Equity Method Flashcards
Ravont Received cash dividends from stock investment. Should peel report an increase in the investment account if it uses the fair value method or equity method.
Fair Value: NO dividend is recorded as income
Equity Method: NO - Dividend would decrease Investment account not increase
Inequity method accounting, would undervalued asset amortization affect the Investor’s reported investment income?
YES. Undervalued asset amortization expense will get us overvalued Net Income from equity from investee earning.
Inequity method accounting, would dividend paid affect the Investor’s reported investee income?
NO: Dividend paid will affect Investment account, not the equity in investee income
If the equity method is used, would a change in the market value of the investee’s common stock affect the Investor’s reported investment income?
No: Changes in the market value of the investee’s common stock are not considered income to the parent under the equity method.
The company has 10% stock in investee and bought 30% more June 1. The dividend is declared on November 1. How much dividend should be recognized?
No revenue is recognized. But Income from Investee will be recognized from the date the significant influence is achieved to the end of the year.
You own 50% at 100,000 and sold half of the investment after 2 years when the Investment was 150,000 for 100,000. What bases you would use to calculate the gain?
NONE of these. In the year of the sale, you add the income from the share that are outstanding at the end of the year. For example, if you have 1,000 shares in Jan and sold half of them. You will calculate the income for 500 shares only.
How do you calculate the Net income from investee earning?
Share of Net Income
- FV (excess of BV) Depreciation of the assets (EXPENSE)
- FV (excess of BV) Inventory. The percentage of Inventory (Expense)that is sold goes to COGS.
How do you calculate the Income from Investee if you sold the share during the year.
If the Income is spread evenly over the year, and it is mentioned in the question, then you sold recognize the income from investee earning for the period you were holding it.
How do you calculate the Gain on Sale of Investment kept for a one-half year.
Calculate the Investment in Investee for the first year.
Investment in Investee
+ Add the Income
- Deduct the Dividend
- Deduct the part of Depreciation (FV over BV)
- Deduct the % of Inventory (FV over BV)
For the second year
Investment from Year 1
+ Add Investment in Investee for six months (yearly income/2)
- Subtract Dividend received
- Deduct the part of Depreciation (FV over BV)
- Deduct the % of Inventory (FV over BV)
Now you have the carrying value of the investment.
Do we use Prior Period Adjustment in the net income and deduct it?
No, this distractor. In the equity method of earning, prior period adjustments are not included in net income. They should be used to adjust the beginning Retained earnings.
What is the JE when you sell an equity that has a unrealized loss and valuation account and sold on gain from previous mark to market loss
Cash (received
Valuation Account
Realized gain
Investment in equity sec. (orginal cost)
What is the JE to record depreciation expense that arise from FV of depreciable asset above the BV
Income from Investee earning
Investment in Investee
What is entry for recording a loss on marketable securities
Unrealized Loss on equity sec. (IS)
Valuation Account - FMA
In the end you just eliminate the Valuation account when you sell the security
What is the JE to record the unrealized gain on marketable securities?
Valuation Account - FMA
Unrealized gain on equity securities (IS).
In the end you just eliminate the Valuation account when you sell the security
