41 when a public company holds between 20 and 50 of the outstanding common shares of 4315399

41.When a public company holds between 20% and 50% of the outstanding common shares of an investee, which of the following statements applies?

a) The investor should always use the equity method to account for its investment.

b) The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise “significant influence” over the investee.

c) The investor must use the cost method unless it can clearly demonstrate the ability to exercise “significant influence” over the investee.

d) The investor should always use the cost method to account for its investment.

42.An investor who owns 15% of an entity's voting shares can

a) potentially have influence over the investee if the shares are widely held.

b) always be assumed to have little or no influence over the investee.

c) be assumed to be using the cost model.

d) be assumed to always use the equity method.

43.An investor who owns 11% of an entity's voting shares

a) must use the equity method.

b) would be likely to prepare consolidated statements.

c) may have significant influence over the investee if the shares are closely held.

d) may have significant influence over the investee if the shares are widely held.

44.Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity method. OldeCorp. should record a cash dividend received from Young as

a) a reduction of the carrying value of the investment.

b) additional paid-in capital.

c) an addition to the carrying value of the investment.

d) dividend income.

45.Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a) investor sells the investment.

b) investee declares a dividend.

c) earnings are reported by the investee in its financial statements.

d) investee pays a dividend.

46.Jabba Inc. owns 35% of Hutt Corp., and has significant influence over Hutt. During the calendar year 2017, Hutt reported net income of $300,000 and paid dividends of $30,000. Jabba mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on Jabba’s investment account, net income, and retained earnings, respectively?

a) understate, overstate, overstate

b) overstate, understate, understate

c) understate, understate, understate

d) overstate, overstate, overstate

47.When an investor is using the equity method and receives dividends from the investee, the journal entry will include a

a) credit to Dividend Income.

b) credit to Retained Earnings.

c) credit to the Investment account.

d) debit to the Investment account.

48.When an investor is using the equity method and the investee reports a net loss, the journal entry will include a

a) debit to the Investment account.

b) debit to Retained Earnings.

c) credit to the Investment account.

d) credit to Investment Income or Loss.

49.When an investor, using the equity method, pays more than its share of the investee’s book value, the difference is

a) ignored.

b) accounted for on the investor’s books by a debit to Goodwill.

c) accounted for on the investee’s books by a debit to Goodwill.

d) requires that the investor’s Investment account and any investment income from the associate be adjusted over time.

50.Current IFRS rules for equity investments that are traded in an active market require that they

a) can be accounted for under the cost model.

b) can be accounted for under the fair value through net income model.

c) should generally be accounted for under the fair value through other comprehensive income model.

d) cannot be accounted for under the fair value through net income model.

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