Chapter 2 Flashcards Preview

ACCT 5130 > Chapter 2 > Flashcards

Flashcards in Chapter 2 Deck (35):
1

cost method

used for reporting investments in equity securities when both consolidation and equity method reporting are inappropriate

2

Equity method

used for external reporting when the investor has significant influence in most cases 20% or more of a company's common stock

3

Consolidation must be used when

an investor exercises control over an investee, involves combining for financial reporting the financial statements of two companies

4

parent

controls a sub

5

levels of control

0-20% Cost Method
20-50% Equity Method
50-100% Equity Method(or cost)+consolidation

6

unconsolidated subsidiary

is not consolidated and is shown as an investment on the parents balance sheet

7

cost method investments are reported at

historical cost

8

JE for dividends under the cost method

Cash
Dividend Income

9

liquidating dividends

dividends in excess of a company's earnings from acquisition
JE
Cash
Investment in company
Dividend Income

10

When interest switches from equity to cost you use that date as

the new date to measure for liquidating dividends

11

changes in number of shares held of a sub

don't affect the investor

12

purchases of additional shares of a sub

are accounted for at book value unless you gain control then the equity method is applied retroactively
JE
Investment in company
RE
this changes the method from cost to equity

13

Sale of Shares under cost method

accounted for like any other non current asset. a gain or loss is recognized according to the consideration received against the carrying value of the sold shares

14

equity method

investment is recorded at the initial purchase price and is adjusted each period for the investor's share of profits or losses and the dividends declared

15

Equity method when should it be used

1.corporate joint venture-a corp owned and operated by a small group of businesses, none of which have the majority
2. significant influence by voting stock

16

Equity method net income

record income on investment, increase in investment account
JE
Investment
Income from company
known as an equity accrual

17

equity method net loss

record loss on investment, decrease investment account

18

equity method dividend declared

record asset, decrease investment account
JE
Div Receivable
Investment in company

19

acquisition at an interim date

the earnings after the acquisition date are included in the investment account
ex: purchase in October and net income 60000
60000*1/4*20%(owned)=3000

20

purchases of additional shares, how does it affect income

income is allocated based on percentage and time of the year that the % was owned
ex
Jan1 20% income 25000 = 5000
july1-dec 30% income 35000 = 10500

21

sale of shares under equity method JE

Cash
Investment
Gain

22

when switching from equity to cost

it is not retroactive the date of sale is the new beginning date

23

Fair Value Option

Investors may report non-sub investments at fair value
dividend income is recognized the same as the cost method where it does not reduce the investment
JE for increase in FV
Investment in company
Unrealized gain on company stock

24

consolidation worksheet format

Elimin Entries
Parent Sub DR DR Consolidated
Income Statement
Revenues
Expenses
Net Income
Statement of Retained Earnings
Retained Earnings 1/1
Add: Net Income
Less:Dividends
Retained Earnings 12/31
Balance Sheet
Assets
Total Assets
Liabilities
Equity
Common Stock
Retained Earnings
Total Liabilities & Equity

25

elimination entries

used in the consolidation worksheet to eliminate inter-company entries, these are not kept on the books of any company but are only included on the consolidated statements

26

optional accum depr elimination entry

getting rid of the subs depreciation
Credit Building, debit accum depr

27

basic investment elimination entry

Comm Stock
RE
Investment in Special Foods

28

consolidated net income

equal to the parent's income from operations, excluding any investment income from subs, and adjusted for any write offs

29

consolidated retained earnings

is the portion of the consolidated enterprises's undistributed earnings accruing to the parent company shareholders
Beginning CRE plus consolidated net income attributable to the controlling interest, less dividends declared by the parent company
It should be equal to the parent company's equity method retained earnings

30

retained earnings of sub companies are

eliminated in consolidated financial statements

31

Dividends from a sub are

eliminated in consolidated financial statements

32

elimination entries eliminate

sub equity, dividends declared, income from sub, investment in sub

33

in the balance sheet portion total debits and credit

must equal on the CFS

34

in the income statement portion total debits and credits

don't have to equal on the CFS

35

Consolidated net income equation

parent net income -sub equity income + sub income=consolidated net income