F3 Equity Method and Joint Ventures

Question 1

Equity Method

Answer 1

20-50% exercises significant influence

• you could be less than 20% but be the largest shareholder and a majority of the board
• like a bank account

Question 2

Balance Sheet - “Investment in Investee” using the Equity

JE to record at cost ( FV of consideration plus legal fees)

Answer 2

DR- investment in investee 
CR- Cash
or 
CR- common stock- parent
CR- APIC - parent

Question 3

BS/IS- JE to record increase by the investor’s/parent ownership percentage of earnings of investee

Answer 3

DR- Investment in investee

CR- Equity in earnings/investee income

Question 4

BS JE to record a decrease by the investor’s/parent’s ownership percentage of cash dividends from the investee
(dividends withdrawl)

Answer 4

DR- cash

CR- investment in investee

Question 5

Equity Method

Answer 5

B- Beginning Balance
A- Add investor’s share of investee’s earnings
S- Subtract: Investor’s share of investee’s dividends
E- Ending Balance

Question 6

Investments in Investee Common Stock or Preferred Stock

Answer 6

if an investor owns both common and preferred stock of an investee company

• the “significant influence” test is generally met by the amount of common stock owed
• the calculation of income from subsidiary (or investee) to be reported on the income statement includes:
• preferred stock dividends
• share of earnings available to common stock shareholders ( net income reduced by preferred dividends)

Question 7

Differences between Purchase Price and Book Value (NBV) of the Investee’s Net Assets

Answer 7

additional adjustments to the investment account under the equity method result from differences between price paid for the investment and the book value of the investee’s net assets
difference is first attributable :
1) Asset Fair Value Differences- difference between the book value and fair value of the net assets acquired
2) Goodwill- any remaining difference is goodwill

Question 8

Amortization Asset Fair Value Difference (Premium) over related Asset life

Answer 8

DR- equity in investee income ( like a bank service charge)

CR- Investment in investee ( lowers income from sub)

Question 9

Stock dividends or Stock Splits

Answer 9

• are not considered income to the recipient
• investors do not record stock dividends at fair value
• they reallocate the investment account balance over more shares so that the value per share decreases

Question 10

Dividends received

Answer 10

• under the equity method reduce the investment account on the BS
• changes in the market value of common stock are not considered income under the equity method

Question 11

Investments in Investee Common and Preferred Stock

Answer 11

• significant influence test is usually met by the amount of common stock owned
• calculation of income from the subsidiary (or investee) reported on his income statement;
• preffered stock dividends
• share of earnings available to common shareholders (net income reduced by preferred dividends)

Question 12

Preferred Stock

Answer 12

• does not allow for significant influence so is accounted for using the cost method

Question 13

Liquidating Dividends- Cost and Equity

Answer 13

• both reduce the balance of the investment account

Question 14

Cost to Equity

Answer 14

Retroactively

Question 15

Equity to Cost

Answer 15

is not retroactive , just move forward