3.02- Cost Method

Question 1

What do you do if a market value exists?

Answer 1

Use marketable securities rules(trading, avail-for-sale, held to maturity)

Question 2

What do you do it no market value exists?

Answer 2

Use the Cost Method

Question 3

How is the original investment recorded with the cost method?

Answer 3

at Cost :-)

Question 4

With the cost method, when an investee earns money what does the JE look like?

Answer 4

No JE required

Question 5

When a dividend is received with the cost method how is it recorded?

Answer 5

It is recorded as Dividend Income on the Income statement

Question 6

When would you record a reduction of dividend income?

Answer 6

In the rare case that the dividend received is greater than the investor’s proportionate share of the investee’s income

Question 7

What is is called when an investee declares dividends which are greater than the cumulative income earned since date of investment?

Answer 7

Return of capital- accounted for as a reduction in the carrying value of the investment

Question 8

What happens when an investee declares a stock dividend of issues stock rights to existing shareholders?

Answer 8

No income is reported- the carrying value of the investment is simply allocated over the increased amount of securities

Question 9

Is income reported on dividends in arrears on cumulative preferred stock under the cost method?

Answer 9

NOPE, this represents dividends that have not been declared yet

Question 10

Can the purchase of life insurance on an officer to be a form of investment?

Answer 10

Yes when it builds up a cash value (cash surrender value)

Question 11

What is the equity to cost method?

Answer 11

Changes in ownership percentage when it goes from high to low, use cost method going forward called prospective

Question 12

What is the cost to equity method?

Answer 12

Ownership goes up, retrospectively apply the equity method using the % you used to own

Question 13

What can you apply the FV option to?

Answer 13

Eligible financial instruments on specified election dates on a security by security basis

Question 14

Under GAAP what is a financial instrument defined as?

Answer 14

Cash, evidence of an ownership interest in an entity or a contract that has a financial liability for one person and financial asset for another

Question 15

What are some examples of eligible financial instruments?

Answer 15

recognized financial assets and liabilities and firm commitments that involve financial instruments or written loan commitment

Question 16

What are the election dates when the FV option can be elected?

Answer 16

• when item first recognized
• when firm commitment entered into
• When FV items no longer qualify for FV
• When FV is required on one time basis
• when change in method of accounting

Question 17

How is the decision made to elect to report items at FV and how many items to apply it to?

Answer 17

on a security by security basis

Question 18

Can the FV election ever be changed?

Answer 18

Yes, but only an election date

Question 19

When FV made how will the item be measured?

Answer 19

At FV on each balance sheet date with unrealized gains and losses being a component of income

Question 20

How would you measure an equity method investment measured at FV?

Answer 20

on each balance sheet and any changes will be recognized as gain or loss

Question 21

How would you measure an AVS investment at FV?

Answer 21

reported as same value as before the election but the unrealized gains and losses will be reported as component of income

Question 22

How would you measure a Held to Maturity investment at FV?

Answer 22

accounted for under the amortized cost method with the carrying value being reduced to FV at balance sheet date and unrealized gain or loss recognized in income

Question 23

How would you measure a foreign currancy forward exchange contract?

Answer 23

as an asset or liability at FV depending on the changes