Question
4. The underlying equity of an investment at acquisition: a Is recorded in the investment account under the equity method b Minus the cost of
4. The underlying equity of an investment at acquisition:
a Is recorded in the investment account under the equity method
b Minus the cost of the investment is assigned to goodwill
c Is equal to the fair value of the investees net assets times the percentage acquired
d Is equal to the book value of the investees net assets times the percentage acquired
5. Son Corporation is a 25 percentowned equity investee of Pop Corporation. During the current year, Pop receives $12,000 in dividends from Son. How does the $12,000 dividend affect Pops financial position and results of operations?
a Increases assets
b Decreases investment
c Increases income
d Decreases income
6. Pam Company owns 25 percent of Sun Corporation. During the year, Sun had net earnings of $450,000 and paid dividends of $28,000. Pam mistakenly recorded these transactions using the cost method rather than the equity method. What effect would this have on the investment account, net earnings, and retained earnings, respectively?
a Understate, overstate, overstate
b Overstate, understate, understate
c Overstate, overstate, overstate
d Understate, understate, understate
7. A corporation exercises control over an affiliate in which it holds a 25 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor?
a Result in an increased current ratio
b Result in increased earnings per share
c Increase several turnover ratios
d Decrease book value per share
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