Equity Method Flashcards
What are the main transactions that impact the ending balance of the equity investment balance sheet account?
Beg. Equity Investment account
(+) Net Income for the % proportion of the investor’s share on the investee.
(-) Cash dividends (Return on capital)
(-) Net losses @ the % proportion of the investor’s share on the investee.
(-) Excess depreciation obtained from the difference of the book value and fair value.
(= ) End equity Investment account
What are the factors that indicates that the investor has significant influence on the investeee
- The investor owns from 20% to 50%.
- Investor has representation on the board of directors of the investee
- The investor participates in policy-making processes
- The investor has material intercompany transactions,
- The investor interchanges managerial personnel, or
- The investee has technological dependency on the investor.
When will an investor stop using the equity method to account for net losses from its investee?
When the share of net losses from the investee has reduce the carrying amount of the investment to zero.
When will an investor who discontinued using the equity method will resume recording gains the investment account?
An investor will resume using the equity method once the investor’s share of net income equals the shares of net losses that were not recognized during the suspension period of using the equity method
Under the equity method what is the impact on the investment account when stock dividends are paid?
Stock dividends paid will no impact the value of the investment, but rather the number of shares owned and the price per share.
The change will be recorded only in memorandum accounts using the equity method.
What is Investment income?
The investor’s proportional share on the investee net income
Under the equity method what does a cash dividend paid from the investee to the investor represent?
Return on capital of the investment.
Under the equity method what is the accounting treatment for dividends paid to cumulative and non cumulative preferred stock?
Cumulative and non cumulative preferred stock have no significant influence and thus do not use the equity method. Dividends from these security are recorded in the P&L.
How is good will from acquisitions accounted for using the equity method?
Any good will from acquisitions is ignored and is not amortized or tested for impairment.
On Jan 1 Y1 and investor recorded its investment using the fair value method, but in Aug-Y1 the investor acquired additional shares giving the investor significant influence. When will the investor begin recording investment income from its investee?
The investor will begin recognizing investment income from its investee from the date significant influence is acquired in this case is Aug-Y1 and going forward.
Although goodwill is ignored for the equity method how is good will determined from an acquisition ?
Compared cash paid vs fair value @ % of ownership.
Cash paid
FV * % of ownership
