Cost and Equity Method

Question 1

What are the percentages for ownership?

Answer 1

0 to 20% is the Cost Method or Marketable Securities, 20 to 50% is the Equity Method (One line Consolidation), Greater than 50% is Consolidation

Question 2

For Equity Method, what is the original investment recorded at?

Answer 2

Original Investment recorded at Cost

Question 3

For Equity Method, what happens when investee earns money?

Answer 3

Investor books and entry. Considered Equity in Earnings

Question 4

What happens to Inventory, Land and Goodwill when investment is sold for Equity Method?

Answer 4

Inventory is written off when sold, Land is not depreciated but written off when sold and Goodwill is not amortized but impairment losses recognized

Question 5

For Cost Method, what is the original investment recorded at?

Answer 5

Original Investment recorded at Cost

Question 6

For Cost Method, what happens when investee earns money?

Answer 6

No Journal Entry needed

Question 7

What happens when ownership changes from Equity Method to Cost?

Answer 7

You will use the Cost Method going forward (Prospectively)

Question 8

What happens when ownership changes from Cost Method to Equity?

Answer 8

Retrospectively apply the Equity Method