F3 Cost Method

Question 1

Cost Method

Answer 1

• less than 20% ownership, does not excercise significant influence
• Balance Sheet - Investment in Investee is recorded at cost

Question 2

Changes in the cost basis of the investment

Answer 2

• shares of stock in investee are purchased or sold
• there is an accumulated dividend in excess of accumulated earnings resulting in a return of capital ( called a liquidating dividend)
• the basis is adjusted to FV as required by marketable equity securities
• the investee incurs losses that substantially reduce net worth from the date of acquisition

Question 3

BS JE to record at cost all costs of acquisition ( FV of consideration plus legal fees)

Answer 3

DR- Investment in investee

CR- Cash

Question 4

BS JE Marketable Securities - Adjust to FV
record unrealized loss/gain to FV at year end

Also be called ; available for sale or fair value method

Answer 4

LOSS
DR- unrealized holding loss (OCI)
CR- investment in investee ( or valuation account)
GAIN
DR- investment in investee ( or valuation account)
CR- unrealized holding gains

Question 5

BS JE Reduce Investment in Investee for Return of Capital Distributions
journal entry to record a return of capital distribution or liquidating dividend is a dividend in excess of investor’s share of retained earnings

Answer 5

DR- Cash

CR- Investment in Investee

Question 6

IS JE Dividends to Investor from Investee are Income to Investor (parent)

Answer 6

DR- Cash

CR- Dividend Income

Question 7

IS JE Distribution that excees Investor’s share of Investee’s Retained Earnings
( not income)

Answer 7

DR- Cash

CR- Investment in investee

Question 8

COST CONCEPTS

Answer 8

• “investment in investee” is NOT adjusted for investee earnings
• “investment in investee” is adjusted to FV
• cash dividends from investee are reported as income by the investor (parent)

Question 9

Dividends received - Cost method

Answer 9

• shown as income to the parent

- does not affect the investment account