1. Invest Company owns 30 percent of Ali Corporation. During the year, Ali had net earnings of $200,000 and paid dividends of $18,000. Invest mistakenly recorded these transactions using the cost method rather than the equity method. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

a. Understate, overstate, overstate

b. Overstate, understate, understate

c. Overstate, overstate, overstate

d. Understate, understate, understate

2. A corporation exercises control over an affiliate in which it holds a 25 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor?

a. Result in an increased current ratio

b. Result in increased earnings per share

c. Increase several turnover ratios

d. Decrease book value per share

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:

a. Zero

b. The total amount of dividends received this year

c. The portion of the dividends received this year that were in excess of the investor’s share of investee’s earnings after the date of investment

d. The portion of the dividends received this year that were not in excess of the investor’s share of investee’s earnings after the date of investment

4. On January 1, Gar Company paid $600,000 for 20,000 shares of Med Company’s common stock, which represents

a. 15 percent investment in Med. Gar does not have the ability to exercise significant influence over Med.

Med declared and paid a dividend of $2 per share to its stockholders during the year. Med reported net income of $520,000 for the year ended December 31. The balance in Gar’s balance sheet account “Investment in Med Company” at December 31 should be

a. $560,000

b. $600,000

c. $638,000

d. $678,000

5. On January 2, 2011, Two Corporation bought 15 percent of Zef Corporation’s capital stock for $30,000. Two accounts for this investment by the cost method. Zef’s net income for the years ended December 31, 2011, and December 31, 2012, were $10,000 and $50,000, respectively. During 2012 Zef declared a dividend of $70,000. No dividends were declared in 2011. How much should Two show on its 2012 income statement as income from this investment?

a. $1,575

b. $7,500

c. $9,000

d. $10,500

6. Par purchased 10 percent of Tot Company’s 100,000 shares of common stock on January 2 for $100,000. On December 31, Par purchased an additional 20,000 shares of Tot for $300,000. 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 $600,000 for the year. What amount should Par report in its December 31 balance sheet as investment in Tot?

a. $340,000

b. $400,000

c. $460,000

d. $580,000

7. On January 1, Pin purchased 10 percent of Ion Company’s common stock. Pin purchased additional shares, bringing its ownership up to 40 percent of Ion’s common stock outstanding, on August 1. During October, Ion declared and paid a cash dividend on all of its outstanding common stock. How much income from the Ion investment should Pin’s income statement report for the year ended December 31?

a. 10 percent of Ion’s income for January 1 to July 31, plus 40 percent of Ion’s income for August 1 to December 31

b. 40 percent of Ion’s income for August 1 to December 31 only

c. 40 percent of Ion’s income

d. Amount equal to dividends received from Ion

8. On January 2, Ken Company purchased a 30 percent interest in Pod Company for $250,000. On this date, the book value of Pod’s stockholders’ equity was $500,000. The carrying amounts of Pod’s identifiable net assets approximated 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. Ken accounts for this investment using the equity method. In its December 31 balance sheet, what amount should Ken report for this investment?

a. $210,000

b. $220,000

c. $270,000

d. $280,000