Advanced Accounting: Chapter 2 E2-2 General Questions

BA 459

Advanced Accounting: Beams, Clement, Anthony, Lowensohn
Floyd A. Beams
Robin P. Clement
Joseph H. Anthony
Suzanne Lowensohn
9th Edition 10th Edition
Chapter 2

Exercise 2-2 (E2-2)
[AICPA adapted] General problems
1. Investor Company owns 40% of Alimand Corporation. During the calendar year, 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?

2. The corporation exercises control over an affiliate in which it holds a 40% common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?

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

4. On January 1 Grade Company paid $300,000 for 20,000 shares of Medium Company’s common stock, which represents a 15% investment in Medium. Grade does not have the ability to exercise significant influence over Medium. Medium declared and paid a dividend of $1 per share to its stockholders during the year. Medium reported net income of $260,000 for the year ended December 31. The balance in Grade’s balance sheet account “Investment in Medium Company” at December 31 should be

5. On January 2, 2006, Troquel Corporation bought 15% of Zafacon Corporation’s capital stock for $30,000. Troquel accounts for this investment by the cost method. Zafacon’s net income for the years ended December 31, 2006, and December 31, 2007, were $10,000 and $50,000, respectively. During 2007 Zafacon declared a dividend of $70,000. No dividends were declared in 2006. How much should Troquel show on its 2007 income statement as income from this investment?

6. Pare purchased 10% of Tot Company’s 100,000 outstanding shares of common stock on January 2 for $50,000. On December 31, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during the year. Tot reported earnings of $300,000 for the year. What amount should Pare report in its December 31 balance sheet as investment in Tot?

7. On January 1, Point purchased 10% of Iona Company’s common stock. Point purchased additional shares, bringing its ownership up to 40% of Iona’s common stock outstanding, on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s income statement report?

8. On January 2, Kean Company purchased a 30% interest in Pod Company for $250,000. On this date, Pod’s stockholders’ equity was $500,000. The carrying amounts of Pod’s identifiable net assets approximated their fair values, except for land, whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 and paid no dividends. Kean accounts for this investment using the equity method. In its December 31 balance sheet, what amount should Kean report as investment in subsidiary?

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