GUST-ACCT401-CH01-1

1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2018 and paid dividends of $60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018?

2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2018, how much income should Yaro recognize related to this investment?

3. On January 1, 2018, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.’s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2018 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2018?

4. An investor should always use the equity method to account for an investment in associate if:

5. Gunawan Limited acquired a 30% share in Juliano Limited for $80,000. At the date on which it became an associate, Juliano Limited had the following equity (all assets and liabilities were carried at fair value):

Share capital                          $300,000.

Retained earnings                $120,000.

At the end of the financial year following the investment, Juliano Limited generated net income of $18,000.

After applying the equity method of accounting, what is the carrying amount for the investment in associate in the books of Gunawan Limited?

6. Gunawan Limited acquired a 30% share in Juliano Limited for $80,000. At the date on which it became an associate, Juliano Limited had the following equity (all assets and liabilities were carried at fair value):

Share capital                          $300,000.

Retained earnings                $120,000.

At the end of the financial year following the investment, Juliano Limited generated net income of $18,000.

After applying the equity method of accounting, what is the share of profit of associate that should reported at end of year?

7. An investor company acquired a 20% interest in an associate for $44,000. The fair value of net assets for the associate at the acquisition date was $240,000. In the financial period immediately following the date on which it became an associate. The investee took the following action:

• Recognize a revaluation gain (in other comprehensive income) of plant assets of $10,000.
• Generated net income of $30,000.
• Paid a dividend of $5,000.

The carrying balance in the investor’s account “investment in associate” after equity accounting has been applied is:

8. The following information relates to questions 8-10

On 1 January 2004 Joey Ltd acquired 20% of the shares of Leo Ltd for $360,000. At that date, the equity of Leo Ltd was $1,500,000, with all identifiable assets and liabilities being measure at fair value. Profits(losses) made since the date of acquisition are as follows.

There have been no dividends paid or movement in reserves since the date of acquisition.

The unrecorded losses on December 2006 amount to?

9. The following information relates to questions 8-10

On 1 January 2004 Joey Ltd acquired 20% of the shares of Leo Ltd for $360,000. At that date, the equity of Leo Ltd was $1,500,000, with all identifiable assets and liabilities being measure at fair value. Profits(losses) made since the date of acquisition are as follows.

There have been no dividends paid or movement in reserves since the date of acquisition.

At December 2006, the equity account balance (carrying Value) of the investment in Leo was:

10. The following information relates to questions 8-10

On 1 January 2004 Joey Ltd acquired 20% of the shares of Leo Ltd for $360,000. At that date, the equity of Leo Ltd was $1,500,000, with all identifiable assets and liabilities being measure at fair value. Profits(losses) made since the date of acquisition are as follows.

There have been no dividends paid or movement in reserves since the date of acquisition.

The amount of profit that should be recorded on December 2007 amount to:

11. Use the following information to answer questions 11-13:

Blue Plc owns 31% of the equity shares in its associate company, Orange Limited. During the year ended 31 December 2015, Orange sold goods to blue for $500,000 which include a profit of $140,000. A quarter of these goods are still held in inventory of blue at December 2015.

The unrealized profit associated with the above transaction is.

12. Use the following information to answer questions 11-13:

Blue Plc owns 31% of the equity shares in its associate company, Orange Limited. During the year ended 31 December 2015, Orange sold goods to blue for $500,000 which include a profit of $140,000. A quarter of these goods are still held in inventory of blue at December 2015.

The journal entry that should be recorded to eliminate the unrealized profit.

13. Use the following information to answer questions 11-13:

Blue Plc owns 31% of the equity shares in its associate company, Orange Limited. During the year ended 31 December 2015, Orange sold goods to blue for $500,000 which include a profit of $140,000. A quarter of these goods are still held in inventory of blue at December 2015.

If the sale of goods were made from Blue plc to Orange Limited, the journal entry that should be recorded to eliminate the unrealized profit.

14. Use the following information to answer questions 14-15:

Bread Plc is the parent of a group of companies. On 1 January 2015, Bread Plc acquired 31% of the ordinary share capital of Sandwich Plc at cost of $161,000. At this date, the fair value of Sandwich’s assets was $600,000 and liabilities $200,000. During the year to 31 December 2015, Sandwich plc made a comprehensive income of $70,000 resulting from a net income after tax of $80,000 and an unrealized loss on non-trading securities of $10,000 (recognized in other comprehensive income). Sandwich also paid dividends of $2,500.

the acquisition of the 31% share in Sandwich result in:

15. Use the following information to answer questions 14-15:

Bread Plc is the parent of a group of companies. On 1 January 2015, Bread Plc acquired 31% of the ordinary share capital of Sandwich Plc at cost of $161,000. At this date, the fair value of Sandwich’s assets was $600,000 and liabilities $200,000. During the year to 31 December 2015, Sandwich plc made a comprehensive income of $70,000 resulting from a net income after tax of $80,000 and an unrealized loss on non-trading securities of $10,000 (recognized in other comprehensive income). Sandwich also paid dividends of $2,500.

the balance in investment account should reported at: