3.1 Investments in Equity Securities

Question 1

Ownership interest in an entity

Answer 1

Equity security

Question 2

Equity securities are characterized by the

Answer 2

percentage of ownership the investor has over the investee

Question 3

Presumed influence based on the ownership interest held:

Answer 3

0-20%: Little or none
20-50%: Significant
50-100%: Control

Question 4

Accounting method for little or none presumed influences

Answer 4

Fair value measurement

Question 5

Accounting method for significant presumed influences

Answer 5

Equity method or FVO

Question 6

Accounting method for control presumed influences

Answer 6

Consolidation

Question 7

When there’s little or no influence, dividends received from investments in equity securities are reported as

Answer 7

dividend income in the income statement

Question 8

Impairment loss

Answer 8

carrying amount - fair value

Question 9

Accounting methods for investments in equity securities according to the percentage of ownership interest

Answer 9

• Ownership under 20%
• Investment is measured at fair value at each balance sheet date
• Unrealized holding gains and losses are reported in the income statement (net income)
• Dividend received are reported as dividend income
• Ownership between 20% and 50%
• The investment should be accounted for by the equity method
• The investor should recognize in income its share of the investee’s earnings or losses
• The investor’s share of dividends increase cash and decrease the investment account
• Ownership over 50%
• The investor should issue consolidated financial statements.

Question 10

Which of the following items is not considered an equity security in the issuer?

A. Bonds convertible to common stock
B. Call options
C. Preferred stock
D. Stock warrants

Answer 10

A. Bonds convertible to common stock

An equity security is an ownership interest in an entity, such as through common or preferred stock, or a right to acquire or dispose or such an interest, such as through stock warrants or call options. However, convertible debt securities are not equity interest in the issuer.