Rogers Section 3 Cost & Equity Method Flashcards
(25 cards)
When do you use the Cost method or Marketable Securities?
0-20% ownership; no influence over the investee company exists; if security is not marketable then use the cost method
When is the Equity method used?
20-50%; when the investor has significant voting influence over the investee
When is the consolidation method used?
50% or more; when the investor has control over the investee; when members of the investor company constitute a majority of the board of directors of the investee
In the equity method, what is equity in earnings?
equity in earnings is an income statement account and appears under continuing operations; when the investee earns money this is considered a increase in the investor’s books and recorded as “equity in earnings”
in the equity methods, how are dividends recorded and where are they recorded?
dividends are a reduction in the investor’s investment account; it is not on the income statement
any difference between purchase price paid by the investee and the book value of the investee’s net assets must be accounted for. What is usually the source of this difference?
goodwill, ppe, land, inventory
where is the excess of cost of the investment over book value reported?
it is included in the investement and not reported separately
What will happen if the difference between cost and purchase is due to depreciable and amortizable assets under the equity method?
differences will be amortized against the reported equity in investee income based on the appropriate life of the asset
what will happen if the difference between cost and purchase is due to goodwill, under the equity method?
amount initially recorded will later reduce reported income in periods that impairment losses are recognized
what will happen if the differences between cost and purchase is due to other assets, under the equity method?
outstanding differences will be written off against reported income at the time the asset is sold
Cost Method
- ) original investment recorded at cost
- ) when the investee earns money, NO journal entry is recorded
- ) when a dividend is received it is recorded as Dividend Income on the income statement NOT a reduction to investment
- ) no difference in BV and purchase price is taken into consideration
Equity Method calculation
FMV-Purchase Price= Goodwill
BV-FMV= changes in PPE or anything else
what happens when dividends received under the cost method are greater than the cumulative income earned since the date of investment?
the excess distribution is a return of capital to the investor and is accounted for as a reduction in the carrying value of the investment
what happens when an investee declares a stock dividend or issues stock rights or other classes of stock to existing shareholders
no income is reported; the CV of the investment is allocated over the increased quantity of securities- if securities are all of the same class then no entry is needed; if they are part of different classes then an entry is made to transfer part of the CV, using the relative FMV approach
cash surrender value
life insurance investment; the portion of the premium that increases the cash value is accumulated as an asset (non-current) on the balance sheet and the rest of the premium is recognized as life insurance expense
Equity to Cost
40 to 10%; use the cost method going forward- PROSPECTIVE
Cost to Equity
10 to 40%; RETROSPECTIVELY apply the equity method but only for the % you previously owned- this requires a prior period adjustment to reported income
How to calculate: previous net income less previous year dividends= what to increase investment and retained earnings by
Under IFRS, when an investment is made in an entity over which it has significant influence…
it is considered an investment in an associate (affiliate) and the equity method is used
- ) if the investor has control, consolidated financial statements are appropriate
- ) if the investor shares control in a joint arrangement, the investment will be considered either a joint operation or a joint venture, which will determine the accounting
Under IFRS, when an investment is made in an entity over which has an active market
use FVTPL, fair value through profit or loss method; must have an active market to determine its FV
Under IFRS joint ventures use
equity method if they share control and have rights to the net assets of the arrangement
proportionate consolidation is joint control do not have rights to the net assets
Equity in earnings is an …
income statement account
-debit equity and earnings and credit investments for depreciation and inventory
how does an excess of fair values over carrying amounts affect equity in earnings and investments for inventory, PPE, and Land?
Land- no effect Sale of Inventory- decrease both Inventory no sale- no change PPE- decrease Goodwill impaired- decrease
Significant influence is indicated by
having the power to participate in the decisions of the investee
AFS (Available for Sale) method of accounting….
purchase- Dr. Investments Cr. Cash
unrealized gain/loss- Dr. Market Adjustment AFS Security (B/S item) Cr. Unrealized gain/loss (B/S item)
Dividends- Dr. Cash Cr. Dividend Income (I/S item)
- initial investment recorded at cost
- DO NOT RECOGNIZE any portion of net income as an increase in investment
- recognize dividend income not decrease in investment
- recognize unrealized gain or loss and report after net income as a component of other comprehensive income
- report the investment amount on balance sheet at FMV (cost plus or minus unrealized gain or loss)
