Matching Revenue & Expenses Part II

Question 1

Cost vs Equity method

Answer 1

nvestor records as revenue its “share of the investee’s earnings” (not “dividends received”) 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.
Changes in the market value of investee’s common stock are not considered income to the parent under the equity method.
Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account.

Question 2

stock dividends

Answer 2

Stock dividends and stock splits are not considered income to the recipient.
Therefore, investors do not record stock dividends at fair value. They simply reallocate the investment account balance (under either method – cost or equity) over more shares so that value per share decreases.

Question 3

Cash dividend (cost vs equity)

Answer 3

Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account.
Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.

Question 4

common vs preferred (equity method)

Answer 4

Under the equity method, the common stock dividends are recorded as a reduction to the Investment account. Preferred stock ownership does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the cost method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.

Question 5

Stock dividend vs Cash dividend (equity / cost)

Answer 5

1. Stock dividend (more shares of stock) is not reported as revenue, only a memo entry is made.
2. Cash dividend (under the equity method) reduces the investment account but does not affect revenue.
3. Cash dividend (under cost method) affect revenue.

Question 6

Common vs preferred (equity method)

Answer 6

Under the equity method, the common stock dividends are recorded as a reduction to the Investment account. Preferred stock ownership does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the cost method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.

Question 7

Goodwill in Equity method

Answer 7

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.