Chapter 3 Section 4: Equity Method

Question 1

When do you use the equity method?

Answer 1

When significant influence exists, even if it’s not 20-5-%

Question 2

What goes into and out of the investment account under this method?

Answer 2

Beginning balance
+Investor’s share of investee earnings
-Dividends received
=Ending balance

Question 3

How are stock dividends handled?

Answer 3

A memo entry only

Question 4

What if you have common and preferred stock?

Answer 4

Only use common stock percentage for significant influence test
Include preferred stock dividends as income

Question 5

What if the purchase price is different than the book value of the investee’s net assets?

Answer 5

First attribute your share to any difference between book and fair values of the assets. Amortize over the asset’s life.
Then record as goodwill. Do not amortize or test for impairment individually.

Question 6

What method is generally used for joint venture accounting?

Answer 6

Equity

Question 7

What if you buy stock once and don’t have significant influence, but then you buy more and get significant influence?

Answer 7

Go from cost to equity. Restate previous financial statements. Use the year end ownership percentage for journal entries, but use old percentage when restating old statements.
For income calculation, use the old percentage for whatever portion of the year you had it.