F3 - Equity Method and Joint Ventures

Question 1

Under the cost or equity method, how should a company record a 2% stock dividend received?

Answer 1

As a memo entry reducing the unit cost of all stock owned (the cost is spread out over more shares, thus reducing the cost per unit)

Question 2

Under which method should joint ventures be accounted for?

Answer 2

Equity method

Question 3

Should dividends be included in calculating income from sub?

Answer 3

No; they only reduce the investment in sub which is a balance sheet account

Question 4

T/F: Under both the cost and equity methods, liquidating dividends reduce the carrying amount of the investment account

Answer 4

True

Question 5

T/F: Non-voting preferred stock is accounted for under the cost method

Answer 5

True; non-voting stock is unable to exercise significant influence and is therefore accounted for under the cost method

Question 6

How is excess fair value treated under the equity method?

Answer 6

It is amortized over its useful life (thereby reducing net income from the investee and also reducing the investment in investee account)