Test Bank For Advanced Financial Accounting 8th Edition by Baker

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Test Bank For Advanced Financial Accounting 8th Edition by Baker

Chapter 02 – Reporting Intercorporate Interests

Multiple Choice Questions

On January 1, 2007, Rotor Corporation acquired 30 percent of Stator Company’s stock for $150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 15 years. During 2007 and 2008 Stator reported net income of $25,000 and $15,000 and paid dividends of $10,000 and $12,000, respectively. Rotor uses the equity method.

  1. Based on the preceding information, what amount of differential will be amortized annually?

A. $0 B. $750 C. $1,000 D. $2,000

  1. Based on the preceding information, what will be the balance in the investment account on Dec 31, 2007?

A. $150,000 B. $157,500 C. $154,500 D. $153,500

  1. Based on the preceding information, what amount of investment income will be reported by Rotor for the year 2007?

A. $6,500 B. $7,500 C. $7,000 D. $25,000

2-1

Chapter 02 – Reporting Intercorporate Interests

  1. Based on the preceding information, what amount will Rotor report as the balance in the investment account on Dec 31, 2008?

A. $150,000 B. $157,500 C. $153,400 D. $153,500

  1. Based on the preceding information, what amount of investment income will be reported by Rotor for 2008?

A. $6,500 B. $7,500 C. $3,500 D. $4,500

  1. Based on the preceding information, had Rotor Corporation used the cost method, what would have been the balance in the investment account on Dec 31, 2008?

A. $150,000 B. $157,500 C. $153,400 D. $153,500

On January 1, 2007, Firewire Company acquired 40 percent of Browser Company’s common stock. For this acquisition, Firewire paid $45,000 above book value. The full differential was attributed to equipment with a remaining life of ten years and zero salvage value at the date of acquisition. During 2007 and 2008, Browser reported net income of $90,000 and $50,000 and paid dividends of $40,000 and $60,000, respectively. Firewire reported a balance in its investment account of $230,000 on December 31, 2008. It uses the equity method in accounting for this investment.

2-2

Chapter 02 – Reporting Intercorporate Interests

  1. Based on the preceding information, what is the annual amount of amortization of differential over the ten year period?

A. $0

B. $1,800 C. $4,500 D. $8,500

  1. Based on the preceding information, during 2007, Firewire will report:

A. an increase in the investment account balance of $15,500.

B. a decrease in the investment account balance of $20,000.

C. an increase in the investment account balance of $36,000.

D. a decrease in the investment account balance of $31,500.

  1. Based on the preceding information, during 2008, Firewire will report: A. an increase in the investment account balance of $8,000.

B. a decrease in the investment account balance of $15,500. C. an increase in the investment account balance of $20,000. D. a decrease in the investment account balance of $8,500.

  1. Based on the information provided, what would be the amount paid by Firewire for this acquisition?

A. $254,000 B. $223,000 C. $230,000 D. $174,000

2-3

Chapter 02 – Reporting Intercorporate Interests

  1. On January 1, 2009 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon’s investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0

B. $16,500 C. $4,500 D. $12,000

On January 1, 2008, William Company acquired 30 percent of eGate Company’s common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 2008 and paid total dividends of $72,000. William uses the equity method to account for this investment.

  1. Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000 B. $21,600 C. $18,600 D. $54,000

  1. Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?

A. $45,000 B. $42,000 C. $62,000 D. $35,000

2-4

Chapter 02 – Reporting Intercorporate Interests

  1. Based on the preceding information, what amount would be reported by William Company as the balance in its investment account on December 31, 2008?

A. $100,000 B. $123,400 C. $120,400 D. $142,000

Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 2008, Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the equity method to account for this investment. Denver reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends.

  1. Based on the preceding information, income tax expense for Denver for the year 2008 will

be:

A. $67,000 B. $64,600 C. $64,000 D. $66,400

  1. Based on the preceding information, income taxes payable for Denver for the year 2008 will be:

A. $67,000 B. $64,600 C. $64,000 D. $76,000

Connector Corporation invested in an unincorporated joint venture and elected to use pro rata consolidation in preparing its financial statements. Connector reported income of $120,000 from its separate operations and net income of $150,000 for the year ended December 31, 2008. The joint venture reported assets of $150,000 and liabilities of $60,000 on January 1, 2008, and assets of $240,000 and liabilities of $75,000 on December 31, 2008. It made no distributions to owners during the year. Connector reports total assets (excluding its investment in the unincorporated joint venture) of $550,000 at December 31, 2008.

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