Advanced Accounting Test 1 Practice

2026 Fall Year at RU.

(PROBLEM 7 BOOK)

In January 2026, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2026, Martes reported net income of $170,000. In 2027, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Inc., at December 31, 2027?

a. $728,000 b. $748,000 c. $756,000 d. $776,000

(Problem 8 Book)

Franklin purchases 40 percent of Johnson Company on January 1 for $500,000. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson's operating and financing policies. Johnson reports assets on that date of $1,400,000 with liabilities of $500,000. One building with a 7-year remaining life is undervalued on Johnson's books by $140,000. Also, Johnson's book value for its trademark (10-year remaining life) is undervalued by $210,000. During the year, Johnson reports net income of $90,000 while declaring dividends of $30,000. What is the Investment in Johnson Company balance (equity method) in Franklin's financial records as of December 31?

1. a. $504,000 b. $507,600 c. $513,900 d. $516,000

Connect Ch1 Problem #1

In January 2026, Domingo, Incorporated, acquired 20 percent of the outstanding common stock of Martes, Incorporated, for $908,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $4,760,000 with liabilities of $970,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2026, Martes reported net income of $228,000. In 2027, Martes reported net income of $287,000. Dividends of $98,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Incorporated, at December 31, 2027?

A $1,074,400 B $1,059,400 C $971,800 D $941,800

answer

Connect Ch1 Problem #3

Hawk Company has owned 10 percent of Lark, Incorporated, for the past several years. This ownership did not allow Hawk to have significant influence over Lark. Recently, Hawk acquired an additional 30 percent of Lark and now will use the equity method. How will the investor report this change?

Top of Form

Multiple Choice

• A cumulative effect of an accounting change is shown in the current income statement.

• A retrospective adjustment is made to restate all prior years presented using the equity method.

• Hawk will report the change as a component of accumulated other comprehensive income.

• No change is recorded; the equity method is used from the date of the new acquisition.

• No change is recorded; the equity method is used from the date of the new acquisition

Connect Ch1 Problem#4

Franklin purchases 40 percent of Johnson Company on January 1 for $578,700. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,509,000 with liabilities of $572,000. One building with a 7-year remaining life is undervalued on Johnson’s books by $274,750. Also, Johnson’s book value for its trademark (10-year remaining life) is undervalued by $235,000. During the year, Johnson reports net income of $180,000 while declaring dividends of $120,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

Top of Form

Multiple Choice

• $577,600

• $649,600

• $602,700

• $593,300

Connect Ch1 Problem#5

On January 1, Belleville Company paid $2,940,000 to acquire 73,500 shares of O'Fallon’s voting common stock, which represents a 40 percent investment. No allocations to goodwill or other specific accounts were made. Significant influence over O'Fallon is achieved by this acquisition, and so Belleville applies the equity method. O'Fallon declared a $2 per share dividend during the year and reported net income of $600,000. What is the balance in the Investment in O'Fallon account found in Belleville’s financial records as of December 31?

Multiple Choice

• $3,033,000

• $3,180,000

• $3,093,000

• $3,153,000

Connect Ch1 Problem#6

On January 1, Belleville Company paid $2,295,000 to acquire 90,000 shares of O'Fallon’s voting common stock, which represents a 30 percent investment. No allocations to goodwill or other specific accounts were made. Significant influence over O'Fallon is achieved by this acquisition, and so Belleville applies the equity method. O'Fallon declared a $1 per share dividend during the year and reported net income of $750,000. What is the balance in the Investment in O'Fallon account found in Belleville’s financial records as of December 31?

Multiple Choice

• $2,430,000

• $2,520,000

• $2,610,000

• $2,295,000

Connect Ch1 Problem#7

Jubilee, Incorporated, owns 30 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $75,600 and then sells it to JPW for $126,000. At the end of the year, JPW still holds only $27,900 of merchandise. What amount of gross profit must Jubilee defer in reporting this investment using the equity method?

Multiple Choice

• $6,048

• $11,160

• $13,548

• $3,348

Connect Ch1 Problem#8

Under fair-value accounting for an equity investment, which of the following affects the income the investor recognizes from its ownership of the investee?

Multiple Choice

• Other comprehensive income reported by the investee.

• Intra-entity profits from upstream sales.

• The investee’s reported income adjusted for excess cost over book value amortizations.

• Changes in the fair value of the investor’s ownership shares of the investee.

• Changes in the fair value of the investor’s ownership shares of the investee.

Connect Ch1 Problem#9

The equity method tends to be most appropriate if

Multiple Choice

• An investment represents 50 percent or more of the voting stock of an investee.

• The investor is unable to obtain representation on the investee’s board of directors.

• An investment enables the investor to influence the operating and financial decisions of the investee.

• Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor.

• An investment enables the investor to influence the operating and financial decisions of the investee.

Connect Ch1 Problem#10

Connect Ch1 Problem#11

On January 1, 2027, Alamar Corporation acquired a 41 percent interest in Burks, Incorporated, for $233,000. On that date, Burks’s balance sheet disclosed net assets with both a fair and book value of $320,000. During 2027, Burks reported net income of $82,000 and declared and paid cash dividends of $28,000. Alamar sold inventory costing $25,000 to Burks during 2027 for $35,000. Burks used all of this merchandise in its operations during 2027.

Prepare all of Alamar’s 2027 journal entries to apply the equity method to this investment.

Note: If no entry is required for a transaction or event, select "No journal entry required" in the first account field.

·       Record the acquisition of a 41 percent interest in Burks.

·       Record the accrual of 41 percent of the reported earnings of the investee

·       Record the investee dividend declaration

·       Record the collection of dividend from investee

·       Record the income on intra-entity sale.

Connect Ch1 Problem#12

On January 1, 2026, Bertrand, Incorporated, paid $73,500 for a 40 percent interest in Chestnut Corporation’s common stock. This investee had assets with a book value of $234,500 and liabilities of $101,500. A patent held by Chestnut having a $5,500 book value was actually worth $37,000. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to an indefinite-lived asset. During 2026, Chestnut earned income of $49,000 and declared and paid dividends of $16,000. In 2027, it had income of $73,500 and dividends of $21,000. During 2027, the fair value of Bertrand’s investment in Chestnut had risen from $86,400 to $97,500.

Required:

1. Assuming Bertrand uses the equity method, what balance should appear in the Investment in Chestnut account as of December 31, 2027?

2. Assuming Bertrand uses fair-value accounting, what income from the investment in Chestnut should be reported for 2027?

Connect Ch1 Problem#13

When an equity method investment account is reduced to a zero balance

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Multiple Choice

• The investor should discontinue using the equity method until the investee begins paying dividends.

• The investor should establish a negative investment account balance for any future losses reported by the investee.

• Future losses are reported as unusual items in the investor’s income statement.

• The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.

• The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.

Connect Ch1 Problem#14

Camille, Incorporated, sold $155,000 in inventory to Eckerle Company during 2026 for $250,000. Eckerle resold $119,000 of this merchandise in 2026 with the remainder to be disposed of during 2027.

Required:

Assuming that Camille owns 25 percent of Eckerle and applies the equity method, what journal entry is recorded at the end of 2026 to defer the intra-entity gross profit?

·       Record the entry at the end of 2026 to defer unrealized gross profit

Connect Ch1 Problem#15

Max Company reports net income of $206,000 each year and declares an annual cash dividend of $110,000. The company holds net assets of $1,330,000 on January 1, 2026. On that date, Eden Company purchases 40 percent of Max’s outstanding common stock for $706,000, which gives it the ability to significantly influence Max. At the purchase date, the excess of Eden’s cost over its proportionate share of Max’s book value was assigned to an indefinite-lived asset. On December 31, 2028, what is the Investment in Max Company balance (equity method) in Eden’s financial records?

Multiple Choice

• $821,200

• $870,800

• $909,200

• $953,200

Connect Ch1 Problem#16

On January 1, 2027, Kroll Corporation paid $2,427,000 for 31 percent of the outstanding voting stock of Sharon, Incorporated, and appropriately applied the equity method for its investment. Any excess of cost over Sharon’s book value was attributed to an indefinite-lived asset. During 2027, Sharon reports $808,000 in net income and a $1,030,000 other comprehensive income loss. Sharon also declares and pays $23,000 in dividends.

Required:

1. What amount should Kroll report as its Investment in Sharon on its December 31, 2027, balance sheet?

2. What amount should Kroll report as Equity in Earnings of Sharon on its 2027 income statement?

Connect Ch1 Problem#17

Milani, Incorporated, acquired 10 percent of Seida Corporation on January 1, 2026, for $188,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2027, Milani purchased an additional 30 percent of Seida for $600,000 that resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,000,000 in total. Seida’s January 1, 2027, book value equaled $1,850,000, although land was undervalued by $135,000. Any additional excess fair value over Seida's book value was attributable to a trademark with an eight-year remaining life. During 2027, Seida reported income of $308,000 and declared and paid dividends of $108,000.

Required:

Prepare the 2027 journal entries for Milani related to its investment in Seida.

Note: If no entry is required for a transaction or event, select "No journal entry required" in the first account field.

·       Record acquisition of Seida stock.

·       Record the accrual of 40 percent of the reported earnings of the investee.

·       Record the amortization of fair value in excess of book value allocated to Trademark.

·       Record investee dividend declaration.

·       Record collection of dividend from investee.

Connect Ch1 Problem#18

Perez, Incorporated, applies the equity method for its 25 percent investment in Senior, Incorporated. During 2027, Perez sold goods with a 40 percent gross profit to Senior, which sold all of these goods in 2027. How should Perez report the effect of the intra-entity sale on its 2027 income statement?

Top of Form

Multiple Choice

• Sales and cost of goods sold should be reduced by the amount of intra-entity sales.

• Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales.

• No adjustment is necessary.

• Investment income should be reduced by 25 percent of the gross profit on the amount of intra-entity sales.

Connect Ch1 Problem#19

On January 3, 2027, Devi Corporation acquired 30 percent of the outstanding common stock of Mustafa Company for $1,449,000. This acquisition gave Devi the ability to exercise significant influence over the investee. The book value of the acquired shares was $823,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2027, Mustafa reported net income of $334,000 and declared cash dividends of $30,000. On December 31, 2027, what should Devi report as its investment in Mustafa under the equity method?