Question

In: Accounting

1. On January​ 1, 2016, TXU Europe Corporation purchased​ 40% of the outstanding stock of Alberta...

1. On January​ 1, 2016, TXU Europe Corporation purchased​ 40% of the outstanding stock of Alberta Power Pool Corporation for​ $800,000. Net income reported by Alberta Power Pool Corporation for 2016 and 2017​ was, respectively,​ $100,000 and​ $125,000. Dividends paid by Alberta Power Pool Corporation during 2016 and 2017​ were, respectively,​ $60,000 and​ $75,000. The long−term investment will appear on TXU Europe​ Corporation's December​ 31, 2017, balance sheet​ at:

A.​$864,000

B.​$836,000

C.​$746,000

D.$890,000

2.Retail Energy Corporation paid​ $1,300,000 on January​ 1, 2017, to purchase​ 32% of the outstanding shares of Natural Gas Limited. In 2017 Natural Gas Limited reported​ $450,000 of net income and paid​ $100,000 in dividends. If this investment is accounted for using the equity method of​ accounting, what will be the impact on the books of Retail Energy​ Corporation?

A.the Investment account will be increased by​ $144,000

B.income of​ $144,000 will be recorded

C.the Investment account will be decreased by​ $144,000

D.income of​ $32,000 will be recorded

3.Under the equity method of accounting for​ investments, dividends paid by the investee are recorded by the investor​ as:

A.a credit to the Investment account of the investor company

B.no entry is made to record dividends in this accounting situation

C.a debit to the Investment account of the investor company

D.a credit to Dividend Revenue of the investor company

4.Corporations invest in ashort−term investment:

A.to sell it for more than its cost

B.to generate a higher profile

C.to invest excess cash temporarily and to increase income

D.to park cash temporarily

Solutions

Expert Solution

1.

Particulars 2016 2017
Original cost $      800,000 $                 -  
Opening balance $                 -   $      816,000
Add Equity in earnings $         40,000 $         50,000
Less Dividend received $       (24,000) $       (30,000)
Closing balance $      816,000 $      836,000

Hence long−term investment will appear on TXU Europe​ Corporation's December​ 31, 2017, balance sheet​ at $836,000.

Hence Option B is correct.

2.

Under equity method

Impact on investment
Increase in Investment due to income $      144,000
Decrease in investmentdue to dividend $       (32,000)

Option B is correct.

3.

Under the equity method of accounting for​ investments, dividends paid by the investee are recorded by the investor​ as a credit to the Investment account of the investor company.

Hence Option A is correct.

4.

Corporations invest in ashort−term investment to invest excess cash temporarily and to increase income.

Hence Option C is correct.

For any clarification, please comment. Kindly Up Vote!

ekkarill92 answered 2 years ago
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