1.Headey Corporation uses the equity method of accounting for its investment in a 40%-owned investee that earned $60,000 and paid $25,000 in dividends. As a result, Heady Corporation made the following entries:

Equity Investment 24,000

Equity Income 24,000

Cash 10,000

Dividend Revenue 10,000

T/F The result of these entries is that both Headeys investment account and retained earnings are overstated.

2. T/F On January 2, 2020, Runner, Inc. purchased a 20% interest in Diner Corp. for $2,300,000 cash. During 2020, Diner's net income was $2,600,000 and it paid dividends of $950,000. The Equity Investment balance of $2,630,000 is reported by Runner on December 31, 2020.

3.T/F John Corporation issues 60,000 shares of its common stock for all the outstanding shares of Smith Corporation. Johns shares have a par value of $4 and a market value of $15 per share. The increase in consolidated additional paid-in capital resulting from the combination is $900,000.

4. T/F On July 1, 2020, Jones Co. paid $475,000 for all the stock of Charlie, Inc. On that date, book values of Charlies assets and liabilities were $320,000 and $155,000, respectively. The fair values of the assets and liabilities were $700,000 and $305,000, respectively. The amount of goodwill at date of acquisition is $225,000.

5. T/F If the sponsoring company goes bankrupt, the assets of the SPE are protected from the creditors of the sponsoring company. This would characterize a special purpose entity as bankruptcy remote.

6. On May 1, 2020, Lucy Company sold equipment to its wholly owned subsidiary, Jerry Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Lucy) of $60,000 and accumulated depreciation of $25,000. The equipment has a five-year estimated remaining life. Jerry reported net income of $250,000, $270,000, and $310,000 in 2020, 2021, and 2022, respectively. Lucy received dividends from Jerry of $90,000, $115,000, and $120,000 for 2020, 2021, and 2022, respectively.

T/F Assume that Lucy uses the cost method to account for its investment in Jerry. The balance in the pre-consolidation Income (loss) from Subsidiary account for 2021 is $155,000.

7. T/F Gym Company sells inventory to its subsidiary, Weight Company, at a profit during 2020. If Gym uses the cost method to account for its investment in Weight, Sales would be a debit entry in the consolidated worksheet for 2021.