9/5 Chapter 2

Question 1

Consolidation

Answer 1

no one keeps there books on an equity method

Question 2

cost method

Answer 2

70% use the cost method as they go through the year

Question 3

Equity method

Answer 3

over 20%

Question 4

Cost method

Answer 4

less than 20%

Question 5

Reporting line

Answer 5

0-20 cost method - investments that are not going to be held long term are marked to market as trading or available for sale securities
20-50 equity method
50-100 Equity method + consolidation(cost method is also ok here on your books) you can’t use fair value on this one

Question 6

control method that can’t be used

Answer 6

if you have control then the fair value method can’t be used

Question 7

cost method

Answer 7

Record investment at cost
Parent
investment in sub 1000000
      cash                               1000000
div
cash 50000
     inc from sub 50000
Sub
Cash 1000000
        common Stock    1000000

record income at the parent level only when the sub declares a dividend
we must wright down an asset if the asset is impaired we can’t write it back up
in order to have a negative investment then we must guarantee the subs debt, you can write the investment up to zerio

Question 8

Equity

Answer 8

used when there is significant influence

Question 9

consolidation

Answer 9

combining the financial statements to make it look there is only one company

Question 10

liquidating dividend

Answer 10

when they distribute dividends in excess of earnings

Question 11

cost method acquisition at interim date

Answer 11

doesn’t create problems in the cost method

Question 12

cost method changes i the number of shares

Answer 12

no formal recognition on the parents side

Question 13

cost method purchase additional shares

Answer 13

recorded at cost similar to initial purchase
new% is calc to determine method if we change to the equity method then we have to account for it as if it was always equity

Question 14

cost method sale of shares

Answer 14

accounted for the same as any other sale of a noncurrent asset

Question 15

equity method

Answer 15

record income at the parent level based on sub's earnings and losses 
subs dividends reduce the parent's investment
parent
inv in sub 1000
    cash              1000
div
cash 50000
   Inv  50000
Earnings
Inv in sub   200000
  inc from sub 20000
two way street, written up based on the sub's income and written down on sub losses and dividends

Question 16

equity method entries

Answer 16

investment is recorded at the initial purchase price and adjusted each period for the investor’s share of the investee’s profits or losses and the dividends declared by the investee

Question 17

corporate joint ventures use

Answer 17

use the equity method when it is over 20%