300393 EQUITY METHOD 2E3

Question 1

Pear Co.’s income statement for the year ended December 31, 20X1, as prepared by Pear’s controller, reported income before taxes of $125,000. The auditor questioned the following amounts that had been included in income before taxes:

Equity in earnings of Cinn Co. $40,000
Dividends received from Cinn 8,000
Adjustments to profits of prior years
for arithmetical errors in depreciation (35,000)
Pear owns 40% of Cinn’s common stock. Pear’s December 31, 20X1, income statement should report income before taxes of what amount?

$85,000

$120,000

$152,000

$117,000

Answer 1

Answer 2

Answer 3

Question 4

2252.35

Answer 4

As a general rule, the ownership of 20% or more of the voting stock of the investee leads to the presumption that, in the absence of evidence to the contrary, the investor has the ability to exercise significant influence over the investee. Examples of possible evidence to the contrary which might cause this presumption to be overcome include the following:

a. Opposition by the investee, such as litigation, challenges the investor’s ability to exercise significant influence.
b. The investor and investee sign an agreement under which the investor surrenders significant rights as a shareholder.
c. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor.
d. The investor needs or wants more financial information to apply the equity method than is available to the investee’s other shareholders, tries to obtain that information, and fails.
e. The investor tries and fails to obtain representation on the investee’s board of directors.

Question 5

2252.37

Answer 5

The amount of the adjustment is included in the net income of the investor and reflects adjustments similar to those made in preparing consolidated statements.

Question 6

2252.38

Answer 6

The types of adjustments include those necessary to:

recognize the investor’s share of the investee’s reported earnings or losses,
eliminate intercompany gains and losses, and
amortize any difference between cost of the investment and the investor’s equity in the net assets of the investee. (However, any difference that is attributable to goodwill may not be amortized.)

Question 7

2252.39

Answer 7

Dividends received from an investee reduce the carrying amount of the investment but are not included in the income of the investor.

Question 8

2252.40

Answer 8

The general types of entries for the equity method are illustrated as follows:

Question 9

FASB ASC 250-10-45-22

Question 10

FASB ASC 323-10-5-5