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Gaw Company owns 15% of the common stock of Teal Corporation and used the fair-value method




Question;Question 1Gaw Company owns 15% of the common stock of Teal Corporation;and used the fair-value method to account for this investment. Teal reported;net income of $110,000 for 2005 and paid dividends of $60,000 on October 1;2005. How much income should Gaw recognize on this investment in 2005?;$16,500;$9,000;$25,500;$7,500;Question 2.2. A company should always use the equity method;to account for an investment if;it has the ability to exercise significant influence over;the operating policies of the investee.;it owns 30% of another company's stock.;it has a controlling interest (more than 50%) of another;company's stock.;it does not have the ability to exercise significant;influence over the operating policies of the investee.;Question 3.3. All of the following would require use of the;equity method for investments except;material intercompany transactions.;investor participation in the policy-making process of the;investee.;valuation at fair market value.;significant control.;Question 4.4. On January 1, 2005, Dermot Company purchased;12% of the voting common stock of Horne Corp. On January 1, 2006, Dermot;purchased 18% of Horne's voting common stock. If Dermot achieves significant;influence with this new investment, how must Dermot account for the change to;the equity method? (Points: 2);It must use the equity method for 2005 but should make no;changes in its financial statements for 2005 and 2006.;It should prepare consolidated financial statements for;2005.;It must restate the financial statements for 2005 and 2006;as if the equity method had been used for those two years.;It must restate the financial statements for 2006 as if the;equity method had been used then.;Question 5.5.;A company has been using the fair-value method to account;for its investment. The company now has the ability to significantly control;the investee and the equity method has been deemed appropriate. Which of the;following statements is true?;A cumulative effect change in accounting principle must;occur.;A prospective change in accounting principle must occur.;A retroactive change in accounting principle must occur.;Future dividends will continue to be recorded as revenue.;Question 6.6.;Club Co. appropriately uses the equity method to account for;its investment in Chip Corp. As of the end of 2005, Chip's common stock had;suffered a significant decline in market value, which is expected to be;recovered over the next several months. How should Club account for the decline;in value?;Club should switch to the fair-value method.;No accounting because the decline in market value is temporary.;Club should not record its share of Chip's 2005 earnings;until the decline in the market value of the stock has been recovered.;Club should decrease the balance in the investment account;to the current value and recognize an unrealized loss on the balance sheet.;Question 7.7.;On January 1, 2005, Jordan Inc. acquired 30% of Nico Corp.;Jordan used the equity method to account for the investment. On January 1;2006, Jordan sold 2/3 of its investment in Nico. It no longer had the ability;to exercise significant influence over the operations of Nico. How should;Jordan have accounted for this change?;Jordan should continue to use the equity method to maintain;consistency in its financial statements.;Jordan has the option of using either the equity method or;the fair-value method for 2005 and future years.;Jordan should report the effect of the change from the;equity to the fair-value method as a cumulative effect of a change in;accounting principle.;Jordan should use the fair-value method for 2005 and future;years but should not make a retroactive adjustment to the investment account.;Question 8.8. Bowler Inc. owns 30% of Yarby Co. and applies;the equity method. During the current year, Bowler bought inventory costing;$66,000 and then sold it to Yarby for $120,000. At year-end, only $24,000 of;merchandise was still being held by Yarby. What amount of unrealized gain must;be deferred by Bowler?;$6,480;$3,240;$10,800;$6,610;Question 9.9.;An upstream sale of inventory is a sale;between subsidiaries owned by a common parent.;with the transfer of goods scheduled by contract to occur on;a specified future date.;made by the investor to the investee.;made by the investee to the investor.;Question 10.10. Which of the following results in a decrease;in the investment account when applying the equity method?;Dividends paid by the investor.;Net income of the investee.;Net income of the investor.;Unrealized gain on intercompany inventory transfers for the;current year.11. Which of the following is a reason for a business;combination to take place? Cost savings through elimination of duplicate facilitiesQuick entry for new and existing products into domestic and;foreign markets.Diversification of business risk.All of the above.Question 12.12. Which of the following statements is true;regarding a statutory merger? The original companies dissolve while remaining as separate;divisions of a newly created company.Both companies remain in existence as legal corporations;with one corporation now a subsidiary of the acquiring company.The acquired company dissolves as a separate corporation and;becomes a division of the acquiring company.The acquiring company acquires the stock of the acquired;company as an investment.Question 13.13.A statutory merger is a(n)business combination in which only one of the two companies;continues to exist as a legal combination in which both companies continues to;exist.acquisition of a supplier or a proposal to acquire outstanding shares of the target's;stock.Question 14.14. At the date of an acquisition which is not a;bargain purchase, the purchase consolidates the subsidiary's assets at fair market value;and the liabilities at book value.consolidates all subsidiary assets and liabilities at book;value.consolidates all subsidiary assets and liabilities at fair;market value.consolidates the subsidiary's assets at book value and the;liabilities at fair market value.Question 15.15. Goodwill is generally defined as: Cost of the investment less the subsidiary's book value at;the beginning of the year.Cost of the investment less the subsidiary's book value at;the acquisition date.Cost of the investment less the subsidiary's Fair Market;Value at the beginning of the year.Cost of the investment less the subsidiary's Fair Market;Value at the acquisitiom date.;Question;16.;16.Bullen Inc. assumed 100% control;over Vicker Inc. on January 1, 2002. The book value and fair market;value of Vicker's accounts on that date (prior to creating the;combination) follow, along with the book value of Bullen's accounts;Bullen;Vicker;Vicker;Remaining;Book;Book;Market;Useful;Value;Value;Value;Life;Reatined;earnings 1/1/02;$160,000;$240,000;Cash;Receivables;170,000;70,000;70,000;Inventory;230,000;170,000;210,000;Land;280,000;220,000;240,000;Buildings;(net);480,000;240,000;270,000;10;yrs;Equipment;(net);120,000;90,000;90,000;5 yrs;Liabilities;650,000;430,000;420,000;4;yrs;Common;Stock;360,000;80,000;Addtl;Paid in Capital;20,000;40,000;Assume;that Bullen issued 12,000 shares of common stock with a $5 par value;and a $47 fair market value to obtain all of Vicker's outstanding;stock. If this transaction is a purchase, how much Goodwill;should be recognized?;$144,000;$104,000;$64,000;$60,00017. In a transaction (accounted for) using the purchase;method where cost exceeds book value, which statement is true? Net assets of the acquired company are revalued to their;fair market values and any excess of costs over fair market value is allocated;to goodwill.Net assets of the acquired company are maintained at book;value and any excess of cost over book value is allocated to goodwill.Assets are revalued to their fair market values. Liabilities;are maintained at book values, any excess is allocated to goodwill.Long-term assets are revalued to their fair market values.;Any excess is allocated to goodwill.Question 18.18.On July 1, 2002, Big acquires 100% of Little. Both companies;have a fiscal year end of 12/31/02. At 12/31/02, how much of the fair market;value adjustment associated with inventory should be amortized?100% of the FMV adjustment50% of the FMV adjustmentNone of the FMV adjustment is amortizedThe FASB does not allow inventory to be adjusted to FMV on;consolidated financial statementsUse the same data from the previous question.What amount will be reported for consolidated inventory?$960$920$700$620;Question 19.;19.;Flynn acquires 100;percent of the outstanding voting shares of Macek Company on January 1;2003. To obtain these shares, Flynn pays $400,000 and issues 10,000 shares;of $20 par value common stock on this date. Flynn's stock had a fair market;value of $36 per share on that date. Flynn also pays $15,000 to a local;investment firm for arranging the acquisition. An additional $10,000 was;paid by Flynn in stock issuance costs.?The book values for both Flynn and;Macek as of January 1, 2003 follow. The fair market value of each of Flynn;and Macek accounts is also included. In addition, Macek holds a fully;amortized trademark that still retains a $40,000 value. The figures below;are in thousands.;Macek Co;Macek Co;Flynn, Inc;Book Value;FMV;Cash;$ 900;$ 80;$ 80;Receivables;480;180;160;Inventory;660;260;300;Land;300;120;130;Buildings (net);1,200;220;280;Equipment;360;100;75;Accts Payable;480;60;60;LT Liabilities;1,140;340;300;Common Stock;1,200;80;Retained earnings;1,080;480;Assume that this;combination is accounted for using the purchase method. What amount will be;reported for consolidated receivables?;$660;$640;$500;$460;Question 21. 21.For each of the following situations, select the best answer;concerning accounting for combinations: PLEASE INPUT THE FOLLOWING ANSWER;FORMAT EXAMPLE: 1=A 2= H etc.(A) Pooling-of-interests method only.(B) Purchase method only.(C) Acquisition method only.(D) Pooling-of-interests method and purchase method, but not;acquisition method.(E) Purchase method and acquisition method, but not;pooling-of-interests method.(F) Pooling-of-interests method and acquisition method, but;not purchase method.(G) All methods (pooling-of-interests, purchase, and;acquisition.)(H) None of the methods (neither pooling-of-interests;purchase, nor acquisition.)_____1. Direct costs are expensed._____2. Indirect costs are expensed._____3. Direct costs reduce the additional paid-in capital;of the acquirer._____4. Both direct costs and indirect costs increase the;investment account._____5. Direct costs increase the investment account, and;indirect costs reduce the acquirer's additional paid-in capital account._____6. Contingent consideration increases the investment;account at date of acquisition._____7. Contingent consideration increases the investment;account at a date subsequent to the acquisition date._____8. A bargain purchase is recorded at date of;acquisition as a gain._____9. The combination clearly defines an acquired company;and an acquiring company.;10.. Method(s) appropriate to combinations prior to;June 30, 2001.="msonormal">


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