Method of accounting Flashcards
Big owns 35% of the stock of Small Industries. The remaining shares are owned by the original founder of the company. The founder’s family members make up the Board of Directors of small Industries.
Cost Method
b/c the investor does not have ability to exercise significant influence over the investee
During the year Big started a partnership with Vector Enterprises to build a power plant that Bog will lease back from the partnership for $12,000 per year. Bog contributed 20,000,000 to the partnership and has 20% of the voting rights. Vector contributed $5,000,000 and has 80% of the voting rights.
Consolidation
On January 1, year 1 Big owned 18% of the Little Ladies, On November 1, Year 1 Big acquired an additional 10% of Little Ladies. Because of the voting for directors Big has a majority of Board Members and is not the largest shareholder of the company.
Equity Method
the investor can exercise significant influence over the investee and holds 50% or less of the voting stock.
Big owns 51% of Shared Services, Inc The remainder of the stock is held by one, unrelated individual and according to the by laws of the Company. Big is required to consult with that shareholder on major decisions of the company.
Consolidation
Big owns 60% of Petite Enterprises. Petite has a June 30 year end, is located in another state, is in a different industry than Big, and shares no common costs.
Consolidation
Define
Cost Method of accounting
The investor has no substantial influence over the investee (20% or less)
The investment has no easily determinable fair value
Define
Equity Method of accounting
is used to account for an organizations investment in another entity (the investee). Used when the investor has significant influence over the investee
Define
Consolidation Method of accounting
When one company purchases a majority stake in another firm, the purchasing company is called the acquirer, parent or controlling entity.
