Question No$.2$:

Multiple Choices

$1.$ 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.

$2.$ 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.

$3.$ 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.

$4.$ 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.

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$5.$ When applying the equity method, how is the excess of cost over book value accounted for?

A$)$ The excess is allocated to the difference between fair value and book value multiplied by the percent of ownership of current assets.

B$)$ The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets.

C$)$ The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.

D$)$ The excess is allocated to goodwill.

E$)$ The excess is ignored.

$6.$ Which statement is true concerning unrealized profits in intra$-$entity inventory transfers when an investor uses the equity method?

A$)$ The investee must defer upstream ending inventory profits.

B$)$ The investee must defer upstream beginning inventory profits.

C$)$ The investor must defer downstream ending inventory profits.

D$)$ The investor must defer downstream beginning inventory profits.

E$)$ The investor must defer upstream beginning inventory profits.

$7.$ At the date of an acquisition which is not a bargain purchase, the acquisition method:

A$)$ consolidates the subsidiary's assets at fair value and the liabilities at book value.

B$)$ consolidates all subsidiary assets and liabilities at book value.

C$)$ consolidates all subsidiary assets and liabilities at fair value.

D$)$ consolidates current assets and liabilities at book value, long$-$term assets and liabilities at fair value.

E$)$ consolidates the subsidiary's assets at book value and the liabilities at fair value.

$8.$ In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?

A$)$ Parent $-$ Book Value

Subsidiary $-$ Book Value

B$)$ Parent $-$ Book Value

Subsidiary $-$ Fair Value

C$)$ Parent $-$ Fair Value

Subsidiary $-$ Fair Value

D$)$ Parent $-$ Fair Value

Subsidiary $-$ Book Value

E$)$ Parent $-$ Cost

Subsidiary $-$ Cost

$9.$ Lisa Co$.$ paid cash for all the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in:

A$)$ a worksheet

B$)$ Lisa's general ledger

C$)$ Victoria's general ledger

D$)$ Victoria's secret consolidation journal

E$)$ the general ledgers of both companies

$10.$ How are direct and indirect costs accounte