(Multiple Choice)
1. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as
a. A deduction from the investor’s share of the investee’s profits.
b. Dividend income.
c. A deduction from the stockholders’ equity account, dividends to stockholders.
d. A deduction from the investment account.

2. Which of the following does not indicate an investor company’s ability to significantly influence an investee?
a. Material intra-entity transactions.
b. The investor owns 30 percent of the investee but another owner holds the remaining 70 percent.
c. Interchange of personnel.
d. Technological dependency.

3. Sisk Company has owned 10 percent of Maust, Inc., for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently, Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report this change?
a. A cumulative effect of an accounting change is shown in the current income statement.
b. No change is recorded; the equity method is used from the date of the new acquisition.
c. A retrospective adjustment is made to restate all prior years presented using the equity method.
d. Sisk has the option to choose the method to show this change.

4. Under the fair-value option, which of the following affects the income the investor recognizes from its ownership of the investee?
a. The investee’s reported income adjusted for excess cost over book value amortizations.
b. Changes in the fair value of the investor’s ownership shares of the investee.
c. Intra-entity profits from upstream sales.
d. Extraordinary items reported by the investee.

5. When an investor elects the fair-value option for a significant influence investment, cash dividends received by the investor from the investee should be recorded as
a. A deduction from the investor’s share of the investee’s reported income.
b. A deduction from the investment account.
c. A reduction from accumulated other comprehensive income reported in stockholders’ equity.
d. Dividend income.

6. Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2011, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2011. How should Perez report the effect of the intra-entity sale on its 2011 income statement?
a. Sales and cost of goods sold should be reduced by the amount of intra-entity sales.
b. Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales.
c. Investment income should be reduced by 25 percent of the gross profit on the amount of intraentity sales.
d. No adjustment is necessary.