1 Equity Method of Accounting for Investments

Question 1

Under Fair Value Method, equity securities are recorded at ____ and subsequently adjusted to ___ if ___ is readily determinable; otherwise, the ____ remains at cost.

Answer 1

Recorded at cost and subsequently adjusted to fair value if fair value is readily determinable; otherwise, the investment remains at cost

Question 2

Under Fair Value method, Equity securities held for sale in the shorter term are classified as ________ _______ and reported at fair value, with unrealized gains and losses included in earnings

Answer 2

Trading securities at fair values

Question 3

Under Fair Value method, Equity securities not classified as trading securities are classified as ____ ___ ____ and reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholder’s equity as part of OCI (other comprehensive income.

Answer 3

available for sale securities and reported at Fair value

Question 4

Under Fair Value method, Dividends are recognized as income for both trading and available for sale securities.

Answer 4

ok

Question 5

what is FASB ASC

Answer 5

Financial Accounting Standards Board and Accounting Standards Codification

Question 6

Application of the equity method requires

Answer 6

Ability to significantly influence but not control the investee, usually means 20-50% ownership

When income is earned, a proportionate share of income is recognized.
When dividends are distributed, they are recorded as reduction in investment.

Question 7

What accounting method for:

1 Lack of ability to significantly influence the investee with less than 20% ownership

2 Presence of ability to significantly influence with 20-50%

3 Control Through voting interests, with more than 50% stock owned

4 Control through variable interests (governane documents, contracts)

Answer 7

1 Fair value or cost

2 Equity method or fair value

3 Consolidated financial statements

4 Consolidated Financial statements

Question 8

JE under equity method

0. Change to Equity Method
1. Accrue earnings of investee
2. Record receipt of cash dividend
3. Record Amortization of excess payment allocated to assets
4. Deferral of Unrealized Gross Profit
5. Subsequent realization of intra-entity Gross profit

Answer 8

0. Investment in Investee
   Retained earnings–prior Period adjustment–Equity in Investee income

Unrealized Holding Gain–Shareholders’ Equity
Fair Value Adjustment (available-for-sale)
**To remove the investor’s percentage of the increase in fair value from stockholder’s equity and the available for sale portfolio valuation account.

1 Investment in Investee
Equity in investee income

2. Cash
   Investment in Investee
3. Equity in Investee Income
   Investment in Investee
4. Equity in investee Income
   Investment in Investee
5. Investment in Investee
   Equity in Investee Income

Question 9

Fair Value Option of Accounting for significant influence

Answer 9

Firms report the investment’s fair Value as an assets and changes in Fair value as earnings.

Question 10

JE Fair Value

1. Record initial investment
2. Recognize dividends
3. Recognize change in fair value
4. Recognize loss in fairvalue

Answer 10

1. Investment
       Cash
2. Cash
       Dividend Income 
3. Investment in Armco
      Investment Income
4. Investment Loss
       Investment in Investee

Question 11

Changing to the Equity to the Fair value method requires _______ adjustment.

Changing from a method to the Equity method requires ________ adjustment

Answer 11

Prospective

Retrospective