Multiple-Choice Questions on Use of Cost and Equity Methods [AICPA Adapted]Select the corr...

Multiple-Choice Questions on Use of Cost and Equity Methods [AICPA Adapted]

Select the correct answer for each of the following questions.

1. Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting?

2. In 20X0, Neil Company held the following investments in common stock:

• 25,000 shares of B&K Inc.’s 100,000 outstanding shares. Neil’s level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K.

• 6,000 shares of Amal Corporation’s 309,000 outstanding shares.

During 20X0, Neil received the following distributions from its common stock investments:

What amount of dividend revenue should Neil report for 20X0?

a. $1,500.

b. $4,200.

c. $31,500.

d. $34,200.

3. What is the most appropriate basis for recording the acquisition of 100 percent of the stock in another company if the acquisition was a noncash transaction?

a. At the book value of the consideration given.

b. At the par value of the stock acquired.

c. At the book value of the stock acquired.

d. At the fair value of the consideration given.

4. An investor uses the equity method to account for an investment in common stock. Assume that

(1) the investor owns more than 50 percent of the outstanding common stock of the investee,

(2) the investee company reports net income and declares dividends during the year, and (3) the investee’s net income is greater than the dividends it declares. How would the investor’s investment in the common stock of the investee company under the equity method differ at year end from what it would have been if the investor had accounted for the investment under the cost method?

a. The balance under the equity method is higher than it would have been under the cost method.

b. The balance under the equity method is lower than it would have been under the cost method.

c. The balance under the equity method is higher than it would have been under the cost method, but only if the investee company actually paid the dividends before year end.

d. The balance under the equity method is lower than it would have been under the cost method, but only if the investee company actually paid the dividends before year end.

5. A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?

a. Result in an increased current ratio.

b. Result in increased earnings per share.

c. Increase several turnover ratios.

d. Decrease book value per share.

6. An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following methods?

7. An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year was in excess of the investor’s share of investee’s earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be

a. Zero.

b. The total amount of dividends received this year.

c. The portion of the dividends received this year that was in excess of the investor’s share of investee’s earnings subsequent to the date of investment.

d. The portion of the dividends received this year that was not in excess of the investor’s share of investee’s earnings subsequent to the date of investment.