F5M2: Equity Method

Question 1

Apply investment method according to the period dividends were declared and paid.

Facts:
10% owners from 1/1/Y1 to 8/31/Y1
40% owners from 9/1/Y1 to 12/31/Y1

Answer 1

If dividends were declared during 10/31/Y1, do no retroactively apply equity method prior to declaration date

Record dividends according to 40% owners (equity) b/c that is the time period dividends were declared and when equity method should be applied.

Question 2

Short and long-term debt securities are reporting at amortized/carrying amount unless there is a permanent decline in market value

Answer 2

TRUE

Question 3

Journal entry for amortizing over the buildings life:

25% ownership; equity method

The differential between the fair value and book value of $2 million is made up of both land ($500,000) and building ($1,500,000).

Land is not amortized.

Building portion will be amortized over the building’s useful life (50 years).

Answer 3

Dr. Equity in investment investee
Cr. Investment in Investee

25% ownership of subsidiary

25% × ($1,500,000 / 50), or $7,500, will be amortized each year.

Question 4

Under equity method, cash dividend impact which account?

Investment income or Investment account

Answer 4

Investment account

dr. Cash (b/s)
cr. Investment account (b/s)

Question 5

Undervalued asset amortization
related to purchase impacts investment income or investment account?

Answer 5

Investment account and investment income

dr. Equity revenue (i/s)
cr. Investment account (b/s)

Question 6

How are dividends treated under the equity method and fair value method?

Answer 6

Equity Method:
* Reduce investments

• No dividend income on I/S
• Exception: Preferred stick

FV Method:
* record dividend as income

Question 7

Rule: Undervalued asset amortization affects both the investment account (an asset) and the investment income account (a revenue), while cash dividends affect the investment account but not the investment income account.

Answer 7

True