FAR 3-Cost and Equity Method Flashcards
Which method is used for 0-20%
If no market value exists, cost;if marketable value exists, then marketable securities
Which method is used for 20-50%
Equity
Which method is used for 50%+
Consolidation
COST METHOD-Journal entry recording percentage of company earnings
none
COST METHOD-Journal entry Amortization/Depreciation of excess
No entry
Equity in Earnings belongs to which statement?
Income statement
Investment account belongs to which statement?
balance sheet
How are 3 prices of investment listed, and in what order?
MNEUMONIC-Pretty Fucking Bad - Purchase price, FMV, and Book Price
How do you handle Changing ownership-Equity to cost method
Simply use cost method on remaining amount of investment
How do you handle Changing ownership-cost to equity method
Must go back and apply equity method for percentage previously owned
COST TO EQUITY METHOD- 2011: owned 10%;Net Income:300, Dividends 50. 2012 purchased additional 20%. Net Income:400, Dividends 60
50*10%=$5 400*30%=$120 Prior period adjustment: (300-50)*10%=$25. Journal entry to fix prior period:DR Investment 25, CR Retained earnings 25. Journal entry for current income:DR Investment 120, CR Equity in net income of investee 120
When can a financial instrument be converted to FMV?
- When first recognized
- When eligible firm commitment is entered into
- When a condition that allows or mandates a finanical instrument to be measured at FMV ends.
Under IFRS, when is a financial instrument measured at FMV?
Always, unless it qualifies for amortization
Under IFRS, when does a finanical instrument qualify for amortization?
Changes in value between cost and face amount amortized if: 1. Instrument calls for shceduled payments to be made that consis exclusively of principal and interest 2. The entities business model has an objective to hold such instruments in order to collect the contractual cash flows
What is the normal journal entry when reducing impairment?
Debit Loss of impairment account (income statement) Credit asset directly
Loss of Impairment xx
Asset xx
With an investment, what is the journal entry for amortization/depreciation/impairment? Explain which financial statements are affected by which.
Equity in earnings xx
Investment xx
The debit reduces equity in earnings, an income statement account, while the credit reduces investment, a balance sheet account.
Equity method - What is the journal entry when your investment has earnings for the year? Which financial statement is affected by each part of the entry?
Purchase price - $1000
FV of investment - $3000
BV of investment - $2500
30% ownership
PPE is $500 higher than BV
$120 earnings for year/ $40 dividends paid out
Goodwill impairment - 10% initally, depreciated over 10 years
Equity in earnings xx
Investment xx
Equity in earnings $30
Investment $30
Equity method - What is the journal entry when aquiring an asset?
Purchase price - $1000
FV of investment - $3000
BV of investment - $2500
30% ownership
PPE is $500 higher than BV
$120 earnings for year/ $40 dividends paid out
Goodwill impairment - 10% initally, depreciated over 10 years
Investment xx
Cash xx
Investment $1000
Cash $1000
Equity method - What is the journal entry when a cash dividend is paid? Explain which statements are affected and why.
Purchase price - $1000
FV of investment - $3000
BV of investment - $2500
30% ownership
PPE is $500 higher than BV
$120 earnings for year/ $40 dividends paid out
Goodwill impairment - 10% initally, depreciated over 10 years
Cash xx
Investment xx
Amont of ownership reduced by cash dividend being paid out: 30% of $40 is $12
Cash $40
Investment $40
Equity method - What is journal entry to record Amortization/Depreciation/Impairment of excess between BV and purchase price?
Purchase price - $1000
FV of investment - $3000
BV of investment - $2500
30% ownership
PPE is $500 higher than BV
$120 earnings for year/ $40 dividends paid out
Goodwill impairment - 10% initally, depreciated over 10 years
Equity in earnings xx
Investment xx
Equity in earnings $25 ($10 GW + $15 PP&E)
Investment $25
COST METHOD - How do you record percentage of a cash dividend?
Cash xx
Dividend Income xx
In the case of the 30% ownership problem the entire divident payout would be $40. So, at 30% ownership:
Cash $12
Dividend income $12
LIFE INSURANCE - Life insurance pruchase by the company for an office can be considered an investment if it is cash value. What would the journal entry look like?
Expense (Insurance policy) $15
Cash surrender value $10
Cash (Insurance Policy) $25
The cash surrender amount is considered an investment.
