Professional Documents
Culture Documents
Chap 001
Chap 001
Chap 001
McGraw-Hill/Irwin
LO 1
** Included in earnings on the income statement for Trading Securities or in Other Comprehensive Income in Shareholders Equity for Available-for-Sale (excluded from earnings)
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except when control does not rest with the majority investor One set of financial statements prepared to consolidate all accounts of the parent company and all of its controlled subsidiaries AS A SINGLE ENTITY.
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LO 2
Equity Method
Use when: Investor has the ability to exercise significant influence on the investee operations (whether influence is applied or not)
If investor has 20% or more ownership, it is presumed to have significant influence, unless it is demonstrated not to be the case. If investor holds less than 20% ownership, it is presumed it does not have significant influence, unless influence can be clearly demonstrated.
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Technological dependency
Other investor ownership percentages
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0%
20%
50%
100%
LO 3
Equity Method
1: Same as Fair Value 2: Investor recognizes its share (% of ownership) of investees net income (net loss) as an increase (decrease) in the investment account and 3. Records dividends as a decrease.
XXXX
XXXX Debit Credit XXXX XXXX Debit Credit XXXX XXXX
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All accounts are restated retroactively so the investors financial statements appear as if the equity method had been applied from the date of the first acquisition. (FASB ASC para. 32310-35-33)
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When net income includes elements other than Operating Income, these elements should be presented separately on the investors income statement.
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LO 4
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Goodwill
GOODWILL
Equity method goodwill accounts are not separable from the investment, and are not separately tested for impairment.
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Amortization of the difference associated with the undervalued assets reduces both the Investment account and the Equity in Investee Income account.
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LO 5
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LO 6
INVESTOR
Downstream Sale
INVESTOR
Upstream Sale
INVESTEE
INVESTEE
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Reporting the profit is delayed until the inventory is consumed within operations or resold to an unrelated party. At the disposition of the inventory, the original sale is culminated and gross profit is recognized.
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Over-emphasis on possession of 20-50% voting stock in deciding on significant influence vs. control Allowing off-balance sheet financing Potential manipulation of performance ratios
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LO 7
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After 2007, under the Fair-value Option, changes in the fair value of these assets are reported in earnings.
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Summary
Accounting methods used for investments in other companies depend on percentage of ownership and level of influence investors can exercise over investees. If an investor pays more than book value of the investee, the excess payment is assigned to specific assets, liabilities, and goodwill. Intercompany profits on transferred assets are deferred until the items are consumed or sold to outside parties. Since 2008, firms may irrevocably elect to report significant influence investments at fair value instead of using the equity method.
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