Equity Method

Question 1

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

Answer 1

memorandum entry that reduces the unit cost of all Guard stock owned. The total investment in Guard, Inc. will simply be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock owned

Question 2

Stock dividends on common stock should be recorded at their fair value by the investor when the related investment under cost and equity methods

Answer 2

Rule: Stock dividends and stock splits are not considered income to the recipient.
Therefore, investors do not record stock dividends at fair value. They simply reallocate the investment account balance (under either method – cost or equity) over more shares so that value per share decreases.

Question 3

Under the cost method, receipt of a dividend is recorded as XXX and does what to to investment account

Answer 3

income and does not affect the investment account.

Question 4

Under the equity method, receipt of a dividend is recorded as a

Answer 4

decrease in the investment account.

Question 5

Under both the cost and equity methods, liquidating dividends have what effect on the carrying amount of the investment account.

Answer 5

decrease

Question 6

Calculating goodwill under the equity method for the current year is

Answer 6

Goodwill in the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test.

Question 7

Nick D’Andrea owns 40% of the outstanding non-voting preferred stock of PORNHUB. What method for recording the investment should Louis use?

Answer 7

The cost method must be used since significant influence cannot be exercised by holding non-voting stock.

Question 8

in a business combo the valuation of goodwill

Answer 8

represents the excess of the price paid over the fair value of the identifiable net assets acquired.