Chapter 3 Equity Method and Joint Ventures (External reporting)

Question 1

How would you determine the amount of net income you would take from a company that you own 40% stock

Answer 1

Multiply net income by the percentage you own (40%) and include any amortization expense related to good will.

Question 2

Using equity method, how do you account for a stock dividend?

Answer 2

As a memorandum entry reducing the unit cost of all Guard stock owned.

Question 3

When the equity method is used to account for investments in common stock, how are investors reported investment income for a change in market value and cash dividends recorded?

Answer 3

Dividends from a investee are recorded as a reduction in carrying amount. Changes in market value are not considered income to parent.

Question 4

How are stock dividends recorded? Cost and Equity

Answer 4

Under both they are not considered income to the recipient, so you simply reallocate the investment account balance.

Question 5

How is a dividend treated under cost and equity method

Answer 5

Under cost a dividend is recorded as income

under equity a dividend is reocred as decrease in the investment