ACC 501 EXAM 1 QUESTIONS AND
ANSWERS GRADED A+ 2026
All of the following statements regarding the investment account using the equity method are
true except: - ANS Dividends received are reported as revenue.
Under the equity method, when the company's share of cumulative losses equals its investment
and the company has no obligation or intention to fund such additional losses, which of the
following statements is true? - ANS The investor should suspend applying the equity method
and not record any equity in income of investee until its share of future profits is sufficient to
recover losses that have not previously been recorded.
A company has been using the equity method to account for its investment. The company sells
shares and does not continue to have significant influence. Which of the following statements is
true? - ANS A prospective change in accounting principle must occur.
(There are more than one answers) When an investor sells a portion of an equity-method
investment, (select all correct answers) - ANS The investment account should reflect a
balance current as of the date of sale
The investor continues to apply the equity method if the investor continues to have the ability
to exercise significant influence over the investee
The investor recognizes a gain or loss on the sale
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,In a situation where the investor exercises significant influence over the investee, which of the
following entries is not actually posted to the books of the investor?
(I) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
(II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income
account.
(III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend
Receivable. - ANS Entry II only
An investor 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 an investee's stock
C) It has a controlling interest (more than 50%) of an investee'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 -
ANS A) It has the ability to exercise significant influence over the operating policies of the
investee.
On January 1, 2016, Dermot Company purchased 15% of the voting common stock of Horne
Corp. On January 1, 2018, 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 2018 but should make no changes in its financial
statements for 2017 and 2016.
B) It should prepare consolidated financial statements for 2018.
C) It must restate the financial statements for 2017 and 2016 as if the equity method had been
used for those two years.
D) It should record a prior period adjustment at the beginning of 2018 but should not restate
the financial statements for 2017 and 2016.
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, E) It must restate the financial statements for 2017 as if the equity method had been used then.
- ANS A) It must use the equity method for 2018 but should make no changes in its financial
statements for 2017 and 2016.
On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to
account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in
Nico. It no longer had the ability to exercise significant influence over the operations of Nico.
How should Jordan account for this change?
A) Jordan should continue to use the equity method to maintain consistency in its financial
statements.
B) Jordan should restate the prior years' financial statements and change the balance in the
investment account as if the fair-value method had been used since 2018.
C) Jordan has the option of using either the equity method or the fair-value method for 2018
and future years.
D) Jordan should report the effect of the change from the equity to the fair-value method as a
retrospective change in accounting principle.
E) Jordan should use the fair-value method for 2019 and future years, but should n - ANS E)
Jordan should use the fair-value method for 2019 and future years, but should not make a
retrospective adjustment to the investment account.
Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of
the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is
expected to recover over the next several months. How should Club account for the decline in
value?
A) Club should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Club should decrease the balance in the investment account to the current value and
recognize a loss on the income statement.
D) Club should not record its share of Chip's 2018 earnings until the decline in the fair value of
the stock has been recovered
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
ANSWERS GRADED A+ 2026
All of the following statements regarding the investment account using the equity method are
true except: - ANS Dividends received are reported as revenue.
Under the equity method, when the company's share of cumulative losses equals its investment
and the company has no obligation or intention to fund such additional losses, which of the
following statements is true? - ANS The investor should suspend applying the equity method
and not record any equity in income of investee until its share of future profits is sufficient to
recover losses that have not previously been recorded.
A company has been using the equity method to account for its investment. The company sells
shares and does not continue to have significant influence. Which of the following statements is
true? - ANS A prospective change in accounting principle must occur.
(There are more than one answers) When an investor sells a portion of an equity-method
investment, (select all correct answers) - ANS The investment account should reflect a
balance current as of the date of sale
The investor continues to apply the equity method if the investor continues to have the ability
to exercise significant influence over the investee
The investor recognizes a gain or loss on the sale
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,In a situation where the investor exercises significant influence over the investee, which of the
following entries is not actually posted to the books of the investor?
(I) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
(II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income
account.
(III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend
Receivable. - ANS Entry II only
An investor 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 an investee's stock
C) It has a controlling interest (more than 50%) of an investee'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 -
ANS A) It has the ability to exercise significant influence over the operating policies of the
investee.
On January 1, 2016, Dermot Company purchased 15% of the voting common stock of Horne
Corp. On January 1, 2018, 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 2018 but should make no changes in its financial
statements for 2017 and 2016.
B) It should prepare consolidated financial statements for 2018.
C) It must restate the financial statements for 2017 and 2016 as if the equity method had been
used for those two years.
D) It should record a prior period adjustment at the beginning of 2018 but should not restate
the financial statements for 2017 and 2016.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
, E) It must restate the financial statements for 2017 as if the equity method had been used then.
- ANS A) It must use the equity method for 2018 but should make no changes in its financial
statements for 2017 and 2016.
On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to
account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in
Nico. It no longer had the ability to exercise significant influence over the operations of Nico.
How should Jordan account for this change?
A) Jordan should continue to use the equity method to maintain consistency in its financial
statements.
B) Jordan should restate the prior years' financial statements and change the balance in the
investment account as if the fair-value method had been used since 2018.
C) Jordan has the option of using either the equity method or the fair-value method for 2018
and future years.
D) Jordan should report the effect of the change from the equity to the fair-value method as a
retrospective change in accounting principle.
E) Jordan should use the fair-value method for 2019 and future years, but should n - ANS E)
Jordan should use the fair-value method for 2019 and future years, but should not make a
retrospective adjustment to the investment account.
Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of
the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is
expected to recover over the next several months. How should Club account for the decline in
value?
A) Club should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Club should decrease the balance in the investment account to the current value and
recognize a loss on the income statement.
D) Club should not record its share of Chip's 2018 earnings until the decline in the fair value of
the stock has been recovered
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
