Accounting

Chapter 2 Test Bank

STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING

|Multiple Choice Questions |
| |

LO1
|1 | |When EagleCompany has less than 50% of the voting stock of Fish Corporation which of the following applies? |
| | | | |
| | |a. |Only the fair value method may be used. |
|| |b. |Only the equity method may be used. |
| | |c. |Either the fair value method or the equity method may be used. |
| | |d. |Neither the fair value method nor the equity method may be used.|

LO2
|2 | |Which one of the following statements is correct for an investor company? |
| | | | |
| | |a. |Once the balance in the Investment in Osprey Co. accountreaches zero, it will not be reduced any further. |
| | |b. |Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee |
| | | |corporation operates at a loss. |
| | |c. |Application of the equity method isdiscontinued when the investor’s share of losses reduces the carrying amount of |
| | | |the investment to zero. |
| | |d. |Under the equity method, any goodwill inherent or contained in the Investment in Osprey Co. account will be amortized|
| | | |to theincome earned from the investee. |

LO2
|3 | |Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the |
| | |following circumstances?|
| | | | |
| | |a. |Griffon has surrendered significant stockholder rights by agreement between Griffon and Duck. |
| | |b. |Griffon has been unable to secure a position on the Duck Corporation Board of Directors.|
| | |c. |Griffon’s ownership is temporary. |
| | |d. |The ownership of Duck Corporation is diverse. |

LO3
|4 | |Jabiru Corporation purchased a 20% interest in Fish Companycommon stock on January 1, 2002 for $300,000. This investment was |
| | |accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2004 |
| | |was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. |
| | |In 2005, Fish Corporation had net...