Chapter 1 Advanced Accounting

1. D. A deduction from the investment account.

2. B. The investor owns 30% of the investee but another owner holds the remaining70%.

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

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

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

6. A. $1,724,000

Acquisition price $1,600,000

Equity in Investee income ($560,000 × 40%) 224,000

Dividends (50,000 shares × $2.00) (100,000)

Investment in Harrison Corporation as of December 31 $1,724,000

7. A. $728,000

Acquisition price $700,000

Income accruals: 2014—$170,000 × 20% 34,000

2015—$210,000 × 20% 42,000

Amortization (Excess cost over book value): 2014 (10,000)

Amortization: 2015 (10,000)

Dividends: 2014—$70,000 × 20% (14,000)

2015—$70,000 × 20% (14,000)

Investment in Martes as of December 31, 2015 $728,000

Acquisition price of Martes $700,000

Acquired net assets (book value) ($3,000,000 × 20%) (600,000)

Excess cost over book value to patent $100,000

Annual amortization (10 year remaining life) $10,000

8. B. $507,600

Purchase price of Johnson stock $500,000

Book value of Johnson Net Assets ($900,000 × 40%) (360,000)

Cost in excess of book value $140,000

Remaining Annual

Payment identified with undervalued assets life amortization

Building ($140,000 × 40%) 56,000 7 yrs. $8,000

Trademark ($210,000 × 40%) 84,000 10 yrs. 8,400

Total $ -0- $16,400

Investment purchase price $500,000...