MULTIPLE CHOICE - Choose the one alternative that best completes the statement or 

answers the question.

1) Baker Company owns 15% of the common stock of Charlie Corporation and used the 

fair-value method to account for this investment. Charlie reported net income of $120,000 for 

2021 and paid dividends of $70,000 on October 1, 2021. How much income should Baker 

recognize on this investment in 2021?

A) $18,000.

B) $10,500.

C) $28,500.

D) $7,500.

E) $50,000.

2) Loeffler Company owns 35% of the common stock of Tetter Co. and uses the equity 

method to account for the investment. During 2021, Tetter reported income of $260,000 and paid 

dividends of $90,000. There is no amortization associated with the investment. During 2021, 

how much income should Loeffler recognize related to this investment?

A) $90,000.

B) $91,000.

C) $122,500.

D) $31,500.

E) $59,500.

3) On January 1, 2021, Lee Company paid $1,870,000 for 80,000 shares of Thomas Co.’s 

voting common stock which represents a 45% investment. No allocation to goodwill or other 

specific account was necessary. Significant influence over Thomas was achieved by this 

acquisition. Thomas distributed a dividend of $2.00 per share during 2021 and reported net 

income of $720,000. What was the balance in the Investment in Thomas Co. account found in the 

financial records of Lee as of December 31, 2021?

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A) $2,114,000.

B) $2,194,000.

C) $2,354,000.

D) $2,158,000.

E) $2,034,000.

4) A necessary condition to use the equity method of reporting for an equity investment is 

that the investor company must

A) have the ability to exercise significant influence over the operating and financial 

policies of the investee.

B) own at least 30% of the investee's voting stock.

C) possess a controlling interest in the investee's voting stock.

D) not have the ability to exercise significant influence over the operating and financial 

policies of the investee.

5) On January 1, 2019, Dermot Company purchased 15% of the voting common stock of 

Horne Corp. On January 1, 2021, Dermot purchased 28% of Horne’s voting common stock. If 

Dermot achieves significant influence with this new investment, how must Dermot account for 

the change to the equity method?

A) It must use the equity method for 2021 but should make no changes in its financial 

statements for 2020 and 2019.

B) It should prepare consolidated financial statements for 2021.

C) It must restate the financial statements for 2020 and 2019 as if the equity method had 

been used for those two years.

D) It should record a prior period adjustment at the beginning of 2021 but should not 

restate the financial statements for 2020 and 2019.

E) It must restate the financial statements for 2020 as if the equity method had been 

used then.