M2 - Equity Method Flashcards
A company that owns what percent of voting stock of another “investee” company is presumed to be able to exercise “significant influence” over the operating and financial policies?
20%-50%,
If they own anywhere in that frame, they must discole the company’s accounting policy for the investment.
They are also required to use the equity method.
If a stock dividend is received, what should the investor record?
A reduction in the total cost of stock owned
or
A memorandum entry reducing the unit cost of all the stock owned
A memorandum entry reducing the unit cost of all the stock owned
The total investment in the company will simply be spread over a larger amount of shares, thereby reducing the unit cost of all stock in that company owned.
Under the EQUITY method, investor records as revenue its “share of the investee’s earnings (not dividends received”). True or false
true
Under the EQUITY method, dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the investment on the balance sheet of the investor. True or false
True, it does not affect the investor’s reported investment income
Changes in the market value of investee’s common stock are not considered income to the parent under the equity method. True or false
True
Under the FAIR VALUE method, receipt of a dividend is recorded as income and does not affect the investment account. True or False
True
Under the equity method, the common stock dividends are recorded as a reduction to the investment account. Preferred stock does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the fair value method and the preferred stock dividends are recorded as dividend revenue on the income statement. (true or false)
True
Entry to record undervalued asset amortization related to purchase.
DR: Equity Revenue (Income Statement)
CR: Investment Acct (Balance Sheet)
Entry to record cash dividends from investee.
DR: Cash (Balance Sheet)
CR: Investment (Balance Sheet)
Under both the fair value and equity methods, liquidating dividends reduce the carrying amount of the investment account. (true or false)
True
Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test. (true or false)
True
Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company. (consolidation) (true or false)
true
Significant influence cannot be exercised by holding non-voting stock (preferred stock). The equity method must be used. (true or false)
FALSE the fair value method must be used. The first sentence is correct.
In a business combination, the valuation of goodwill is a calculation of what?
The residual paid above the fair value of the identifiable net assets
Or
Of all of the increase in market valuation of the intangible assets acquired
The residual paid above the fair value of the identifiable net assets.
The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
