Quiz I (Chapters 1and 2)
Date: Name: ID: Answer the following Questions: 1. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of inter-company inventory profit must be deferred by Tower? A. $6,480 B. $3,240 C. $10,800 D. $16,200 E. $6,610 2. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account 3. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A. Cost of goods sold B. Property, plant, & equipment C. Patents D. Goodwill E. Bonds payable
4. A company should always use the equity method to account for an investment if A. it has the ability to exercise significant influence over the operating policies of the investee. B. it owns 30% of another company's stock. C. it has a controlling interest (more than 50%) of another company's stock. D. the investment was made primarily to earn a return on excess cash. E. it does not have the ability to exercise significant influence over the operating policies of the investee. 5. An upstream sale of inventory is a sale A. between subsidiaries owned by a common parent. B. with the transfer of goods scheduled by contract to occur on a specified future date. C. in which the goods are physically transported by boat from a subsidiary to its parent. D. made by the investor to the investee. E. made by the investee to the investor. 6. In a situation where the investor exercises significant influence over the investee, which of the following entries is not...
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