Problem 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?
Cost Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
Problem 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.
During 20X0, Neil received the following distributions from its common stock investments:
November 6 $30,000 cash dividend from B&K
November 11 $1,500 cash dividend from Amal
December 26 3 percent common stock dividend from Amal
The closing price of this stock was $115 per share.
What amount of dividend revenue should Neil report for 20X0?
a. $1,500.
b. $4,200.
c. $31,500.
d. $34,200.
Problem 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?
a. At the book value of the consideration given.
b. At the par value of the stock acquired.
c. At the book value of the stock acquired.
d. At the fair value of the consideration given.
Problem 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:
a. Decreases the investment account.
b. Decreases the goodwill account.
c. Increases the investment revenue account.
d. Does not affect the investment account.
Problem 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?
a. Result in an increased current ratio.
b. Result in increased earnings per share.
c. Increase several turnover ratios.
d. Decrease book value per share.