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14 Cards in this Set

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Equity Method
Used to account for investments if significant influence can be exercised by the investor over the investee. Ownership of 20% to 50% of the investee's voting stock is deemed to represent significant influence.
Investment is originally recorded at the price paid to acquire the investment. The investment account is subsequently adjusted as the net assets of the investee change through the earning of income and payment of dividends.
Equity Method Not Appropriate When
(even when they own 20-50% of voting stock)
1. Subsidiary is bankrupt
2. Investment in sub is temporary
3. A lawsuit of complaint is filed.
4. A "standstill agreement is filed"
5. Another small group has majority ownership and operates w/out regard to the investor
6. The investor cannot obtain the financial information necessary to apply the equity method
7. Investor cannot obtain representation on the Board of Directors.
Balance Sheet
-Think of the equity method like a bank account. Cost + Earnings - Dividends (withdrawal) = Ending Balance.

1. J/E to record at cost (FV of consideration plus legal fees):
DR. Investment in Investee
CR. Cash (or Common Stock and APIC of parent)
2. J/E to record increase by the parent's ownership % of earnings of investee:
DR. Investment in Investee
CR. Equity in Earnings/Investee Income

3. J/E to record decrease by the parent's ownership % of cash dividends from investee (stock
DR. Cash
CR. Investment in Investee
Income Statement
Record the parent's ownership % of earnings as income (dividends aren't income, treat as withdrawals).

1. J/E to record investee earnings (parent's %)
DR. Investment in Investee
CR. Equity in Earnings/Investee Income
2. J/E to record investee cash dividends (lower investment)
DR. Cash
CR. Investment in Investee
Investments in Investee Common & Preferred Stock
-If investor owns both common and preferred stock of an investee company:
1. The significant influence test is generally met by the amount of common stock owned (which is usually the voting stock)
2. Calculation of the income from sub to be reported on the I/S includes:
-Preferred stock dividends
-Share of earnings available to common shareholders (net income reduced by preferred dividends)
Differences Between Purchase Price & Book Value
-Additional adjustments to the investment account under the equity method result from differences between the price paid for the investment and the book value of the investee's net assets. This difference is first attributable to:
1. Asset Fair Value Differences: differences between the BV and FV of the net assets acquired.
2. Goodwill: any remaining difference is goodwill.
Amortize Asset FV Difference
-The excess of an asset's FV over its BV is amortized over the life of the asset (excess caused by land not amortized). This additional amortization causes the investor's share of the investee's net income to decrease.
DR. Equity in Investee Income
CR. Investment in Investee

-Like a bank service charge, lowers income from sub.
Goodwill Difference
-The FV excess attributable to goodwill is not amortized and is not subject to a separate impairment test.
-However, the total equity method investment (including goodwill) must be analyzed at least annually for impairment.
Unconsolidated Investment of Over 50%
-A parent company that does not consolidate a 50%+ owned sub must use the equity method when presenting the investment in that sub in:
1. Consolidated F/S's (without sub being consolidated)
2. Unconsolidated parent company F/S's are NOT allowed to be issued to stockholders as the "primary reporting entity." However they may be presented as a supplemental disclosure.
Joint Venture Accounting
Under both U.S. GAAP and IFRS, investors generally account for joint venture investments using the equity method.
Step-By-Step Acquisition
(still not consolidating) A corporation may acquire an investment in investee in more than one transaction.
In this case, any goodwill must be computed at the time of each transaction.
Change From Cost to Equity Method
-When significant influence is acquired, it's necessary to record a change from the cost/AFS classification to the equity method.
-The investment account and the R/E's account are adjusted retrospectively for the difference between the AFS/cost method to the equity method.
To Equity From Cost
When two or more stock purchases of ownership in an investee corporation occur causing the investor to go from not having significant influence (<20%) to having significant influence (>20% but > 50%)
1. Equity method should be used and the periods during which the cost method (FV) was used are retrospectively adjusted.
2. The year-end ownership percentage is used to make all equity entries.
Equity in Investee Income Calculation
-When the additional investment is made sometime during the year, the investor will calculate its share of the investee's income by multiplying the:
1. Investee's income by the fraction of the year that the cost method was used and the % ownership before the change.
2. This will then be added to the investee's income multiplied by the fraction of the year remaining and the percentage of ownership after the change.