F4 - M2 - Equity Method

Question 1

When to use Equity Method

Answer 1

Depends of amount invested in investee:

Fair Value Method = 1 - 19% Ownership; Do not consolidate

EQUITY METHOD = 20% to 50% with Significant Influence; Do not consolidate

Consolidate / Control = Over 50%

Question 2

Significant Influence

Answer 2

20% to 50% Ownership of voting stock

Question 3

When NOT to use Equity Method

Answer 3

• Bankruptcy
• Investment is temporary
• lawsuit or compliant is filed
• Standstill agreement
• Anther small has majority ownership and operates without regard to investor
• Cant get financials info
• Cant get board of director representation

Question 4

Equity Method Accounting

Answer 4

Bank Account

Originally recorded at price paid to acquire; then adjusted by earnings of income and payment of dividends

BASE - Beginning balance, Add investors share, Subtract dividends, Ending balance

Initial investment JE:
Dr. Investment in Investee
Cr. Cash

Increase of investment by investors share of earnings
Dr. Investment in Investee
Cr. Equity in earnings / investee income

Share of dividends (withdraw) from investee
Dr. Cash
Cr. Investment in investee

Question 5

Net Income to Common Shareholders

Answer 5

Sub Earnings minus Preferred Dividends = Sub Net income Available to Common Shareholders

Question 6

Difference between Purchase Price and Book Value

Answer 6

Assets Fair Value Differences

Goodwill - Any remaining differences

Question 7

Purchase Price of Equity Method

Answer 7

1st - Book Value of Equity Acquired
     - Difference is Asset Fair Value Difference; Like a bank service charge; Dr. Equity. Cr. Investment 
2nd - Fair Value of Equity Acquired
     - Difference is goodwill 
3rd - Purchase Price of Investment

Question 8

Equity Method Impairment

Answer 8

Recognized if:

1. Fair Value of investment falls below carrying value
2. Entity believes the decline in value is other than temporary

Question 9

Transition to the Equity Method

Answer 9

When significant method is acquired

1. Add the cost
2. Adopt the equity method

Dr. Investment in Small Co.
Cr. Cash