Question 32 On January 1, 2013, Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings. Book values of Sunflower's net assets equaled their fair values on this date. Sunflower's net income and dividends for 2013 through 2015 were as follows: 2013 2014 2015 Net income $ 8,000 $ 10,000 $15,000Dividends paid 5,000 5,000 5,000 Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2015 was Answers:A. $76,700. B. $95,000. C. $80,000. D. $83,300. Question 33 Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis? Answers:A. Depreciation expense on the excess fair value attributed to machinery B. Amortization expense of goodwill C. Depreciation expense on the excess fair value attributed to building D. Amortization expense on the excess fair value attributed to lease agreements Question 34 Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2015 was Answers:A. $81,800. B. $83,300. C. $78,200. D. $80,000. Question 35 Bart Company purchased a 30% interest in Simpson Corporation on January 1, 2013, and Bart accounted for its investment in Simpson under the equity method for the next 3 years. On January 1, 2016, Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson. Bart should Answers:A. account for the remaining investment under the cost method, using the investment in Simpson account balance immediately after the sale as the new cost basis. B. adjust the investment in Simpson account to one-half of its original amount and account for the remaining 15% interest using the equity method. C. continue to account for its remaining investment in Simpson under the equity method for the sake of consistency. D. adjust the investment account to one-half of its original amount (one-half of the purchase price in 2013), and account for the remaining 15% investment under the cost method. Question 36 Which method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company? Answers:A. Either the fair value method or the equity method may be used, depending upon the relationship between the companies. B. Only the acquisition method. C. Only the equity method may be used. D. Only the fair value method may be used. Question 37 In reference to intercompany transactions between an investor and an investee, when the investor can significantly influence the investee, which of the following statements is correct, assuming that the investor is using the equity method? Answers:A. In reporting its share of earnings and losses of an investee, the investor must eliminate the effect of profits and losses on the intercompany transactions until they are realized. B. As long as the investor recognizes the effects of the transaction in its financial statements, it is not required to provide any additional disclosures. C. None of the above is correct. D. There is the presumption of arms-length bargaining between the related parties. Question 38 Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000 and $730,000, respectively. At what value will the buildings be recorded by Pepper? Answers:A. $520,000 B. $0 C. $730,000 D. $210,000

Question

Question 32   On January 1, 2013, Pansy Company acquired a 10% interest in Sunflower Corporation for $80,000 when Sunflower's stockholders' equity consisted of $400,000 capital stock and $100,000 retained earnings. Book values of Sunflower's net assets equaled their fair values on this date. Sunflower's net income and dividends for 2013 through 2015 were as follows:                                                        2013                        2014                     2015    Net income                            $ 8,000                 $ 10,000                $15,000Dividends paid                       5,000                       5,000                    5,000 Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2015 was   Answers:A. $76,700. B.  $95,000. C. $80,000. D.  $83,300.   Question 33   Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis?   Answers:A. Depreciation expense on the excess fair value attributed to machinery B. Amortization expense of goodwill C. Depreciation expense on the excess fair value attributed to building D. Amortization expense on the excess fair value attributed to lease agreements   Question 34   Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower. The balance in the Investment in Sunflower account at December 31, 2015 was   Answers:A. $81,800. B. $83,300. C. $78,200. D. $80,000.   Question 35   Bart Company purchased a 30% interest in Simpson Corporation on January 1, 2013, and Bart accounted for its investment in Simpson under the equity method for the next 3 years. On January 1, 2016, Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson. Bart should   Answers:A. account for the remaining investment under the cost method, using the investment in Simpson account balance immediately after the sale as the new cost basis. B. adjust the investment in Simpson account to one-half of its original amount and account for the remaining 15% interest using the equity method. C. continue to account for its remaining investment in Simpson under the equity method for the sake of consistency. D. adjust the investment account to one-half of its original amount (one-half of the purchase price in 2013), and account for the remaining 15% investment under the cost method.   Question 36   Which method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company?   Answers:A. Either the fair value method or the equity method may be used, depending upon the relationship between the companies. B. Only the acquisition method. C. Only the equity method may be used. D. Only the fair value method may be used.   Question 37   In reference to intercompany transactions between an investor and an investee, when the investor can significantly influence the investee, which of the following statements is correct, assuming that the investor is using the equity method?   Answers:A. In reporting its share of earnings and losses of an investee, the investor must eliminate the effect of profits and losses on the intercompany transactions until they are realized. B. As long as the investor recognizes the effects of the transaction in its financial statements, it is not required to provide any additional disclosures. C. None of the above is correct. D. There is the presumption of arms-length bargaining between the related parties.   Question 38   Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000 and $730,000, respectively. At what value will the buildings be recorded by Pepper?   Answers:A. $520,000 B. $0 C. $730,000 D. $210,000

Accepted Answer

Answer 32)
Since the company uses the cost method of accounting for its investment, hence the…