Cost Method (External Reporting) Flashcards
What is the cost method also know as?
Fair value method or Available-for-sale method
When should the cost method be used?
When the investor owns less than 20% of the investee’s voting stock and does not exercise significant influence
How is the carrying amount of the “investment in investee” account measured?
Original cost = FV of consideration given + legal fees
When would the investment account change from the date of acquisition?
- Shares of stock in the investee are purchased/sold
- There is an accumulated dividend in excess of accumulated earnings resulting in a return in capital (liquidating dividend)
- The basis is adjusted to FV as required for marketable equity securities
- The investee incurs losses that substantially reduce net worth from the date of acquisition
Journal entry to record at cost
Dr. Investment in investee
Cr. Cash
Journal entry to record unrealized loss and adjust to FV at year end
Dr. Unrealized holding losses (OCI)
Cr. Investment in investee (or valuation account)
Journal entry to record unrealized gain and adjust to FV at year end
Dr. Investment in investee (or valuation account)
Cr. Unrealized holding gains
Journal entry to record a return in capital distribution or liquidating dividend
Dr. Cash
Cr. Investment in investee
Liquidating dividend
Dividend in excess of investor’s share of RE
How are cash dividends and stock dividends accounted for?
Cash dividends: Recorded
Stock dividends: Memo entry only
How does the investor record dividends?
As income
How does the investor record distributions that exceed their share of the investee’s RE?
Reduction of basis/return of capital distribution (not income)
“Investment in Investee”
Not adjusted for investee earnings
Adjusted to FV
