3.01- Equity Method Flashcards
What is an example of an equity security?
Common or preferred stock
What is an example of debt securities?
Bonds
What is an example of derivatives?
Stock rights
When a company acquires COMMON STOCK, how do you determine the appropriate method for accounting for the investment?
- 0-20%: Cost method or Marketable securities
- 20-50%: Equity Method
- 50%+: Consolidation
How much influence does an investor have over an investee under the difference accounting methods?
Cost method- No influence
Equity method- Significant influence
Consolidation- Complete control
When is the EQUITY METHOD used?
- 20-50%
- Significant influence over investee
What are the five FACTORS that must be considered with the EQUITY METHOD?
(if these are true, equity method should be used)
- Intercompany transactions and technological dependency
- Officers of investor are officers or board members of investee
- Investor is a major customer or supplier of investee
- Investor owns at least 20% of voting stock
- Investor has definite plans to obtain at least 20% of stock in the future
Under the EQUITY METHOD, what is an investment originally recorded at?
Cost
What are EQUITY IN EARNINGS?
The increase in the investors books based on their ownership percentage that happens when the investee earns money.
Where is EQUITY IN EARNINGS recorded?
Income Statement as a component of continuing operations
How do DIVIDENDS affect an investment under the EQUITY METHOD?
Reduction
How do you account for the difference between PURCHASE PRICE PAID and the BOOK VALUE of an investee’s net assets?
Use fair market value
Book value- fair market value = PP&E, Inventory, or Land
Purchase price- fair market value = Goodwill
How is PROPERTY, PLANT, & EQUIPMENT handled in the EQUITY METHOD?
Depreciation
How is INVENTORY handled in the EQUITY METHOD?
Written off when sold
How is LAND handled in the EQUITY METHOD?
No depreciated, but written off when sold
