1) On January 3, 2013, Matteson Corporation acquired 30 percent of the outstanding common stock of O’Toole Company for $1,209,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $840,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2013, O’Toole reported net income of $308,000 and paid cash dividends of $40,000. At December 31, 2013, what should Matteson report as its investment in O’Toole under the equity method?

2) On January 1, 2012, Alison, Inc., paid $72,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $260,500 and liabilities of $115,500. A patent held by Holister having a $10,200 book value was actually worth $23,700. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2012, Holister earned income of $39,000 and paid dividends of $13,000. In 2013, it had income of $61,500 and dividends of $18,000. During 2013, the fair value of Allison’s investment in Holister had risen from $84,500 to $92,700.
a.
Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2013?
Investment in Holister $
b.
Assuming Alison uses the fair-value option, what income from the investment in Holister should be reported for 2013?
Investment income $

3) Waters, Inc., acquired 10 percent of Denton Corporation on January 1, 2012, for $274,300 although Denton’s book value on that date was $2,190,000. Denton held land that was undervalued by $148,000 on its accounting records. During 2012, Denton earned a net income of $315,000 while paying cash dividends of $118,000. On January 1, 2013, Waters purchased an additional 30 percent of Denton for $779,250. Denton’s land is still undervalued on that date, but then by $170,000. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2013, Denton reported income of $366,500 and distributed dividends of $137,000.
Prepare all of the 2013 journal entries for Waters.

4) On January 1, 2011, Monroe, Inc., purchased 10,300 shares of Brown Company for $267,800, giving Monroe 10 percent ownership of Brown. On January 1, 2012, Monroe purchased an additional 20,600 shares (20 percent) for $628,300. This latest purchase gave Monroe the ability to apply significant influence over Brown. The original 10 percent investment was categorized as an available-for-sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill.
Brown reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years.
Net Income Cash Dividends
(paid quarterly)
2011 $416,000 $129,000
2012 546,000 166,000
2013 579,500 224,000
On July 1, 2013, Monroe sells 2,060 shares of this investment for $48 per share, thus reducing its interest from 30 to 28 percent. However, the company retains the ability to significantly influence Brown. Using the equity method, what amounts appear in Monroe’s 2013 income statement? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)
As total income accrual (no unearned gains) $
As (Click to select)gain or loss on sale of shares $

5) Russell owns 30 percent of the outstanding stock of Thacker and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2013, the balance in the Investment in Thacker account is $382,000. Amortization associated with this acquisition is $10,500 per year. In 2013, Thacker earns an income of $156,000 and pays cash dividends of $39,000. Previously, in 2012, Thacker had sold inventory costing $54,600 to Russell for $78,000. Russell consumed all but 20 percent of this merchandise during 2012 and used the rest during 2013. Thacker sold additional inventory costing $59,400 to Russell for $90,000 in 2013. Russell did not consume 40 percent of these 2013 purchases from Thacker until 2014.
a.
What amount of equity method income would Russell recognize in 2013 from its ownership interest in Thacker?
Equity income $
b.
What is the equity method balance in the Investment in Thacker account at the end of 2013?
Investment in Thacker $

6) On January 1, 2012, Allan acquires 15 percent of Bellevue’s outstanding common stock for $69,350. Allan classifies the investment as an available-for-sale security and records any unrealized holding gains or losses directly in owners’ equity. On January 1, 2013, Allan buys an additional 10 percent of Bellevue for $53,010, providing Allan the ability to significantly influence Bellevue’s decisions.
During the next two years, the following information is available for Bellevue:
Income Dividends Common Stock
Fair Value (12/31)
2012 $ 170,000 $ 120,000 $ 477,500
2013 201,200 135,600 524,300
In each purchase, Allan attributes any excess of cost over book value to Bellevue’s franchise agreements that had a remaining life of 10 years at January 1, 2012. Also at January 1, 2012, Bellevue reports a net book value of $319,000.
Assume Allan applies the equity method to its Investment in Bellevue account:
a-1.
On Allan’s December 31, 2013, balance sheet, what amount is reported for the Investment in Bellevue account?
Investment in Bellevue $
a-2.
What amount of equity income should Allan report for 2013?
Equity income $
a-3.
Prepare the January 1, 2013, journal entry to retrospectively adjust the Investment in Bellevue account to the equity method.
General Journal Debit Credit
To eliminate AFS fair value adjustment account.
(Click to select)Fair Value Adjustment (Available-for-Sale Securities)Accounts ReceivableUnrealized Holding Gain-Shareholders’ EquityInvestment in BellevueAccounts PayableRetained Earnings (January 1, 2013)CashInterest Payable
(Click to select)Investment in BellevueAccounts PayableCashInterest PayableUnrealized Holding Gain-Shareholders’ EquityAccounts ReceivableRetained Earnings (January 1, 2013)Fair Value Adjustment (Available-for-Sale Securities)
To record retrospective adjustment.
(Click to select)CashAccounts PayableInterest PayableFair Value Adjustment (Available-for-Sale Securities)Retained Earnings (January 1, 2013)Investment in BellevueAccounts ReceivableUnrealized Holding Gain-Shareholders’ Equity
(Click to select)Fair Value Adjustment (Available-for-Sale Securities)Interest PayableAccounts ReceivableInvestment in BellevueCashAccounts PayableRetained Earnings (January 1, 2013)Unrealized Holding Gain-Shareholders’ Equity
Assume Allan elects the fair-value reporting option for its investment in Bellevue:
b-1.
On Allan’s December 31, 2013, balance sheet, what amount is reported for the Investment in Bellevue account?
Investment in Bellevue $
b-2.
What amount of income from its investment in Bellevue should Allan report for 2013?
Reported income $

7) Hobson acquires 40 percent of the outstanding voting stock of Stokes Company on January 1, 2012, for $341,100 in cash. The book value of Stokes’s net assets on that date was $655,000, although one of the company’s buildings, with a $65,200 carrying value, was actually worth $125,450. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $137,500.
Stokes sold inventory with an original cost of $107,100 to Hobson during 2012 at a price of $153,000. Hobson still held $25,050 (transfer price) of this amount in inventory as of December 31, 2012. These goods are to be sold to outside parties during 2013.
Stokes reported a loss of $66,000 for 2012, $44,000 from continuing operations and $22,000 from an extraordinary loss. The company still manages to pay a $6,000 cash dividend during the year.
During 2013, Stokes reported a $47,400 net income and distributed a cash dividend of $8,000. It made additional inventory sales of $76,000 to Hobson during the period. The original cost of the merchandise was $47,500. All but 30 percent of this inventory had been resold to outside parties by the end of the 2013 fiscal year.
Prepare all journal entries for Hobson for 2012 and 2013 in connection with this investment. Assume that the equity method is applied. (Do not round intermediate calculations.)