F4M2 Flashcards
When do you use the equity method
between 20-50% ownership
Do not consolidate
exercise signficant influence
When do you know if you have significant influence
- largest shareholder
- majority of the board
JE to record investment Equity Method
Dr. Investment
Cr. Cash
JE to record increase in earnings Equity Method
Dr. Investment
Cr. Equity in earnings/investment income
JE to record dividends in equity method
Dr. Cash
Cr. Investment
Treatment of stock dividends in equity method
memo entry only
Equity Method BASE
Beginning balance
+ % income
- % dividends
Equity method with preferred stock
sub earnings
- preferred dividends
= sub net income avaliable to common stock shareholders
Asset Fair Value Differences
difference between FV and BV (up to purchase price) is a premium that is amortized, the excess is goodwill
Asset fair value journal entry
think of it like a bank service charge
difference between fv and book value
amortized over the life
reduces income and asset
Dr. Equity
Cr. Investment
When to recognize impairment during equity method
- FV falls below CV
2. Entity believes the decline is other than temporary
Goodwill in equity method
NOT amortized and NOT tested for impairment
How to increase investment income in equity method
ONLY increases in earnings
dividends decrease investment income
