FAR 3 - Cost Method (External Reporting)

Question 1

What is criteria for cost method?

Answer 1

Less than 20% interest, DOES NOT EXERCISE SIGNIFICANT INFLUENCE.

Question 2

What are other names of cost method?

Answer 2

Fair Value Method, Available-for-sale method

Question 3

What are Balance sheet journal entries for Cost Method?

Answer 3

1) Record at cost - FV + LEGAL FEES

Dr: Investment in investee
Cr: Cash

2) Marketable Securities - Adjust to FV

Dr: Unrealized holding losses (OCI)
Cr: Investment in investee

Dr: Investment in investee
Cr: Unrealized holding gains (OCI)

3) Return of capital distributions
- When company gives you not dividends but a dividend in excess of their retained earnings (a return of your capital)

Dr: Cash
Cr: Investment in investee

Question 4

What are Income statement journal entries for Cost Method?

Answer 4

1) Dividends to the investor (from investee)
When company gives you dividends NOT in excess of their retained earnings (a return of your capital). It is their retained earnings

Dr: Cash
Cr: Dividend income

2) Return of capital distributions
- When company gives you not dividends but a dividend in excess of their retained earnings (a return of your capital) NOT INCOME

Dr: Cash
Cr: Investment in investeei

Question 5

What are dividends that are in excess of retained earnings called? The company gives you more money not from their retained earnings?

Answer 5

A liquidating dividend, a return of capital distribution

Question 6

How are stock dividends recognized?

Answer 6

As a memo entry