II. Problem Set 1 with Options (Total 39 pts.; 3 pts each) Goebel Company purchased outstanding shares of Dobbs Company's common stock. Under the following two independent scenarios (Situation 1 and 2), use the following information for questions 8-20. Situation 1: Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2018 for $350,000. During 2019 Dobbs Company had net income of $150,000 and paid a cash dividend of $60,000. (Dobbs Company paid $60,000 cash dividend to all of its shareholders.) 8. Assuming no other factors need to be considered, 20% interest acquired by Goebel represents a "passive interest" in Dobbs Company. Goebel should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation. On December 31, 2018, the amount of the debit to Equity Investments (Dobbs) would have been a. $278,000. b. $230,000. c. $350,000. d. $360,000. 10. Based on the information of cash dividend given, regular cash dividends received by Goebel Company are recorded as a. A reduction of the investment $12,000. b. A reduction of the investment $60,000. c. Dividend revenue of $12,000. d. Dividend revenue of $60,000. 11. Based on the information of net income reported by Dobbs Company, applying the fair value method would lead to an addition to the carrying value of the Equity Investments (Dobbs) account in 2019 of a. $0. b. $30,000. c. $60,000. d. $150,000 12. Based on the information regarding Goebel's investment in Dobbs Company: Fair Value 12/31/18 12/31/19 $350,000 $365,000 Cost $350,000 Equity investment If the Fair Value Adjustment has a debit balance of $8,000, what amount of unrealized holding gain or loss would Goebel Company report in its income statement for the year ended December 31, 2019 related to its investment? a. $7,000 gain. b. $8,000 gain. c. $15,000 gain, d. $23,000 gain, 13. Based on the information given in Question 12, if the Fair Value Adjustment has a credit balance of $8,000, which of the following journal entries is required at December 31, 2019? a. Fair Value Adjustment 15,000 Unrealized Holding Gain or Loss-Income 15,000 b. Fair Value Adjustment Unrealized Holding Gain or Loss-Income 23,000 c. Unrealized Holding Gain or Loss-Income 7,000 Fair Value Adjustment 7,000 d. Unrealized Holding Gain or Loss-Equity 23,000 Fair Value Adjustment 23,000 23,000 Situation 2: Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2018 for $350,000. During 2019 Dobbs Company had net income of $150,000 and paid a cash dividend of $60,000. (Dobbs Company paid $60,000 cash dividend to all of its shareholders.) 14. Assuming no other factors need to be considered, 30% interest acquired by Goebel enables them to exercise "significant influence over the Dobbs Company. Goebel should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation. 15. On December 31, 2018, the amount of the debit to Equity Investments (Dobbs) would have been a. $278,000 b. $230,000. c. $350,000. d. $360,000 16. Based on the information of cash dividend given, regular cash dividends received by Goebel Company are recorded as a. A reduction of the investment $18,000. b. A reduction of the investment $60,000. c. Dividend revenue of $18,000. d. Dividend revenue of $60,000. 17. Based on the information of net income reported by Dobbs Company, applying the equity method would lead to an addition to the carrying value of the Equity Investments (Dobbs) account in 2019 of a. So. b. $30,000 c. $45,000. d. $150,000. 18. The beginning balance in the investment account in Dobbs Company was $350,000, the balance at December 31, 2019 should be a. $332,000. b. $350,000 c. $377,000. d. $395,000. 19. Goebel should report investment income for 2019 of a. $18,000. b. $45,000. c. $60,000. d. $150,000. Assuming the fair value of Goebel's investments in Dobbs Company is $400,000 at the end of 2019. Applying the equity method, Goebel Company should report its investment in Dobbs Company as a. $332,000. b. $377,000. c. $395,000. d. $400,000
