#10 Flashcards
(20 cards)
Exception to consolidating financial statement
when the subsidiary is in bankcruptcy
When does an investor establish parent status?
When control over the investee is established or more than 50% of the voting stock of the investee has been acquired
If the company receives a stock dividend, what is the effect? Is it income?
It is not income. It just increases the number of shares held and lower the cost basis per share.
Dividend under the cost method
Dividend reflected as income by the investor under the cost method, NOT the earning
A return on capital under cost method
when cumulative dividend exceeds cumulative earning
Difference between the cost method and the equity method when receiving a dividend
Under the cost method, receiving dividend is recorded as income and does not affect the investment account.
Under the equity method, receiving dividend is recorded as reduction in the carrying amount of investment on the balance sheet of the investor. So decrease in the investment account. Because under the equity method, the investor gets a share of the investee’s earning.
For the parent, what is recorded as revenue under the equity method
share of the investee’s earning.
Net income to common shareholders =
net income - preferred dividend
What happens to stock dividend?
Simply reallocate the investment amount account balance over so value per share decrease. Not considered income by either cost method or equity method, so not recorded at fair value.
When company A purchase 30% or more of company B, with some items that have fair value which exceeds their carrying amount, what should company A do at the end of the year?
30% or more of a company means company A must use the equity method. You don’t add anything from items with fair value that exceeds their carrying amount. you just subtract any depreciation or usage of it from the income from investment.
common stock under equity method
decrease the investment account
cash dividend under equity method
only affects the balance sheet investment account. does not affect the investor’s reported investment income.
When stock ownership go from less than 20% to more than 20%, what happens?
Equity method should be used and the periods during which the cost method was used are retroactively stated.
Difference between cost method and equity method for cash dividend?
Cash dividend under equity method is return on capital, so it’s not dividend revenue. Cash dividend under cost method is dividend revenue.
Inventory excess under the equity method
debit investment income and credit invest account
What is liquidating dividend?
dividends in excess of the investor’s share of the investee’s earnings
Effect of liquidating dividend under equity method and cost method
liquidating dividend reduce the carrying amount of the investment account under both equity method and cost method
Cost method or equity method if a company owns 40% of another company’s outstanding non-voting preferred stock?
Cost method. NON-VOTING cannot exercise significant influence, so cost method.
Dividends received under cost method is investment revenue. What about dividends received under equity method?
Return on capital
Purchased goodwill under equity method
No impairment test. Only purchased goodwill in acquisition of a controlling interest will be tested for impairment. Equity method is less than 50%, so it’s not controlling.
