Equity Method

Question 1

What are the factors that indicates that the investor has significant influence on the investeee

Answer 1

1. The investor owns from 20% to 50%.
2. Investor has representation on the board of directors of the investee
3. The investor participates in policy-making processes
4. The investor has material intercompany transactions,
5. The investor interchanges managerial personnel, or
6. The investee has technological dependency on the investor.

Question 2

When will an investor stop using the equity method to account for net losses from its investee?

Answer 2

When the share of net losses from the investee has reduce the carrying amount of the investment to zero.

Question 3

When will an investor who discontinued using the equity method will resume recording gains the investment account?

Answer 3

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

Question 4

Under the equity method what is the impact on the investment account when stock dividends are paid?

Answer 4

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.

Question 5

What is Investment income?

Answer 5

The investor’s proportional share on the investee net income

Question 6

Under the equity method what does a dividend paid from the investee to the investor represent?

Answer 6

Return on capital of the investment.

Question 7

Under the equity method what is the accounting treatment for dividends paid to cumulative and non cumulative preferred stock?

Answer 7

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.

Question 8

How is good will from acquisitions accounted for using the equity method?

Answer 8

Any good will from acquisitions is ignored and is not amortized or tested for impairment.

Question 9

When will an investor begin using the equity method to account for its investment from a investee?

Answer 9

From the date of significant influence is acquired and going forward. (i.e. significant influence Aug/1/Y1. Investment income will begin from Aug to Dec for Y1)