Equity Method & Consolidated F/S

Question 1

What is goodwill formula

Answer 1

Excess of the purchase price - Fair value

Question 2

When to use the equity formula when accounting for investments

Answer 2

1. When owning 20-50% of the sub’s common stock
2. When exercising significant influence (Even when an investor owns less than 20 percent, if they exercise significant influence, they will use the equity method)

Question 3

What is the consolidated workpaper eliminating journal entry CAR IN (is) BIG

Answer 3

Dr. Common stock - subsidiary
Dr. APIC - subsidiary
Dr. Retained Earnings - subsidiary
Cr. Investment in subsidiary (acquisition price)
Cr. Noncontrolling interest
Dr. Balance sheet adjustments to FV
Dr. Identifiable Intangible assets to FV
Dr. Goodwill

Question 4

When is the acquisition method of accounting used?

Answer 4

When control is over 50% of the voting interest of an investee

Question 5

In the equity method of accounting, where are common stock dividends revenue recorded?

Answer 5

Reduce investment in subsidiary account on the balance sheet

Question 6

When calculating the investor’s share of net income, how is the excess of an asset’s fair value over its book value recorded?

Answer 6

The excess of an asset’s fair value over its book value is amortized over the life of the asset. It is then subtracted from the investor’s share of net income