300389

Question 1

Grant, Inc., acquired 30% of South Co.’s voting stock for $200,000 on January 2, 20X1. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 20X1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X2, and $200,000 for the year ended December 31, 20X2. On July 1, 20X2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X2.

In its 20X2 income statement, what amount should Grant report as gain from the sale of half of its investment?

$24,500

$30,500

$35,000

$45,500

Answer 1

$30,500

Question 2

Carrying Amount (Book Value)

Answer 2

The carrying amount or book value is the net amount at which an item is reported in the financial statements of the enterprise. For a receivable, the FASB ASC Glossary indicates the carrying amount is the “face amount increased or decreased by applicable accrued interest and applicable unamortized premium, discount, finance charges, or issues costs and also an allowance for uncollectible amounts and other valuation accounts.”

For a payable, the FASB ASC Glossary indicates the carrying amount is the “face amount increased or decreased by applicable accrued interest and applicable unamortized premium, discount, finance charges, or issue costs.”

Question 3

2252.35

Answer 3

As a general rule, the ownership of 20% or more of the voting stock of the investee leads to the presumption that, in the absence of evidence to the contrary, the investor has the ability to exercise significant influence over the investee. Examples of possible evidence to the contrary which might cause this presumption to be overcome include the following:

a. Opposition by the investee, such as litigation, challenges the investor’s ability to exercise significant influence.
b. The investor and investee sign an agreement under which the investor surrenders significant rights as a shareholder.
c. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor.
d. The investor needs or wants more financial information to apply the equity method than is available to the investee’s other shareholders, tries to obtain that information, and fails.
e. The investor tries and fails to obtain representation on the investee’s board of directors.

Question 4

2252.37

Answer 4

The amount of the adjustment is included in the net income of the investor and reflects adjustments similar to those made in preparing consolidated statements.

Question 5

2252.38

Answer 5

The types of adjustments include those necessary to:

recognize the investor’s share of the investee’s reported earnings or losses,
eliminate intercompany gains and losses, and
amortize any difference between cost of the investment and the investor’s equity in the net assets of the investee. (However, any difference that is attributable to goodwill may not be amortized.)

Question 6

2252.39

Answer 6

Dividends received from an investee reduce the carrying amount of the investment but are not included in the income of the investor.

Question 7

2252.40

Answer 7

The general types of entries for the equity method are illustrated as follows:

Question 8

2252.44

Answer 8

The investor’s ownership percentage may decrease below the level required for the equity method to be used. In such a case, the investor should switch to the fair value method.

Question 9

FASB ASC 323-10-05-5