Chapter 12: Part B Flashcards
how do investors benefit who can’t control but has significant influence
directly through dividends/ market price appreciation
indirectly through the creation of desirable operating relationship with investee
investor is the
partent
investee
subsidiary
2 aspects of consolidated of interest to understanding the equity methods
- the acquired company’s assets are included in the financial statements at FAIR VALUE as of the date of acquisition, rather than book values on that date.
- the acquisition price is MORE than the sum of the separate fair values of the acquired net assets (assets - liabilities) that difference is recorded as INTANGIBLE ASSETS - GOODWILL
how does the investor recognize investment income
to the % of share (stock ownership) of the net income earned by the investee rather than the portion of that net income received at cash dividend
The investment is recorded at
COST
the carrying amount of the investment is:
- the increase by investor’s % share on the investee’s net income (or decrease in loss)
- decrease by dividends paid
purchase of the investment JE
(debit) investment in stock
(credit) cash
additional assets earned JE
(Debit) investment in stock
(Credit) investment revenue
dividends received JE
(debit) cash
(credit) investment in stock
how to record adjustment
(debit) investment revenue
(credit) investment in stock
The adjustment for land and goodwill
NO ADJUSTMENT
what is the carrying amount
initial cost + investors equity of undistributed earnings of the investee.
change from equity method to another method
both investment and RE would be increased by the investors share of the undistributed earnings. In years prior to the change to the equity method. No adjustments to the remaining carrying amount and balance in investment account would be the new cost basis
change from another method to the equity
balance would change as if equity method had been used all along, and RE would be adjusted as well.
