F4M2

Question 1

When do you use the equity method

Answer 1

between 20-50% ownership

Do not consolidate

exercise signficant influence

Question 2

When do you know if you have significant influence

Answer 2

• largest shareholder

- majority of the board

Question 3

JE to record investment Equity Method

Answer 3

Dr. Investment

Cr. Cash

Question 4

JE to record increase in earnings Equity Method

Answer 4

Dr. Investment

Cr. Equity in earnings/investment income

Question 5

JE to record dividends in equity method

Answer 5

Dr. Cash

Cr. Investment

Question 6

Treatment of stock dividends in equity method

Answer 6

memo entry only

Question 7

Equity Method BASE

Answer 7

Beginning balance
+ % income
- % dividends

Question 8

Equity method with preferred stock

Answer 8

sub earnings
- preferred dividends
= sub net income avaliable to common stock shareholders

Question 9

Asset Fair Value Differences

Answer 9

difference between FV and BV (up to purchase price) is a premium that is amortized, the excess is goodwill

Question 10

Asset fair value journal entry

Answer 10

think of it like a bank service charge

difference between fv and book value

amortized over the life

reduces income and asset

Dr. Equity
Cr. Investment

Question 11

When to recognize impairment during equity method

Answer 11

1. FV falls below CV

2. Entity believes the decline is other than temporary

Question 12

Goodwill in equity method

Answer 12

NOT amortized and NOT tested for impairment

Question 13

How to increase investment income in equity method

Answer 13

ONLY increases in earnings

dividends decrease investment income