FAR - The Adjusted Cost Method and the Equity Method Flashcards

1
Q

Investments in the stock of other entities - which accounting method do you use to record influence 1) 0-20%, 20%-50%, more than 50%? and answer each influence’ definitions.

A

1) 0-20% Adjusted cost method (no significant influence, used when fair value is not available, requires election)
2) 20% to 50% - Equity method (ability to exercise significant influence, investor does not have a controlling financial interest)
3) more than 50% - Consolidation (investor has a controlling financial interest, may result from equity ownership or other factors, such as representation on the BoD making the investor the primary beneficiary of a variable interest entity (VIE))

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2
Q

What do we call these people? 1) 0-50% influence, 2) more than 50%

A

1) Investor - Investee

2) Acquirer - Acquiree

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3
Q

What is role of Board of Directors?

A

In charge of the general operation of the entity (hiring management, declaring dividends)

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4
Q

What are the factors to determine the degree of influence?

A
  1. Significant intercompany trans, or technological dependency
  2. Officers of the investor serving as officers of board members of investee
  3. The investor is a major customer or supplier of the investee
  4. The investor owns at least 20% of the voting stock of the investee provided:
    a) no other investor holds a larger voting stock, or
    b) a small group of investors own a majority of the equity and exercises total control
  5. the investor has definite plans to acquire additional stock in the future to bring their interest up to at least 20%
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5
Q

Equity Method - Answer the JE (Acquisition, Earnings, Dividend, Deprec/Impairment of excess)

  1. 1/1/x1 acquire 30% for $1000
  2. FV of investee $3000, BV is $2500 - difference is PPE of FV is $500 higher (10year deprec), income $120, dividend $40, 10% of GW impairment
A
1. Acquisition
DR Investment $1000
CR Cash $1000
2. Earnings
DR Investment $36 ($120 income*30%)
CR Equity in earnings $36 (I/S)
3. Dividend
DR Cash $12 ($40*30%)
CR Investment $12 
4. Deprec/Impairment
DR Equity in earnings $25($10 GW & $15 PPE)
CR Investment $25

Investment Acct balance $999 ($1000 + 36 - 12 - 25)

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6
Q

Adjusted Cost Method - Answer the JE (Acquisition, Earnings, Dividend, Deprec/Impairment of excess)

  1. 1/1/x1 acquire 30% for $1000
  2. FV of investee $3000, BV is $2500 - difference is PPE of FV is $500 higher (10year deprec), income $120, dividend $40, 10% of GW impairment
A
1. Acquisition
DR: Investment $1000
CR: Cash $1000
2. Earnings
No entry
3. Dividend
DR: Cash $12
CR: Dividend Income $12 (I/S)
4. Deprec/Impairment
No Entry

Investment Acct Balance $1000

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7
Q

Adjusted cost method - what happened to JE if dividend paid is liquidating dividend (no income but dividends paid)?

A

DR: Cash
CR: Investment in B/S (instead of dividend income in I/S)

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8
Q

Fair value option for equity method investment - how to record it?

A

Initial purchase - record the investment at cost

When value goes up or down - adjust it as gain/loss in I/S

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9
Q

Under IFRS - what is considered to be significant influence (equity method) and control (consolidation)?

A
  1. significant influence - power to participate in the decisions of the investee
  2. control - power to direct activities of investee
    * **ownership 20%-50% doesn’t apply in IFRS
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10
Q

Under IFRS - what are the methods to record equity?

A
  1. Amortized cost - HFM
  2. FVTOCI (Fair value through other comprehensive income) - AFS
  3. FVTPL (fair value through profit and losses)
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