Equity Method

Question 1

Equity Method-Significant Influence

Answer 1

20%-50%, Largest Single Shareholder, and/or Majority of Subs Board of Directors

Question 2

B. A. S. E.

Answer 2

Beginning investment,
Add % subs income,
Subtract % subs dividends/withdrawals
= Ending inventory

Purchase price
+Investee Income
- Amortized FV> NBV
-Investee Dividends

Question 3

J/E Record Purchase Price (Balance Sheet)

Answer 3

DR: Investment in investee
CR: Cash

Question 4

J/E Record Investee Income (Balance Sheet)

Answer 4

DR: Investment in investee
CR: Equity in earnings

Question 5

J/E Record Amortized Amount (Balance Sheet)

Answer 5

DR: Equity in earnings
CR: Investment in investee

Question 6

J/E Record Investee Dividends (Balance Sheet)

Answer 6

DR: Cash
CR: Investment in investee

Question 7

Stock Dividends

Answer 7

Memo entry only

Question 8

J/E Record Investment Income (Income Statement)

Answer 8

DR: Investment in investee
CR: Equity in earnings

Question 9

J/E Record Amortized FV>NBV (Income Statement)

Answer 9

DR: Equity in earnings
CR: Investment in investee

Question 10

Record Goodwill or land (Reportable Income)

equity method only

Answer 10

Not amortized Not impaired

Goodwill —— Excess= $ ———– Purchase Price
FV ————– x % = $ ————– ^
NBV————- x % = $ ————– ^

Question 11

Changing from Equity Method to Cost Method

Answer 11

Does NOT require retroactive adjustment (to investment income for prior year)

Question 12

Changing from Cost Method to Equity Method

Answer 12

DOES require a retroactive adjustment to investment income for prior years in which cost method was used.

Question 13

Preferred Stock

Answer 13

The COST method is used for preferred stock, no matter what percentage is held because preferred stock does not give significant influence. Significant influence cannot be exercised by holding NON-Voting stock.

Question 14

Goodwill in Business Combinations

Answer 14

The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the Price Paid over the Fair Value of the identifiable net assets acquired.

Question 15

Prior Period adjustments

Answer 15

Prior period adjustments should be reported as an adjustment to the opening balance of retained earnings, not current period income.

Question 16

Liquidating Dividends

Answer 16

Dividends in excess of the investor’s share of investee’s earnings subsequent to the date of investment are Liquidating Dividends. Under COST and EQUITY method: Liquidating dividends reduce the carrying amount of the investment account (B/S)

Question 17

Undervalued Asset Amortization related to purchase (FV>NBV)

Answer 17

Effects the investment account (an asset)(B/S)
Effects the investment income account (revenue)(I/S)
J/E
DR: Equity Revenue (I/S)
CR: Investment Account (B/S)

Question 18

Cash Dividends

Answer 18

Does NOT affect income. It affects the balance sheet account of the investment carrying value.
J/E
DR: Cash (B/S)
CR: Investment account (B/S)