The equity in investee income is reduced. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. Every day, the business press carries stories about themerger and acquisition mania, the complexities of modern business entities, new organizationalstructures for conducting business, accounting scandals related to complex businesstransactions, the foreign activities of multinational firms, the operations of governmental andnot-for-profit entities, and bankruptcies of major firms. Which types of transactions exchanges or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee Answer Given When an investor has the ability to exercise significant influence over the operations of an investee the investor should use the equity method to account for the investment.
Therewas no goodwill or other cost allocation associated with the investment. A realized gain or loss is reported as the difference between selling price and carrying value. If Dermot achieves significant influence with this new investment how must Dermot account for the change to the equity method 1. Accountants must understand andknow how to deal with the accounting and reporting ramifications of these issues. It should record a prior period adjustment at the beginning of2011 but should not restate the financial statements for 2010 and 2009. Lennon distributed a dividend of 2.
The cumulative losses should be reported as a prior period adjustment. On January 1 2011 the balance in the Investment in Ticker Co. The balance of the investment account is increased by the investors share of the investees income and decreased by investee losses and dividends paid and amortization of depreciable allocations. The investor is required to recognize its share of the investees income even when it is unlikely that the investor will ever receive the entire amount in cash dividends. Therewas no goodwill or other cost allocation associated with the investment. Net income of the investee. During 2010 Bike reported net income of 500000.
During 2011 Ticker earned income of 108000 and paid cash dividends of 36000. What is the balance in the investment account on December 31 2011 1. Just post a question you need help with, and one of our experts will provide a custom solution. A patent held by Sacco having a book value of 10000 was actually worth 40000 with a six year remaining life. When an investor sells shares of its investee company which ofthe following statements is true 1.
You can check your reasoning as you tackle a problem using our interactive solutions viewer. Gaw Company owns 15 of the common stock of Trace Corporation and used the fair-value method to account for this investment. Dividends paid by the investor. This investment gave Harley the ability to exercise significant influence over Bike. On the income statement the investors total revenues will be increased by its share of the investees earnings reduced by any amortization of cost in excess of fair value of depreciable net assets. An extraordinary loss would be reported.
Note: To view the Adobe® Acrobat pdf files, you'll need to download the free. The fairvalue method was used during 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. The loss would be ignored but shown in the investors notes to the financial statements. Any excess of cost over book value is attributable to goodwill withan indefinite life. Also in the income statement the dividends received would be reflected as dividend income.
Bikes assets on thatdate were recorded at 10500000 with liabilities of 4500000. Club should not record its share of Chips 2011 earnings untilthe decline in the fair value of the stock has been recovered. The extraordinary loss should increase equity in investee income. During 2010 Sacco reported income of 50000 and paid dividends of 20000 while in 2011 it reported income of 75000 and divide 1. Complete Test Bank for Advanced Accounting, 11th Edition, Joe B. During 2011 Hefly reported income of 150000 and paid dividends of 40000.
A prospective change in accounting principle must occur. What is the primary objective of the fair value method of accounting for an investment Answer Given The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decision-making of the investee. At that time thebook value and fair value of Heflys net assets was 1400000. The investor must defer downstream ending inventory profits. Advanced Accounting by Paul M.
During 2011 Ticker earned income of 108000 and paid cash dividends of 36000. During 2011 Hefly reported income of 150000 and paid dividends of 40000. A decrease of current earnings. This investment gave Harley the ability to exercise significant influence over Bike. Chapters 1 through 11 cover business combinations, the equity and cost methods of accounting for investments in common stock, and consolidated financial statements This emphasizes the importance of business combinations and consolidations in advanced accounting courses as well as in reporting practices Accounting and reporting standards for acquisition-method business combinations.
Different adjustments are made for upstream and downstream transfers. During 2011 Thomas reportedincome of 300000 and paid dividends of 100000. The equity method applies accrual accounting when the investor could exercise significant influence over the investee. Net income of the investor. All of the following statements regarding the investment account using the equity method are true except: 1. The balance in the investment account at the time of the change would be treated as the cost of the investment.