F4 M2 Equity Method

Question 1

Equity method: When a company owning an investment with “significant influence” over another company should disclose what in the company’ annual financial statements?

Answer 1

The company’s accounting policy for the investment

Question 2

Under the Equity method, investee’s earnings are recorded as a ____ in the carrying amount of the investment on the balance sheet of the investor

Answer 2

Increase

Question 3

Under the Equity method, dividends from an investee company are recorded as a ____ in the carrying amount of the investment on the balance sheet of the investor

Answer 3

Reduction

Question 4

Journal entry under the Equity Method:
Record the investment in the investee
What is the amount that is included in the cost?

Answer 4

Dr Investment in investee
Cr Cash
Fair value of consideration plus legal fees

Question 5

Journal entry under the Equity Method:

Record an increase in the investment by the investor’s share of the earnings of the investee

Answer 5

Dr Investment in investee

Cr Equity in earnings/investee income

Question 6

Journal entry under the Equity Method:

Record a decrease in the investment by the investor’s share of the cash dividends from the investee

Answer 6

Dr Cash

Cr Investment in the investee

Question 7

When significant influence is acquired, it is necessary to record a change from the ____ method to the ____ method.

Answer 7

Fair value to the equity method

Question 8

Fair value to equity method:
On the date the investment qualifies for the equity method, add the cost of acquiring the additional interest in the investee to ____.

Answer 8

The carrying value of the previously held investment

Question 9

Fair value to equity method:

Do you need to retroactively adjust the transactions

Answer 9

No, adopt the equity method as of the date the investment qualifies for the equity method

Question 10

Under both the fair value and the equity methods, liquidating dividends does what to the carrying amount of the investment?

Answer 10

Reduces the carrying amount of the investment

Question 11

Under the Equity Method, if an asset’s fair value is greater than it’s book value you’ll need to amortize the premium. This would cause the investor’s share of the investee’s net income to _______.

Answer 11

Decrease

Question 12

Under the Equity Method, if land’s fair value is great than it’s book value what do you do with the premium?

Answer 12

Nothing, you don’t amortize land

Question 13

Under the Equity Method, if goodwill’s fair value is great than it’s book value what do you do with the premium?

Answer 13

Nothing, you don’t amortize goodwill