Equity Method Flashcards
How to calculate revenue under the equity method, when there is preferred and common stocks
1- Calculate dividends related to preferred stocks.
ex: 10% cumulative preferred stock @ 100,000.
dividend to be received is 10% of 100,000 = $10,000 dividend
if parent owns 40%, total dividend revenue is 10,000*.20 = 2,000.
2- Calculate net income available to common shareholders:
Net Income available to common Shareholders = Net income - Total Preferred Dividends.
3- calculate Net Income allocated to parent
Net income ava. to common shareholders *.40 %.
4- Total revenue from investment = Preferred dividend + Net Income.
How to handle dividends under the equity method
Preferred dividend recognize as revenue, they increase the portion of the revenue allocated to the parent
Common stock dividend are not considered revenue under the equity method. They decrease the investment in investee account.
Accounting for transaction that occur on 12/31
Any transaction that occur as of 12/31 are accounted for the following year. They are never recorded for the same fiscal year.
Equity Method.
What are the factors that affect NI for Investee
1- Equipment depreciation, reduces NI of Investee.
ex: CA - FV for Equipment = $100,000
ownership = 40 %
Ex: company A makes owns 10% of company B during the year for 50 . On 12/31/2015, company A purchases additional shares of company B for 250 and make ownership to 40 % . How do you account for investment as of 12/31/2015 ?
total investment = total cost. 50 + 250 = 300.
If company B has income, account for income only for the 10 %, not the entire 40 %
Change from cost method to equity method from year 1 to yr 2
apply equity method in Y2, add income ignore dividend
if Y1 cost was used, add income to the same percentage and reduce dividend revenue by the same percentage
accounting of stock dividend
under the cost method, stock dividend increase number of shares but , no increase in dividend revenue. memo entry only
what is the impact of cash dividend to the investment account under both equity and cost method
Cost method. Cash dividend is reported as dividend revenue and has no impact on the investment account
Equity method. Cash dividend decreases the investment account.
How are liquidating dividends reported?
they are reported like in the equity method, as a reduction of the investment balance whether it is on the stock method.
Goodwill as a result of equity method
no entry is made. the entire investment is subject to impairement test at least once a year
