#10

Question 1

Exception to consolidating financial statement

Answer 1

when the subsidiary is in bankcruptcy

Question 2

When does an investor establish parent status?

Answer 2

When control over the investee is established or more than 50% of the voting stock of the investee has been acquired

Question 3

If the company receives a stock dividend, what is the effect? Is it income?

Answer 3

It is not income. It just increases the number of shares held and lower the cost basis per share.

Question 4

Dividend under the cost method

Answer 4

Dividend reflected as income by the investor under the cost method, NOT the earning

Question 5

A return on capital under cost method

Answer 5

when cumulative dividend exceeds cumulative earning

Question 6

Difference between the cost method and the equity method when receiving a dividend

Answer 6

Under the cost method, receiving dividend is recorded as income and does not affect the investment account.

Under the equity method, receiving dividend is recorded as reduction in the carrying amount of investment on the balance sheet of the investor. So decrease in the investment account. Because under the equity method, the investor gets a share of the investee’s earning.

Question 7

For the parent, what is recorded as revenue under the equity method

Answer 7

share of the investee’s earning.

Question 8

Net income to common shareholders =

Answer 8

net income - preferred dividend

Question 9

What happens to stock dividend?

Answer 9

Simply reallocate the investment amount account balance over so value per share decrease. Not considered income by either cost method or equity method, so not recorded at fair value.

Question 10

When company A purchase 30% or more of company B, with some items that have fair value which exceeds their carrying amount, what should company A do at the end of the year?

Answer 10

30% or more of a company means company A must use the equity method. You don’t add anything from items with fair value that exceeds their carrying amount. you just subtract any depreciation or usage of it from the income from investment.

Question 11

common stock under equity method

Answer 11

decrease the investment account

Question 12

cash dividend under equity method

Answer 12

only affects the balance sheet investment account. does not affect the investor’s reported investment income.

Question 13

When stock ownership go from less than 20% to more than 20%, what happens?

Answer 13

Equity method should be used and the periods during which the cost method was used are retroactively stated.

Question 14

Difference between cost method and equity method for cash dividend?

Answer 14

Cash dividend under equity method is return on capital, so it’s not dividend revenue. Cash dividend under cost method is dividend revenue.

Question 15

Inventory excess under the equity method

Answer 15

debit investment income and credit invest account

Question 16

What is liquidating dividend?

Answer 16

dividends in excess of the investor’s share of the investee’s earnings

Question 17

Effect of liquidating dividend under equity method and cost method

Answer 17

liquidating dividend reduce the carrying amount of the investment account under both equity method and cost method

Question 18

Cost method or equity method if a company owns 40% of another company’s outstanding non-voting preferred stock?

Answer 18

Cost method. NON-VOTING cannot exercise significant influence, so cost method.

Question 19

Dividends received under cost method is investment revenue. What about dividends received under equity method?

Answer 19

Return on capital

Question 20

Purchased goodwill under equity method

Answer 20

No impairment test. Only purchased goodwill in acquisition of a controlling interest will be tested for impairment. Equity method is less than 50%, so it’s not controlling.