Chapter 2

Question 1

If Company A purchases 45% of the outstanding common stock of Company B, the investment in Company B should be accounted for

a) as an available-for-sale investment.
b) as a consolidated subsidiary.
c) as a trading investment.
d) as an equity investment.
e) none of the above.

Answer 1

d) as an equity investment.

Question 2

Under the cost method, a sub’s dividends would:

a) NOT be eliminated in consolidation.
b) be the parent’s income from investment.
c) decrease the parent’s investment account.
d) increase the parent’s investment account.
e) none of the above.

Answer 2

b) be the parent’s income from investment.

Question 3

Under the equity method, a sub’s dividends would:

a) NOT be eliminated in consolidation.
b) be the parent’s income from investment.
c) decrease the parent’s investment account.
d) increase the parent’s investment account.
e) none of the above.

Answer 3

c) decrease the parent’s investment account.

Question 4

Under the equity method, a sub’s losses would:

a) never reduce the parent’s income.
b) normally reduce the parent’s income.
c) always reduce the parent’s income.
d) always be eliminated in consolidation.
e) none of the above.

Answer 4

b) normally reduce the parent’s income.

Question 5

On 1/1/x4, Philip invested $650,000 in Sleeper (100% owned). For 20x4, Sleeper:
  (1)  earned $90,000
  (2) declared dividends of $60,000, and
  (3) paid dividends of $40,000.
What amounts does Philip report?

                                                          Cost      Equity Investment income for 20x4            \_\_\_\_\_\_   \_\_\_\_\_\_ Investment in Sleeper at year-end  \_\_\_\_\_\_   \_\_\_\_\_\_ Retained earning increase               \_\_\_\_\_\_   \_\_\_\_\_\_

Answer 5

Cost Equity
Investment income for 20x4 $60k $90k
Investment in Sleeper at year-end $650k $680k
Retained earning increase $60k $90k