Chapter 1 Advanced Accounting

Question 1

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value in applying the equity method?

a. the equity method will likely expense excess costs allocated to different asset categories over different useful lives.

b. the excess cost of book value immediately expensed on the date the investment is purchased

c. the equity method reports the underlying assets and liabilities of the investee in the investor’s balance sheet.

Answer 1

a. the equity method will likely expense excess costs allocated to different asset categories over different useful lives.

Question 2

T/F When firms are affiliated through a common set of owners, measurements that recognize the relationships among the firms help provide subjectivity that can be used to create the footnotes for financial reporting.

Answer 2

False

Question 3

In applying the equity method,

a. no changes are made to the investment account until it is sold.

b. the investor recognizes its proportionate share of the investee’s income.

c. the existence of significant influence requires the investor to recognized investee dividends as revenue.

d. the investor increases the investment account for investee dividends declared.

Answer 3

b. the investor recognizes its proportionate share of the investee’s income.

Question 4

An investor sells inventory to its investee, at a profit. At year end, the investee has not disposed of this inventory. How should the investor account for the gross profit form this intra-entity inventory sale?

a. defer the entire intra-entity gross profit.

b. recognize the investors proportionate ownership share of the intra-entity gross profit.

c. defer the investor’s proportionate ownership share of the intra-entity gross profit.

d. recognize the entire intra-entity gross profit.

Answer 4

c. defer the investor’s proportionate ownership share of the intra-entity gross profit.

Question 5

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%?

a. in applying the equity method, the liabilities of the investee company are not combined with those on the investor’s balance sheet.

b. by avoiding consolidation, a firm employing the equity method will report larger values for total assets and liabilities.

c. using the equity method, investee’s sales can be included on the investor’s income statement.

Answer 5

a. in applying the equity method, the liabilities of the investee company are not combined with those on the investor’s balance sheet.

Question 6

An investor that accounts for an equity investment under the cost method record income from the investment based on its share of ______ declared from the investee.

Answer 6

dividends

Question 7

An excess price paid by an investor company over the percentage book value of the investee attributable to a depreciable asset will likely affect the equity method ______ recognized by the investor company over time.

Answer 7

income

Question 8

When one firm can significantly influence the decisions of another firm through its ownership of voting shares, transactions between the two firms

a. do not provide an objective basis for financial reporting.

b. are accounted for the same as transactions with outside parties.

c. provide an objective basis for accounting valuations.

Answer 8

a. do not provide an objective basis for financial reporting.

Question 9

The investor decreases its _____ account for its share of investee cash dividends.

Answer 9

investment

Question 10

T/F Regardless of its ownership level, if entity A has the ability to exercise control over entity B, financial statement consolidation (and not the equity method) is appropriate.

Answer 10

True

Question 11

Under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to the investor’s ____ share of the investee.

Answer 11

percentage

Question 12

Under the equity method, the investor records a credit to the investment account if a net _____ is reported on the investee’s income statement.

Answer 12

loss

Question 13

According to International Accounting Standards, when an investor has significant influence over an investee the investor must account for its investment using the ____ method.

Answer 13

equity

Question 14

When an equity method investee sells investee sells inventory to its investor at a gross profit and a portion of the inventory remains unsold to outside parties at year-end, the investor’s Equity in the Investee Income account.

a. is decreased for the investor’s ownership percentage of the gross profit on intra-entity inventories that have not been resold to outside entities.

b. remains unaffected

c. is increased for the investor’s ownership percentage of the gross profit on intra-entity inventories that have not been resold to outside entities.

d. is decreased for 100% of the gross profit from the original intra-entity sale.

Answer 14

a. is decreased for the investor’s ownership percentage of the gross profit on intra-entity inventories that have not been resold to outside entities.

Question 15

Under the equity method, as the owner’s equity of an investee company increases through the earnings process, the investment account of the investor company

a. is unaffected

b. decreases

c. increases

Answer 15

c. increases

Question 16

When an investor sells inventory to its equity-method investee, how is the reported sales balance on the investor’s income statement affected?

a. the sales account remains unaffected

b. the sales account is reduced by the investor’s proportional ownership of intra-entity sales.

c. the sales account balance is reduced to the extent that the goods have not been resold to outside entities.

d. the sales account is reduced by the amount of intra-entity sales.

Answer 16

a. the sales account remains unaffected

Question 17

Goodwill is recorded when:

a. the amount paid for a company is greater than its purchased net assets.

b. a company has sold in intangible asset at a loss.

c. a company has sold an intangible asset at a gain.

d. the company can prove that it has created an asset with value.

Answer 17

a. the amount paid for a company is greater than its purchased net assets.

Question 18

Under the equity method, the excess of the investment cost over the proportionately-owned acquisition-date fair value of the investee’s net identifiable assets is allocated to the asset _____.

Answer 18

goodwill

Question 19

When a company invests in the actively-traded equity shares of another company, but cannot influence the decisions of the investee, the investor company accounts for its investment using the _____ value method.

Answer 19

fair

Question 20

T/F When an investor sells inventory to an outside party that had been purchased from its equity-method investee, the investor recognizes any related deferred gross profit.

Answer 20

True

Question 21

T/F When an investor uses the equity method to account for investments in common stock, the investor’s share of cash dividends from the investee should be recorded as dividend income.

Answer 21

false

Question 22

T/F The equity method tends to be most appropriate if an investment enables the investor to influence the operating and financial decisions of the investee.

Answer 22

true

Question 23

T/F When an investor owns a majority of the voting stock of another company, the two corporations are viewed as a single entity for reporting purposes.

Answer 23

true

Question 24

T/F If an investor holds between 10 and 40 percent and of the voting stock of the investee, significant influence is normally assumed.

Answer 24

false

Question 25

T/F The equity method employs the accrual basis for recognizing the investor’s share of investee income.

Answer 25

true

Question 26

T/F Excess amortization is recognized by decreasing the investor’s equity income accruing from the investee company.

Answer 26

true

Question 27

T/F Through the recognition of reported losses as well as permanent drops in fair value, the investment account can eventually be reduced to a negative number.

Answer 27

false

Question 28

T/F Intra-entity sales require special accounting to ensure proper timing for profit recognition.

Answer 28

true

Question 29

T/F Under the fair-value option, changes in the fair value of elected financial items are included in earnings.

Answer 29

true