity method to account for an investment if A. It has the ability to exercise significant influence over the operating policies of the investee B. It owns 30% of another company's stock C. It has a controlling interest (more than 50%) of another company's stock D. The investment was made primarily to eam a return on excess cash E. It does not have the ability to exercise significant influence over the operating policies of the investee Cavity 5. During January 2007, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells'investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2007, Wilton reported net income of $600,000. For 2008, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2008?

Answer 1

SOLUTION 1

(B) $9000

15% OF $60000 = $9000

SOLUTION 2

(C) DIVIDEND INCOME = 30% OF $80000 = $24000

INCOME ATTRIBUTABLE TO PARENT = 30% OF $250000 = $75000

TOTAL INCOME = $99000

SOLUTION 3

(E) $2071500

DIVIDEND INCOME FROM LENNON = 60000 SHARES x $2.50 = $150000

INCOME ATTRIBUTABLE TO PACER = 45% OF 670000 = $301500

THE INVESTMENT ACCOUNT IS REDUCED BY THE DIVIDEND INCOME AND INCREASED BY THE INCOME ATTRIBUTABLE TO PARENT HENCE,

BALANCE IN INVESTMENT ACCOUNT = OPENING BALANCE - DIVIDEND INCOME + INCOME ATTRIBUTABLE TO PARENT

= $1920000 - $150000 + $301500

= $2071500

SOLUTION 4

(A) IT HAS THE ABILITY TO EXERCISE SIGNIFICANT INFLUENCE OVER THE OPEARTING POLICIES OF TGE INVESTEE.

SOLUTION 5

AMOUNT ATTRIBUTABLE TO PATENTS

= PURACHASE CONSIDERATION - VALUE OF INVESTMENT IN NET ASSETS

= $1400000 - [30% OF ($6400000-$3000000)]

= $380000

INVESTMENT IN ASSOCIATES = $1020000

THE INVESTMENT ACCOUNT IS REDUCED BY THE DIVIDEND INCOME AND INCREASED BY THE INCOME ATTRIBUTABLE TO PARENT HENCE,

BALANCE IN INVESTMENT ACCOUNT = OPENING BALANCE - DIVIDEND INCOME + INCOME ATTRIBUTABLE TO PARENT

BALANCE = $1020000 - ($200000 + $200000) + [30% OF %600000 + 30% OF $750000]

= $1025000