1. Pam Company owns 25 percent of Sun Corporation. During the year, Sun had net earnings of $450,000 and paid dividends of $28,000. Pam 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, Pop Company paid $600,000 for 20,000 shares of Son Company's common stock, which represents
a. 15 percent investment in Son. Pop does not have the ability to exercise significant influence over Son. Son declared and paid a dividend of $2 per share to its stockholders during the year. Son reported net income of $520,000 for the year ended December 31. The balance in Pop's balance sheet account "Investment in Son Company" at December 31 should be:
a. $560,000
b. $600,000
c. $638,000
d. $678,000
5. On January 2, 2016, Pam Corporation bought 15 percent of Sun Corporation's capital stock for $30,000. Pam accounts for this investment using the cost method. Sun's net income for the years ended December 31, 2016, and December 31, 2017, were $10,000 and $50,000, respectively. During 2017 Sun declared a dividend of $70,000. No dividends were declared in 2016. How much should Pam report on its 2017 income statement as income from this investment?
a. $1,575
b. $7,500
c. $9,000
d. $10,500
6. Pam purchased 10 percent of Sun Company's 100,000 shares of common stock on January 2 for $100,000. On December 31, Pam purchased an additional 20,000 shares of Sun for $300,000. There was no goodwill as a result of either acquisition, and Sun had not issued any additional stock during the year. Sun reported earnings of $600,000 for the year. What amount should Pam report in its December 31 balance sheet as investment in Sun?
a. $340,000
b. $400,000
c. $460,000
d. $580,000
7. On January 1, Pop purchased 10 percent of Son Company's common stock. Pop purchased additional shares, bringing its ownership up to 40 percent of Son's common stock outstanding, on August 1. During October, Son declared and paid a cash dividend on all of its outstanding common stock. How much income from the Son investment should Pop report for the year ended December 31?
a. 10 percent of Son's income for January 1 to July 31, plus 40 percent of Son's income for August 1 to December 31
b. 40 percent of Son's income for August 1 to December 31 only
c. 40 percent of Son's income
d. Amount equal to dividends received from Son
8. On January 2, Pam Company purchased a 30 percent interest in Sun Company for $250,000. On this date, the book value of Sun's stockholders' equity was $500,000. The carrying amounts of Sun's identifiable net assets approximated fair values, except for land, whose fair value exceeded its carrying amount by $200,000. Sun reported net income of $100,000 and paid no dividends. Pam accounts for this investment using the equity method. In its December 31 balance sheet, what amount should Pam report for this investment?
a. $210,000
b. $220,000
c. $270,000
d. $280,000