FAR 3 - Equity Method and Joint Ventures (External Reporting)

Question 1

What is the criteria for Equity Method?

Answer 1

Exercises Significant Influence. Typically 20%-50%

1) Largest Shareholder
2) Majority of board of directors

*Even if below 20% and there is significant influence, use equity method.

Question 2

What are the journal entries for balance sheet entries for Equity Method?

Answer 2

1) To record at cost (FV + legal fees)

Dr: Investment in investee
Cr: Cash

2) To record the increase in investor’s ownership percentage of earnings of investee

Dr: Investment in investee
Cr: Equity in earnings/investee income

3) To record decrease in investor’s ownership percentage of cash dividends

Dr: Cash
Cr: Investment in investee

Question 3

What are the journal entries for income statement entries for Equity Method?

Answer 3

1) To record investee earnings

Dr: Investment in investee
Cr: Equity in earnings/investee income

Question 4

Is significant influence determined by common stock or preferred stock?

Answer 4

Common Stock

Question 5

What is the calculation of the income from subsidiary (or investee)

Answer 5

1) Preferred stock dividends

2) Share of earnings

Question 6

What two premiums (excess paid over goodwill) do you not amortize?

Answer 6

1) Land - because it has indefinite life

2) Goodwill - because it has indefinite life

Question 7

What does the difference between NBV and Purchase Price go to?

Answer 7

1) First to Asset Fair Value Differences (Land, equipment)

2) Then any difference goes to goodwill

Question 8

What is the journal entry to amortize asset fair value difference (premium). Reduces income (amortization expense)

Answer 8

Dr: Equity in investee income (reduce income)
Cr: Investment in investee (lowering balance sheet)

Question 9

Is goodwill amortized or subject to impairment test?

Answer 9

Not amortized and no impairment test ONLY in equity method

Question 10

What method do you use for joint venture investments? 50-50

Answer 10

Equity Method for both U.S. GAAP and IFRS

Question 11

How do you account for a change from cost to equity method?

Answer 11

The investment account and the retained earnings account are adjusted retrospectively

Pass Key
Use the equity method for the last year’s percentage (1%-20%)

Do NOT apply the new percentage to the prior period (you did not own that percentage back then!)

Question 12

Difference between U.S. GAAP and IFRS for reporting changes from cost to equity method?

Answer 12

IFRS requires entities to apply equity method prospectively.

U.S. GAAP requires a retrospective approach.