F4 M2

Answer 1

This is used if sig influence can be exercised by the investor over the investee and the
investor owns 20-50% of the investee (as long as investor has sig influence, use
equity method)

Answer 2

A parent comp that doesn’t consolidate a sub that is more than 50% owned must use the
equity method

Answer 3

This method can be used if investor owns <20% or >50% of investee

Answer 4

The equity method can’t be used if a comp obtains non-voting stock. Only voting stock is
allowed to use the equity method

Answer 5

Don’t use equity method, even if investor owns 20-50% w/sig influence when the sub is
in bankruptcy, investment in sub is temporary, another small group has majority
ownership of investee, or a lawsuit is filed

Answer 6

Changes in the market val of investee’s CS are not considered income

Answer 7

“What we should’ve paid for a security” is the $ amount of the net assets x the % of the
company that we acquired

Answer 8

When equity method is utilized in the middle of the year, the investor can only recognize
rev for earnings from the investee during the time that the investor had sig influence in
the year

Answer 9

If I sell the stock in the middle of the year to no longer have sig influence and there are
cash dividends issued throughout the year that I no longer have sig influence, I must use
the FV method and recognize dividends received as dividend rev

Answer 10

Second JE: debit investment in investee (this is the amt of earnings x % that I owe in
investee) and credit investee income for the same amt (I earn interest on $ in savings
acc)

Answer 11

Third JE: Debit cash and credit investee income (this is the amt of dividends the investee
pays x % that I owe in investee) for the same amt (I withdrawal $ from the savings acc)

Answer 12

This is just like a bank account

Answer 13

Sub earnings - PS = sub NI available to CS shareholders

Answer 14

If an investor owns PS and CS in an investee, the sig influence test is met by the % of
CS that they own

Answer 15

If there is a price of PS on the statement of SE and the PS description includes the
phrase “5% cumulative,” I would multiply this by the price of the PS. That would give me
price of PS that I would need to subtract from NI to get the total price of CS available to
stockholders. If I own PS and CS in the investee, I would multiply the income available
for CS by the % I own and the total PS dividends paid by the % that I should receive to
get the amt of earnings from investee income

Answer 16

PS dividends goes in income (like it normally would) along with the % of earnings the
comp is owed

Answer 17

Any goodwill created in an investment accounted for under the equity method is
calculated to find the difference between purchase price and FV of net assets of
investee. This particular amt of goodwill isn’t tested for impairment or amortized; rather,
the entire investment is tested for impairment under the equity method (purchase price
> FV net assets = goodwill)

Answer 18

GOODWILL is not recorded in equity method bc I did not gain 100% of the investee

Answer 19

Instead, the FV > CV of the net assets is recorded by the investor. To do this, multiply
the FV and CV of the assets by the % that I own. Then, subtract the two. This # = how
much I will need to amortize (amortize over the remaining useful life of the net assets)

Answer 20

JE to record amortization (FV > CV) of net assets = debit equity in investee income
and credit investment in comp (this decreases the rev I earn from investee earnings
bc I overpaid for a share in the comp; think of it like a service charge from the bank)

Answer 21

If net assets have a book value of $1,400,000 and a FV of $1,520,000 and I own 25% of
the comp, this means that I would do 120,000 x 25% to get 30,000. I overpaid $30,000
and this premium must be amortized by the useful life (it’s basically a refund of our
investment - think of it as a bank service charge)

Answer 22

When the entire investment of investee stock is tested for impairment at YE, I would find
the CV of my % of stock that I own in the investee (add income, subtract dividends by
my % owned). Then, if the CV > FV of the investment at YE, then I would subtract the
two and permanently write down my investment to the FV at YE (just like normal)

Answer 23

When an investor who originally owned less than 20% of a comp (ex: they owned 15%)
buys more shares to make them eligible for the equity method, I would debit the
investment in investee by the amt they paid for the new shares and credit cash (no
retrospective adjustment is required)

Answer 24

Joint ventures are accounted for using the equity method