3 - Cost and Equity Method

Question 1

Equity Method (journal entries)

Answer 1

1) Buy:

Investment 1000 (750 BV; 150 FMV FMV>BV; 100 GW)

Cash 1000

2) Earnings

Investment 36 (120 x 30%) (B/S)

Equity in earnings 36 (I/S)

3) Dividend

Cash 12

investment 12

4) Amor./dep/impair.

Equity in earnings 25

Investment 25

Question 2

Cost Method (journal entries)

Answer 2

1) Buy:

Investment 1000

cash 1000

2) investee earns money:

no entry

3) dividend

cash 12

div. income 12 (DI = IS (n) section
4) amor./dep/impairment:

no entry

Question 3

Changes in ownership percentages

Answer 3

Equity to cost: - use cost method going forward (prospective)

Cost to Equity (ex. 10% to 40%) - Retrospectively apply the equity method but only for the % you previously owned (10%); this requires a prior period adj. to reported income.