Question No$.2$:

Multiple Choices

$1.$ A company should always uses the equity method to account for an investment if:

A$)$ It has the ability to exercise significant control over the operating policies of the investee.

B$)$ It owns $30\%$ of another company's stock.

C$)$ It has controlling interest $($more than $50\%)$ of another company's stock.

D$)$ The investment was made primarily to earn a return on cash.

E$)$ It does not have the ability to exercise significant influence over the operating policies of the investee.

$2.$ On January $1,2011,$ Dermot Company purchased $15\%$ of the voting common stock of Horne Corp. On January $1,2013,$ Dermot purchased $28\%$ of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

A$)$ It must use the equity method for $2013$ but should make no changes in its financial statements for $2012$ and $2011.$

B$)$ It should prepare consolidated financial statements for $2013.$

C$)$ It must restate the financial statements for $2012$ and $2011$ as if the equity method had been used for those two years.

D$)$ It should record a prior period adjustment at the beginning of $2013$ but should not restate the financial statements for $2012$ and $2011.$

E$)$ It must restate the financial statements for $2012$ if the equity method had been used then.

$3.$ On January $1,2013$ Jordan Inc., acquired $30\%$ of Nico Corp. Jordan used the equity method to account for the investment. On January $1,2014,$ Jordan sold two$-$thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?

A$)$ Jordan should continue to use the equity method to maintain consistency in its financial statements.

B$)$ Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair$-$value method has been used since $2013.$

C$)$ Jordan has the option of using either the equity method or the fair$-$value method for $2013$ and future years.

D$)$ Jordan should report the effect of the change from the equity o fair$-$value method as a retrospective change in accounting principle.

E$)$ Jordan should use the fair$-$value method for $2014$ and future years but should not make a retrospective adjustment to the investment account.

$4.$ Club Co$.$ appropriately uses the equity method to account for its investment in Chip Corp. As of the end of $2013,$ Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value?

A$)$ Club should switch to fair$-$value method.

B$)$ No accounting change because the decline in fair$-$value is temporary.

C$)$ Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.

D$)$ Club should not record its share of Chip's $2013$ earnings until the decline in the fair value of the stock has been recovered.

E$)$ Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

$5.$ An upstream sale of inventory is a sale:

A$)$ between the subsidiaries owned by a common parent.

B$)$ with the transfer of goods scheduled by contract to occur on a specified future date.

C$)$ in which the goods are physically transported by boat from a subsidiary to its parent.

D$)$ made by the investor to the investee.

E$)$ made by the investee to the investor.

$6.$ All the following would require the use of the equity method for investments except:

A$)$ material intra$-$entity transactions.

B$)$ investor participation in the policy$-$making process of the investee.

C$)$ valuation at fair value.

D$)$ technological dependency.

E$)$ significant control.

$7.$ All of the following statements regarding the investment account using the equity method are true except:

A$)$ the investment is recorded at cost$.$

B$)$ dividends received are reported as revenue.

C$)$ net income of investee increases the investment account.

D$)$ dividends received reduce the investment account.

E$)$ Amortization of fair value over cost reduces the investment account.

$8.$ An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

A$)$ Under the equity method, the investor only recognizes its share of investee's income from continuing operations.

B$)$ The extraordinary loss would reduce the value of the investment.

C$)$ The extraordinary loss should increase equity in investee income.

D$)$ The extraordinary loss would appear on the income statement but would be a component of comprehensive income.

E$)$ The loss would be ignored but shown in the investor's notes to the financial statements.