FAR 3-Cost and Equity Method

Question 1

Which method is used for 0-20%

Answer 1

If no market value exists, cost;if marketable value exists, then marketable securities

Question 2

Which method is used for 20-50%

Answer 2

Equity

Question 3

Which method is used for 50%+

Answer 3

Consolidation

Question 4

COST METHOD-Journal entry recording percentage of company earnings

Answer 4

none

Question 5

COST METHOD-Journal entry Amortization/Depreciation of excess

Answer 5

No entry

Question 6

Equity in Earnings belongs to which statement?

Answer 6

Income statement

Question 7

Investment account belongs to which statement?

Answer 7

balance sheet

Question 8

How are 3 prices of investment listed, and in what order?

Answer 8

MNEUMONIC-Pretty Fucking Bad - Purchase price, FMV, and Book Price

Question 9

How do you handle Changing ownership-Equity to cost method

Answer 9

Simply use cost method on remaining amount of investment

Question 10

How do you handle Changing ownership-cost to equity method

Answer 10

Must go back and apply equity method for percentage previously owned

Question 11

COST TO EQUITY METHOD- 2011: owned 10%;Net Income:300, Dividends 50. 2012 purchased additional 20%. Net Income:400, Dividends 60

Answer 11

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

Question 12

When can a financial instrument be converted to FMV?

Answer 12

1. When first recognized
2. When eligible firm commitment is entered into
3. When a condition that allows or mandates a finanical instrument to be measured at FMV ends.

Question 13

Under IFRS, when is a financial instrument measured at FMV?

Answer 13

Always, unless it qualifies for amortization

Question 14

Under IFRS, when does a finanical instrument qualify for amortization?

Answer 14

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

Question 15

What is the normal journal entry when reducing impairment?

Answer 15

Debit Loss of impairment account (income statement) Credit asset directly

Loss of Impairment xx

Asset xx

Question 16

With an investment, what is the journal entry for amortization/depreciation/impairment? Explain which financial statements are affected by which.

Answer 16

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.

Question 17

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

Answer 17

Equity in earnings xx

Investment xx

Equity in earnings $30

Investment $30

Question 18

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

Answer 18

Investment xx

Cash xx

Investment $1000

Cash $1000

Question 19

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

Answer 19

Cash xx

Investment xx

Amont of ownership reduced by cash dividend being paid out: 30% of $40 is $12

Cash $40

Investment $40

Question 20

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

Answer 20

Equity in earnings xx

Investment xx

Equity in earnings $25 ($10 GW + $15 PP&E)

Investment $25

Question 21

COST METHOD - How do you record percentage of a cash dividend?

Answer 21

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

Question 22

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?

Answer 22

Expense (Insurance policy) $15

Cash surrender value $10

Cash (Insurance Policy) $25

The cash surrender amount is considered an investment.