Equity Method and JV

Question 1

Equity method

Answer 1

external reporting only

Question 2

when

Answer 2

generally 20% to 50%

BUT CRITICAL THAT PARENT EXERCISES SIGNIFICANT CONTROL:
1) largest shareholder
2) majority of board
if no evidence of significant control, ownership of 20% to 50% of the voting shares is deemed to represent significant influence

significant influence test: met by % common shares owned not preferred stock because that is usually the voting stock

Question 3

not used even if owns 20% to 50% if

Answer 3

1) bankruptcy of sub
2) investment in sub is temp
3) lawsuit or complaint is filed
4) investor cannot obtain rep in bod
etc.

Question 4

Step 1: record investment

Answer 4

like cost method record at FV of consideration surrendered + legal fees

dr investment in investee
cr cash

or

dr investment in investee
cr common stock (of parent if parent is issuing stock for this investment)
cr apic

Question 5

Step 2: + earnings

Answer 5

dr investment in investee
cr. equity in earnings/ investee income

it is like a bank account; as the sub earns money you claim your share

earnings:
share of earnings available to common shareholders (NI-dividends) and preferred stock dividends

Question 6

Step 3: dividends

dividends are not income but treated as bank withdrawals

Answer 6

dividends or withdrawals: decrease by the parent’s ownership % of cash dividends from investee; *stock dividends reduce unit cost of stock owned in investee and are memo entry only

dr. cash
cr. investment in investee

Question 7

step 4: record the investor’s percentage of earnings as income

Answer 7

parent’s % of ownership of earnings of investee

same as step 2

Question 8

pass key

Answer 8

bb + parent’s share of earnings (so like interest where it is income when earned and not when taken out) - parent’s share of dividends (like withdrawals, but not income) = eb

Question 9

Problem

Answer 9

page f3-17

Question 10

ONLY FOR EQUITY METHOD

Answer 10

Diff between purchase price and NBV of the investee’s net assets

Question 11

Adjustment

Answer 11

Purchase price:

first cover parent’s % of nbv; excess cover parent’s % of fv; excess = goodwill

Question 12

a) part of excess between fv and bv

Answer 12

amortized over the life of the asset (will tell you why you were willing to pay the premium= for what assets) if inventory, amortize over life of inventory which is usually a year

if more than one asset then allocate proportionally
amortization is like a bank’s service charge

expense and reduces basis:
dr equity in investment income
cr investment in investee

EXCEPTION: LAND= DO NOT AMORTIZE

Question 13

Premium attributed to goodwill

Answer 13

not amortized and no impairment test

Question 14

premium

Answer 14

purchase price - book value of asset acquired

Question 15

total equity method investment including goodwill

Answer 15

annually tested for impairment; goodwill by itself is not

Question 16

COST METHOD AND EQUITY METHOD

Answer 16

VALUED AT % OWNERSHIP vs acquisition which is at 100%: see saw at the cost of the investment

Question 17

Unconsolidated investment over 50%

Answer 17

either due to lack of control due to a company being controlled by a bankruptcy trustee or a sub that is likely to be a temporary investment must use equity method when presenting the investment in the sub

Question 18

Comparison of cost and equity methods

Answer 18

Cost and equity on page f3-19

cost and equity: report at FV***

Question 19

JV accounting

Answer 19

usually under both GAAP and IFRS: JV accounted for using equity method

Question 20

JV accounting

Answer 20

usually under both GAAP and IFRS: JV accounted for using equity method

Question 21

Step by step acquisition- still not consolidating

Answer 21

from cost method to acquisition method:

1) record goodwill at the time of each transaction
2) important to record a change from the cost of afs to equity method:
a) equity methods should be used and the periods during which cost method or fair value method was used are retrospectively adjusted
b) the year end ownership % is used to make all the equity entries**

Income calc:
(old % * income before the ownership change) + (total ownership % * income after the ownership change)

KEY:

1) Apply equity method to prior period’s old %
2) do not apply the new % to the prior period

1) Add cost of acquiring additional interest in the investee to the carrying value of previously held investment
2) adopt equity method going forward
3) if investment was previously recognized as afs and there were unrealized gains or losses in OCI, release that in earnings

sticky note

IFRS: requires entities to apply equity method prospectively from time at which obtains significant influence. Retroactive adjustment is not req

Question 22

Comprehensive

Answer 22

Cost method: don’t really care about the book value

1) Find ending value of investment under equity method
2) find ending value of investment under cost method
3) add gain or subtract loss from OCI
= adjustment to re

when you have cost method initially and wnat to find amortization expense you can just take purchase price - book value and amortize all of that premium because they only give you fv at end of the year and that doesnt help

*JE on 21

1) adjustment JE’s
2) additional investment JE

Question 23

stock dividends

Answer 23

memorandum entry reducing the unit cost of all guard stock owned

Question 24

equity method preferred stock

**problem

Answer 24

two types of revenue due:

% claim to pref cash div
% claim to ni after preferred div have been paid out

(so 100% ni - 100% div ) * % ownership only detemined by common stock %

preferred stock does not allow the investor to exercise control so the preferred stock investment is accounted for using the cost method and preferred stock dividends of our ownership % are recorded as dividend revenue on the income statement

Question 25

moving from cost to equity

Answer 25

equity income (total ownership) from the date you switched methods;

no retroactive adjustment

Question 26

adjustments to prior years profits should be

Answer 26

included in beg re adjustment

not this year’s ni

Question 27

half period acquisitions

Answer 27

only for the portion of the year

Question 28

undervalued asset amortization

Answer 28

dr. equity rev

cr. investment acc

Question 29

liquidating dividends

Answer 29

decreases investment accounts in both cost and equity methods

Question 30

liquidating dividends

Answer 30

decreases investment accounts in both cost and equity methods

Question 31

purchased goodwill testing for impairment

Answer 31

not under cost or equity only when you acquire controlling interests

Question 32

div paid at a certain date

*problem

Answer 32

only matters when you pay it doesnt matter how many months before or after that

Question 33

useful life to amortize an asset excess fv

Answer 33

new useful life