1. Which of the following results in a decrease in the investment account when applying the equity method?

a. Net income of the investor

b. Net income of the investee

c. Unrealized gain on intercompany inventory transfers for the current year

d. Dividends paid by the investor

e. Purchase of additional common stock by the investor during the current year

2. Which of the following is a characteristic of a business combination that should be accounted for as a purchase?

a. The combination must involve the exchange of equity securities only.

b The acquired subsidiary must be smaller in size than the acquiring parent.

c The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.

d The transaction may be considered to be the uniting of the ownership interests of the companies involved.

e The transaction clearly establishes an acquisition price for the company being acquired.

3. Under the partial equity method, the parent recognizes income when

a dividends are received from the investee.

b dividends are declared by the investee.

c it is earned by the subsidiary.

d the related contract is signed by the subsidiary.

e the related expense has been incurred.