Multiple-Choice Questions on Applying Equity Method [AICPA Adapted] Select the co...

Multiple-Choice Questions on Applying Equity Method [AICPA Adapted]

Select the correct answer for each of the following questions.

1. On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for $250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod?

a. $160,000.

b. $223,000.

c. $340,000.

d. $277,000.

2. On January 1, 20X8, Mega Corporation acquired 10 percent of the outstanding voting stock of Penny Inc. On January 2, 20X9, Mega gained the ability to exercise significant influence over Penny’s financial and operating decisions by acquiring an additional 20 percent of Penny’s outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny’s net assets, which equaled their carrying amounts. For the years ended December 31, 20X8 and 20X9, Penny reported the following:

In 20X9, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to 20X8 investment income?

3. Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5, Alimand had net earnings of $100,000 and paid dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting.

What effect would this have on the investment account, net earnings, and retained earnings, respectively?

a. Understate, overstate, overstate.

b. Overstate, understate, understate.

c. Overstate, overstate, overstate.

d. Understate, understate, understate.

4. A corporation using the equity method of accounting for its investment in a 40 percent–owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries:

What effect will these entries have on the investor’s statement of financial position?

a. Financial position will be fairly stated.

b. Investment in the investee will be overstated, retained earnings understated.

c. Investment in the investee will be understated, retained earnings understated.

d. Investment in the investee will be overstated, retained earnings overstated.