Sea Corporation uses the equity method of accounting for its investment in a 30%-owned investee that earned $24,000 and paid $6,000 in dividends. As a resuilt, Sea Corporation made the Equity Investment 7,200 Equity Income 7.200 Cash 1,800 Dividend Revenue 1,800 What effect will these entries have on Sea Corporation's balance sheet? Investment understated, retained earnings understated Investment overstated, retained earnings overstated a. b. c. Investment overstated, retained earnings understated d. No effect 2. Jeter Co. received a cash dividend from a common stock investment. Should Jeter report an increase in the investment account if it accounts for the investment under the fair value method or the equity method? a. b. c. d. An investor who owns 30% of the common stock of an investee is most likely to exercise significant influence requiring use of the equity method when: a. Fair value method, NO: Fair value method, YES; Equity method, YES Fair value method, YES; Equity method, NO Fair value method, NO: Equity method, NO Equity method, YES 3 The investor and investee sign an agreement under which the investor surrenders significant rights b. The investor tries and fails to obtain representation on the investee's board of directors c. Tries and fails to obtain financial information from the investee The second largest investor owns only 1% of the investee's outstanding stock An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the equity investment account of the investor is: a. Not affected by its share of the earnings or losses of the investee b. Not affected by its share of the earnings of the investee but is decreased by its share of the d. 4. losses of the investee. Increased by its share of the earnings of the investee but is not affected by its share of the C. investee's losses. d. Increased by its share of the earnings of the investee and is decreased by its share of the investee's losses. Sherman uses the equity method to account for its investment in Forrest on January 1. On the date of acquisition, Forrest's land and buildings were undervalued on its balance these excesses of fair values over book values affect Sherman's Equity Income from Forrest? a. Building, Decrease; Land, Decrease b. Building, Decrease; Land, No Effect c. Building, Increase; Land, Increase d. Building, Increase; Land, No Effect