Multiple-Choice Questions on Intercorporate Investments

Select the correct answer for each of the following questions.

1. Companies often acquire ownership in other companies using a variety of ownership arrangements. The investor should use equity-method reporting whenever

1. The investor purchases voting common stock of the investee.
2. The investor has significant influence over the operating and financing decisions of the investee.
3. The investor purchases goods and services from the investee.
4. When there is no differential included in an investment, the carrying value of the investment is less than the market value of the investee's shares held by the investor.

2. The carrying amount of an investment in stock correctly accounted for under the equity method is equal to

1. The original price paid to purchase the investment.
2. The original price paid to purchase the investment plus cumulative net income plus cumulative dividends declared by the investee since the date the investment was acquired.
3. The original price paid to purchase the investment plus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired.
4. The original price paid to purchase the investment minus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired.