Chapter 2

Question 1

cost method

Answer 1

used for reporting investments in equity securities when both consolidation and equity method reporting are inappropriate

Question 2

Equity method

Answer 2

used for external reporting when the investor has significant influence in most cases 20% or more of a company’s common stock

Question 3

Consolidation must be used when

Answer 3

an investor exercises control over an investee, involves combining for financial reporting the financial statements of two companies

Question 4

parent

Answer 4

controls a sub

Question 5

levels of control

Answer 5

0-20% Cost Method
20-50% Equity Method
50-100% Equity Method(or cost)+consolidation

Question 6

unconsolidated subsidiary

Answer 6

is not consolidated and is shown as an investment on the parents balance sheet

Question 7

cost method investments are reported at

Answer 7

historical cost

Question 8

JE for dividends under the cost method

Answer 8

Cash

Dividend Income

Question 9

liquidating dividends

Answer 9

dividends in excess of a company's earnings from acquisition
JE
Cash
   Investment in company
   Dividend Income

Question 10

When interest switches from equity to cost you use that date as

Answer 10

the new date to measure for liquidating dividends

Question 11

changes in number of shares held of a sub

Answer 11

don’t affect the investor

Question 12

purchases of additional shares of a sub

Answer 12

are accounted for at book value unless you gain control then the equity method is applied retroactively
JE
Investment in company
RE
this changes the method from cost to equity

Question 13

Sale of Shares under cost method

Answer 13

accounted for like any other non current asset. a gain or loss is recognized according to the consideration received against the carrying value of the sold shares

Question 14

equity method

Answer 14

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

Question 15

Equity method when should it be used

Answer 15

1. corporate joint venture-a corp owned and operated by a small group of businesses, none of which have the majority
2. significant influence by voting stock

Question 16

Equity method net income

Answer 16

record income on investment, increase in investment account
JE
Investment 
  Income from company
known as an equity accrual

Question 17

equity method net loss

Answer 17

record loss on investment, decrease investment account

Question 18

equity method dividend declared

Answer 18

record asset, decrease investment account
JE
Div Receivable
Investment in company

Question 19

acquisition at an interim date

Answer 19

the earnings after the acquisition date are included in the investment account
ex: purchase in October and net income 60000
600001/420%(owned)=3000

Question 20

purchases of additional shares, how does it affect income

Answer 20

income is allocated based on percentage and time of the year that the % was owned
ex
Jan1 20% income 25000 = 5000
july1-dec 30% income 35000 = 10500

Question 21

sale of shares under equity method JE

Answer 21

Cash
Investment
Gain

Question 22

when switching from equity to cost

Answer 22

it is not retroactive the date of sale is the new beginning date

Question 23

Fair Value Option

Answer 23

Investors may report non-sub investments at fair value
dividend income is recognized the same as the cost method where it does not reduce the investment
JE for increase in FV
Investment in company
Unrealized gain on company stock

Question 24

consolidation worksheet format

Answer 24

Elimin Entries
                     Parent Sub   DR  DR Consolidated
Income Statement
  Revenues
  Expenses
    Net Income
Statement of Retained Earnings
  Retained Earnings 1/1
  Add: Net Income
  Less:Dividends
     Retained Earnings 12/31
Balance Sheet
  Assets
    Total Assets
  Liabilities
  Equity
     Common Stock
     Retained Earnings
     Total Liabilities & Equity

Question 25

elimination entries

Answer 25

used in the consolidation worksheet to eliminate inter-company entries, these are not kept on the books of any company but are only included on the consolidated statements

Question 26

optional accum depr elimination entry

Answer 26

getting rid of the subs depreciation

Credit Building, debit accum depr

Question 27

basic investment elimination entry

Answer 27

Comm Stock
RE
Investment in Special Foods

Question 28

consolidated net income

Answer 28

equal to the parent’s income from operations, excluding any investment income from subs, and adjusted for any write offs

Question 29

consolidated retained earnings

Answer 29

is the portion of the consolidated enterprises’s undistributed earnings accruing to the parent company shareholders
Beginning CRE plus consolidated net income attributable to the controlling interest, less dividends declared by the parent company
It should be equal to the parent company’s equity method retained earnings

Question 30

retained earnings of sub companies are

Answer 30

eliminated in consolidated financial statements

Question 31

Dividends from a sub are

Answer 31

eliminated in consolidated financial statements

Question 32

elimination entries eliminate

Answer 32

sub equity, dividends declared, income from sub, investment in sub

Question 33

in the balance sheet portion total debits and credit

Answer 33

must equal on the CFS

Question 34

in the income statement portion total debits and credits

Answer 34

don’t have to equal on the CFS

Question 35

Consolidated net income equation

Answer 35

parent net income -sub equity income + sub income=consolidated net income