ACCT 405 Chapter 1 Problems: 1 3 5 9 10 11

ACCT 405 Chapter 1 Problems: 1 3 5 9 10 11

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ACCT 405 Chapter 1 Problems: 1 3 5 9 10 11

Advanced Accounting

ACCT-405-14613 Chapter 1 Problems: 1 3 5 9 10 11

1. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as

1. A deduction from the investor’s share of the investee’s profits.
2. Dividend income.
3. A deduction from the stockholders’ equity account, Dividends to Stockholders.
4. A deduction from the investment account. (AICPA adapted)

3. Sisk Company has owned 10 percent of Maust, Inc., for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently, Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report this change?

1. A cumulative effect of an accounting change is shown in the current income statement.
2. No change is recorded; the equity method is used from the date of the new acquisition.
3. A retrospective adjustment is made to restate all prior years presented using the equity method.
4. Sisk will report the change as a component of accumulated other comprehensive income.

5. When an investor elects the fair-value option for a significant influence investment, cash dividends received by the investor from the investee should be recorded as

1. A deduction from the investor’s share of the investee’s reported income.
2. A deduction from the investment account.
3. A reduction from accumulated other comprehensive income reported in stockholders’ equity.
4. Dividend income.

9. Goldman Company reports net income of $140,000 each year and pays an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2012. On that date, Wallace purchases 40 percent of the outstanding stock for $600,000, which gives it the ability to significantly influence Goldman. At the purchase date, the excess of Wallace’s cost over its proportionate share of Goldman’s book value was assigned to goodwill. On December 31, 2014, what is the Investment in Goldman Company balance (equity method) in Wallace’s financial records?

1. $600,000.
2. $660,000.
3. $690,000.
4. $708,000.

Cost of stock		600000
2012	Income accrued	56000
2012	Dividend collected	-20000
2013	Income accrued	56000
2013	Dividend collected	-20000
2014	Income accrued	56000
2014	Dividend collected	-20000
Investment in Goldman		708000

10. Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2013, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2013. How should Perez report the effect of the intra-entity sale on its 2013 income statement?
11. Sales and cost of goods sold should be reduced by the amount of intra-entity sales.
12. Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales.
13. Investment income should be reduced by 25 percent of the gross profit on the amount of intra-entity sales.
14. No adjustment is necessary.

11. Panner, Inc., owns 30 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $54,000 and then sells it to Watkins for $90,000. At the end of the year, Watkins still holds only $20,000 of merchandise. What amount of unrealized gross profit must Panner defer in reporting this investment using the equity method?