1.PAS 28 generally applies when the level of ownership over another company is at what percentage?

a.Less than 20%

b.20%-30%

c.20%-50%

d.More than 50%

2.When an investor uses fair value accounting to account for investments in common stock, cash dividends received by the investor from the investee would normally be recorded as

a.a deduction from the investment account.

b.dividend revenue.

c.an addition to the investor's share of the investee's profit.

d.a deduction from the investor's share of the investee's profit.

3.Under the equity method in PAS 28, goodwill amortization

a.reduces the investment account.

b.increases the investment account.

c.reduces both investment income and the investment account.

d.is not recorded.

4.The equity method of accounting should be used when an investment

a.is composed of ordinary shares and it is the investor's intent to vote the ordinary shares.

b.ensures a source of supply such as raw materials.

c.enables the investor to exercise significant influence over the investee.

d.gives the investor voting control over the investee.

5.When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes

a.a proportionate share of the net income of the investee.

b.a cash dividend received from the investee.

c.periodic amortization of the goodwill related to the purchase.

d.depreciation related to the excess of fair value over carrying amount of the investee's depreciable assets at the date of purchase by the investor.

6.When an investor uses the equity method, cash dividends received from the investee are recorded as

a.an increase in the investment account.

b.a deduction from the investment account.

c.dividend revenue.

d.a deduction from the investor's share of the investee's profits.

7.Dane, Inc. owns 35% of Marin Corporation. During the calendar year 2004, Marin had net earnings of 300,000 and paid dividends of 30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. Dane recognized 20,000 gain on the change in fair value of the investment during the year. What effect would this have on the investment account, net income, and retained earnings, respectively?

a.Understate, overstate, overstate

b.Overstate, understate, understate

c.Overstate, overstate, overstate

d.Understate, understate, understate

8.Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a.investor sells the investment.

b.investee declares a dividend.

c.investee pays a dividend.

d.earnings are reported by the investee in its financial statements.

9.When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

a.The investor should always use the equity method to account for its investment.

b.The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

c.The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.

d.The investor should always use the fair value method to account for its investment.

10.Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as

a.a reduction of the carrying value of the investment.

b.additional paid-in capital.

c.an addition to the carrying value of the investment.

d.dividend income.

Use the following information for the next nine questions:

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2004 are as follows:

Elston Company

Balance Sheet

December 31, 2004

Assets800,000

Liabilities100,000

Capital stock400,000

Retained earnings300,000

Total equities800,000

Alley Company

Balance Sheet

December 31, 2004

Assets600,000

Liabilities150,000

Capital stock370,000

Retained earnings80,000

Total equities600,000

1. If Elston Company acquired a 20% interest in Alley Company on December 31, 2004 for 130,000 and the fair value method of accounting for the investment were used, the amount of the debit to Investment in Alley Company Stock would have been

a.90,000.

b.74,000.

c.130,000.

d.120,000.

2. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for 150,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Alley Company Stock would have been

a.190,000.

b.150,000.

c.120,000.

d.135,000.

3. If Elston Company acquired a 20% interest in Alley Company on December 31, 2003 for 90,000 and during 2004 Alley Company had net income of 50,000 and paid a cash dividend of 20,000, applying the fair value method would give a debit balance in the Investment in Alley Company Stock account at the end of 2004 of

a.74,000.

b.90,000.

c.100,000.

d.None of these

4. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for 135,000 and during 2005 Alley Company had net income of 50,000 and paid a cash dividend of 20,000, applying the equity method would give a debit balance in the Investment in Alley Company Stock account at the end of 2005 of

a.135,000.

b.144,000.

c.150,000.

d.145,000.

5.Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount of Alley's net assets on December 31, 2004 approximates its fair value. If the acquisition did not result to any implied goodwill, how much is the acquisition cost of the investment?

a.135,000.

b.144,000.

c.150,000.

d.145,000.

6.Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount of Alley's net assets on December 31, 2004 approximates its fair value. If the acquisition did not result to any implied goodwill, how much is the acquisition cost of the investment?

a.135,000.

b.144,000.

c.150,000.

d.145,000.

7.Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to any goodwill. At the time of acquisition, the carrying amount of Alley's net assets approximates its fair value. There have been no impairment losses on the investment. In principle, the equity method would result to a carrying amount of the investment on December 31, 2004 of

a.112,500.

b.135,000.

c.144,000.

d.Cannot be determined; given information is insufficient

8.Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to any goodwill. At the time of acquisition, the carrying amount of Alley's net assets approximates its fair value. There have been no impairment losses on the investment. Alley Company reported profit of 200,000 and declared dividends of 40,000 in 2004. Theoretically, the carrying amount of the investment on December 31, 2003 would approximate which of the following amounts?

a.72,500.

b.98,500

c.112,500.

d.Cannot be determined; given information is insufficient

9.Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to any goodwill. At the time of acquisition, the carrying amount of Alley's net assets approximates its fair value. There have been no impairment losses on the investment. The carrying amount of the investment on January 1, 2004 is 98,500. Alley Company declared dividends of 40,000 in 2004. If the proportionate share of Elston in the net assets of Alley at December 31, 2004 reflects the carrying amount of Elston's investment, how much would have been Alley's profit in 2004?

a.200,000.

b.24,000

c.96,000.

d.Cannot be determined; given information is insufficient

10.Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company's common stock for 180,000 on January 2, 2004. During 2004, Flynn Company declared dividends of 30,000 and reported earnings for the year of 120,000. If Karter Company uses the equity method of accounting for its investment in Flynn Company, its Investment in Flynn Company account at December 31, 2004 should be

a.174,000.

b.180,000.

c.198,000.

d.204,000.