F3- Equity Method Flashcards
explain what is amortization?
must have finite life. the value of intangible asset will disappear, so the cost of intangible asset (except for goodwill and infinite asset life)must be amortized by systematic charge to income over estimated periods.
explain the difference between purchasing price and investee net book value?
it is equity method only, not cot method. 1. assets fair value difference = difference between book value and fair value. 2. any remaining difference is goodwill.
explain “equity Method”?
owning 20%-50%/ have significant influence. equity method=bank account when do Journal Entry.
how to record JE for decreased stock dividend using equity method?
DR: cash, CR: investment in investee. (stock dividend reduce unit cost of stock owned in investee.) the easy way to memorize GAAP equity method is think it is bank account and use BASE:
B = beginning balance
A = added investors share of investees earning(like ban interest, it is income when earned, not when take out).
S = subtract, investor’s share of investee’s dividends(like bank withdrawals, it is not income)
E= ending balance.
how to record stock dividend received from investee?
bank will record % of stock dividend with Memorandum entry. the total investment in investee will be spread over a large amount of shares, tis will reduce the unit cost of stock investee owned.
explain the difference between equity and cost methods when record dividends in income stmt?
the change of fair value of common stock will not record as income under equity method. (not dividend record, but reduction in carrying value on the balance sheet)
dividend receipt will record as income in cost method. (does not effect investment account)
what is equity method?
equity method is accounted for investment. It begins with the amount we pay to acquire the shares plus the adjustment of the net income and the dividend paid.
Do investors record fair value of dividends under cost and equity methods?
no, under both methods, investors will not record fair value of dividends. they will record that dividend for a loss to dilute the value of the share they owned.
Does dividends receipt affect investment account under cost method?
no, dividends receipt will record as income on coast method. dividend will reduce carring value under equity method.
how to report income under equity method?
no investment account method use. only calculate the % of income + period of that income owned.
what’s the difference between cash and stock dividends?
cash dividend will record in income statement but stock dividends won’t, stock dividend means more stock given, not cash given. stock dividend do not report as revenue, it will report as memo entry.
what’s the difference between cash and st0ck dividends?
cash dividend will record in income statement but stock dividends won’t.
does liquidating dividends affect cost and equity methods of investment account?
under both cost and equity method, liquidating dividends reduce the carrying amount of investment account.
explain goodwill in equity method?
any goodwill created in an investment account under equity method is ignored. it is neither amortized nor test for impairment. the entire investment (equity method) is impairment test.
can preferred stock be used in equity method?
non-voting (preferred) stock cannot be used under equity method (no significant influence even you have 100% stock). you must use cost method for preferred stock.
