Ch 3 Cost & Equity Method

Question 0

Equity method accounting

Answer 0

any diff paid btwn the purch price paid for the investee and the book value of the investees net assets must be accounted for :
PPE- depreciated
Inventory- written off when sold
Land- not deprec but amortized when sold
Goodwill- not ammortized but impairment loss recognized

Question 1

Equity method

20-50%

Answer 1

Investor has significant voting influence Over investee

• investment originally recorded at cost
• as the investee earns money this is recorded as an increase on the investors books based on the % the investor owns..shown as income on the income stmt
• dividends received are reduction of investment & do NOT show up on inc stmt
• any diff paid btwn the purch price paid for the investee and the book value of the investees net assets must be accounted for

Question 2

Equity method dividends

Answer 2

Reduce investment

Dividends receivable
Investment

Dividends received are a reduction of invesent account and do not show up on income statement

Question 3

Equity method recording income

Answer 3

Investment 120
Equity in investee income 120

Shown on income statement as a component of continuing ops

Question 4

Equity method dividend example

Answer 4

Initial invest 400
Income 10% 50
Div 10% -15

Ending: 435

Question 5

When is equity method applied under IFRS?

Answer 5

When the entity has the ability to exercise significant influence over the investee. Under IFRS that’s when the investor can participate in the decisions of the investee

Question 6

Cost method

Answer 6

No significant influence exists 10% or less

Question 7

Cost method two methods

Answer 7

If market value exists: use securities rules trading, AFS, HTM

if no market value: use the cost method

Question 8

Cost method

Answer 8

-Original investment is recorded at cost
-when investee earns money NO journal entry is recorded
-dividend means dividend income is recognized on the income statement & is Not a reduction of investment
Cash
Investment

-no difference between book value and price is taken into consideration like equity method

Question 9

Investment in preferred stock is accounted for as…

Answer 9

Cost method process so trading, AFS of HTM if marketable or the cost method if not