Question : 21. The rationale for the equity method that it better measures : 1230382

21. The rationale for the equity method is that it better measures an investor’s income from investing activities when, because of its ownership interest, it  
A. can exert control over the operations and dividend policy of the investee.
B. can exert significant influence over the operations and dividend policy of the investee.
C. cannot exert significant influence over the operations and dividend policy of the investee.
D. can exert control over the operations and dividend policy of the investor.
E. can exert significant influence over the operations and dividend policy of the investor.

22. Paula Company measures its investments in available-for-sale marketable securities  
A. at cost on the balance sheet and recognizes income only when it receives a dividend (revenue) or sells some of the securities at a gain or loss.
B. at fair value on the income statement and recognizes income when it receives a dividend (revenue) .
C. at cost on the balance sheet and recognizes income only when it receives a dividend (revenue).
D. at fair value on the balance sheet and recognizes income only when it receives a dividend (revenue) or sells some of the securities at a gain or loss.
E. at cost on the balance sheet and recognizes income only when it sells some of the securities at a gain or loss.

23. Paula Company recognizes unrealized changes in the fair value of available-for-sale securities in  
A. net income.
B. retained earnings.
C. additional paid-in-capital.
D. other comprehensive income, not in earnings.
E. none of the above

24. The equity method records the initial purchase of an investment in voting common stock at _____  Each period, the investor treats as revenue its share of the _____, of the investee. The investor treats dividends declared by the investee as _____.  
A. acquisition cost; dividends; income
B. acquisition cost; periodic earnings; a reduction of the investor’s investment in stock of the investee account
C. present value of future cash flows; dividends; a reduction of the investor’s investment in stock of the investee account
D. present value of future cash flows; periodic earnings; a reduction of the investor’s investment in stock of the investee account
E. future value of present cash flows; dividends; a reduction of the investor’s investment in stock of the investee account

25. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

The entry to record the acquisition is:  
A. Investment in Stock of Investee Corporation . . . . . . . . . . . . . .600,000 
   Marketable Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .600,000
B. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     600,000
   Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
C. Investment in Stock of Investee Corporation . . . . . . . . . . . . . .600,000
   Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  600,000
D. Marketable Securities . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . .  600,000
   Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
E. Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  600,000
   Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000

26. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee Corporation reports earnings of $80,000. Purchaser Corporation records the following journal entry:  
A. Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
   Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .  .24,000
B. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 24,000
   Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24,000
C. Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
    Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .  80,000
D. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 80,000
   Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   80,000
E. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 24,000
   Investment Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    24,000

27. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

If Investee Corporation declares and pays a dividend of $30,000 to holders of its common stock, Purchaser Corporation records the following journal entry:  
A. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9,000
   Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .  . 9,000
B. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 9,000 
   Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9,000 
C. Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 
    Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .   9,000 
D. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  9,000 
   Investment Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           9,000 
E. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  9,000
   Investment Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9,000

28. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

Purchaser Corporation records income earned by Investee Corporation as a(n) _____, while the dividend _____, and  _____ account.  
A. increase in investment; returns part of the investment; decreases the Investment in Stock of  Investee Corporation
B. increase investment revenue; returns part of the investment; decreases the Investment in Stock of  Investee Corporation
C. increase investment revenue; decreases investment revenue; increases the Investment in Stock of  Investee Corporation
D. decrease in investment; returns part of the investment;  increases the Investment in Stock of  Investee Corporation
E. decrease in investment; decreases investment revenue; increases the Investment in Stock of  Investee Corporation

29. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

Suppose that Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the next accounting period. Purchaser Corporation’s entries are:  
A. Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
   Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .  .30,000
Investment in Stock of Investee Corporation. . . . . . . . . . .. . . . . 12,000 
   Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           12,000 
B. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 30,000
   Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12,000 
   Investment in Stock of Investee Corporation. . . . . . . . . . . . . . . . . . . . 12,000
C. Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
    Investment in Stock of Investee Corporation . . . . . . . . . . . . . . .  .  .  100,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12,000 
   Investment in Stock of Investee Corporation. . . . . . . . . . . . . . . . . . . . 12,000 
D. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 100,000
   Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  100,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12,000 
   Investment in Stock of Investee Corporation. . . . . . . . . . . . . . . . . . . . 12,000 
E. Investment in Stock of Investee Corporation . . . . . . . . . . . . . . . 30,000
   Investment Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    30,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12,000 
   Investment in Stock of Investee Corporation. . . . . . . . . . . . . . . . . . . . 12,000 

30. Purchaser Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000. Purchaser Corporation acquires the investment in Investee Corporation by buying previously issued shares of Investee Corporation from other investors.

Between the time of the acquisition and the end of Purchaser Corporation’s next accounting period, Investee Corporation reports earnings of $80,000; and pays a dividend of $30,000 to holders of its common stock,

Investee Corporation reports earnings of $100,000 and pays dividends of $40,000 during the subsequent accounting period.

Purchaser Corporation’s Investment in Stock of Investee Corporation  account now has a balance of :  
A. $609,000 
B. $621,000
C. $633,000
D. $642,000
E. $657,000