3.02- Cost Method Flashcards
What do you do if a market value exists?
Use marketable securities rules(trading, avail-for-sale, held to maturity)
What do you do it no market value exists?
Use the Cost Method
How is the original investment recorded with the cost method?
at Cost :-)
With the cost method, when an investee earns money what does the JE look like?
No JE required
When a dividend is received with the cost method how is it recorded?
It is recorded as Dividend Income on the Income statement
When would you record a reduction of dividend income?
In the rare case that the dividend received is greater than the investor’s proportionate share of the investee’s income
What is is called when an investee declares dividends which are greater than the cumulative income earned since date of investment?
Return of capital- accounted for as a reduction in the carrying value of the investment
What happens when an investee declares a stock dividend of issues stock rights to existing shareholders?
No income is reported- the carrying value of the investment is simply allocated over the increased amount of securities
Is income reported on dividends in arrears on cumulative preferred stock under the cost method?
NOPE, this represents dividends that have not been declared yet
Can the purchase of life insurance on an officer to be a form of investment?
Yes when it builds up a cash value (cash surrender value)
What is the equity to cost method?
Changes in ownership percentage when it goes from high to low, use cost method going forward called prospective
What is the cost to equity method?
Ownership goes up, retrospectively apply the equity method using the % you used to own
What can you apply the FV option to?
Eligible financial instruments on specified election dates on a security by security basis
Under GAAP what is a financial instrument defined as?
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
What are some examples of eligible financial instruments?
recognized financial assets and liabilities and firm commitments that involve financial instruments or written loan commitment
What are the election dates when the FV option can be elected?
- 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
How is the decision made to elect to report items at FV and how many items to apply it to?
on a security by security basis
Can the FV election ever be changed?
Yes, but only an election date
When FV made how will the item be measured?
At FV on each balance sheet date with unrealized gains and losses being a component of income
How would you measure an equity method investment measured at FV?
on each balance sheet and any changes will be recognized as gain or loss
How would you measure an AVS investment at FV?
reported as same value as before the election but the unrealized gains and losses will be reported as component of income
How would you measure a Held to Maturity investment at FV?
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
How would you measure a foreign currancy forward exchange contract?
as an asset or liability at FV depending on the changes
