Intercorporate Investments

Question 1

Investments in financial assets

Answer 1

Less than 20% ownership
No significant influence
Accounting treatments: held to maturity, fair value through profit or loss, available for sale
Dividends & investment income reported in investor’s financial statements

Question 2

Investments in associates

Answer 2

20-50% ownership
Significant influence
Equity method

Question 3

Business combinations

Answer 3

More than 50% ownership
Control
Acquisition method

Question 4

Held to maturity securities

Answer 4

Reported on balance sheet at amortized cost

Subsequent changes in fair value are ignored

Question 5

Fair value through profit or loss securities

Answer 5

Reported at fair value, unrealized gains and losses recognized in income statement

Question 6

Available for sale securities

Answer 6

Reported at fair value, unrealized gains/losses reported in OCI (stockholders’ equity)

Question 7

Equity method

Answer 7

Proportionate share of the investee’s earnings increase the investor’s investment account on the balance sheet and are recognized in the investor’s income statement. Dividends received reduce investment account (not recognized in investor’s income statement).
In rare cases, proportionate consolidation may be allowed instead.
No minority owners’ interest required.
Same net income as acquisition method; equity lower by amount of minority interest; assets, liabilities, sales lower.

Question 8

Acquisition method

Answer 8

All assets, liabilities, revenues, expenses or the subsidiary are combined with parent. Intercompany transactions excluded. When parent owns less than 100% of subsidiary, necessary to creat non-controlling interest account for proportionate share of subsidiary net assets and net income that is not owned by the parent.
Same net income as equity method. Equity will be higher by amount of minority interest. Assets, liabilities & sales higher.