This document includes ACC 440 Week 1 Individual Assignment Ch. 2 Textbook Exercises C2-1 E2-1

C2-1

Choice of Accounting Method

Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 20X3. On December 31, 20X3, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or cost method in reporting their ownership in Flat Flooring.

Required

a. What factors should be considered in determining whether equity-method reporting is appropriate?

b. Which of the two methods is likely to show the larger reported contribution to Slanted’s earnings in 20X4? Explain.

c. Why might the use of the equity method become more appropriate as the percentage of ownership increases?

E2-1

Multiple-Choice Questions on Use of Cost and Equity Methods [AICPA Adapted]

Select the correct answer for each of the following questions.

1. Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting?

2. In 20X0, Neil Company held the following investments in common stock:

• 25,000 shares of B&K Inc.’s 100,000 outstanding shares. Neil’s level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K.

• 6,000 shares of Amal Corporation’s 309,000 outstanding shares.

What amount of dividend revenue should Neil report for 20X0?

3. What is the most appropriate basis for recording the acquisition of 40 percent of the stock in another company if the acquisition was a noncash transaction?

4. An investor uses the equity method to account for investments in common stock. The purchase price implies a fair value of the investee’s depreciable assets in excess of the investee’s net asset carrying values. The investor’s amortization of the excess:

5. A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?

6. An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following methods?

7. An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year was in excess of the investor’s share of investee’s earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be: