Module 8.3: Investment in Associates, Part 1—Equity Method

Question 1

the initial investment

Answer 1

is recorded at cost and reported on the balance sheet as a noncurrent asset.

Question 2

In subsequent periods

Answer 2

the proportionate share of the investee’s earnings increases the investment account on the investor’s balance sheet and is recognized in the investor’s income statement

Question 3

Dividends received

Answer 3

are treated as a return of capital and thus, reduce the investment account
not recognized in the investor’s income statement.

Question 4

Fair Value Option - U.S. GAAP

Answer 4

allows equity method investments to be recorded at fair value.

Question 5

Fair Value Option - IFRS

Answer 5

only available to venture capital firms, mutual funds, and similar entities.

Question 6

Two Adjustments in the equity method

Answer 6

1 - Additional depreciation due to difference between FV and BV
2 0 Removal of a pro rata share of unconfirmed profits (upstream or downstream)

Question 7

Excess of Purchase Price Over Book Value Acquire

Answer 7

At the acquisition date, allocated to the investee’s identifiable assets and liabilities based on their fair values. Any remainder is considered goodwill.

In subsequent periods, the investor recognizes expense based on the excess amounts assigned to the investee’s assets and liabilities.

Question 8

Impairments of Investments in Associates (US GAAP)

Answer 8

if the fair value of the investment falls below the carrying value, the investment is written-down to fair value and a loss is recognized on the income statement.

Question 9

Impairments of Investments in Associates (IFRS)

Answer 9

Under IFRS, impairment needs to be evidenced by one or more loss events.

Question 10

Transactions With the Investee (upstream)

Answer 10

investee to the investor. the investee has recognized all of the profit in its income statement.

Question 11

Transactions With the Investee (downstream)

Answer 11

investor to the investee. the investor has recognized all of the profit in its income statement