高级财务会计 陈信元 chapter 2

1、chapter 2 accounting for stock investmentadditional readings: cas no.21. fair value/cost method and equity method11. fair value/cost method1) characteristics records an investment at cost recognizes dividend in excess of earnings are considered as a return of investment (reduction of investment) 2)

2、conditions for cost method no ability to influence: 20% ownership testif the stock is marketable, the investment should be accounted for at fair value11/29/2021112. equity method1) characteristics initially records an investment at cost recognizes the share of the investees earnings as income divide

3、nds received reduce the carrying amount of the investment adjusts the investment account to recognize the share of the investees earnings after the date of acquisition, by * eliminating unrealized gains and losses * amortizing the fmv-bv differential incomplete equity method vs. equity methodnote: e

4、quity method goodwill shall not be tested for impairment. 11/29/202122) conditions for equity method significant influence over the financial and operating policies of the investee, indicated by * representation on the board of directors * participation in policy making processes * material intercom

5、pany transaction * interchange of managerial personnel * technological dependency 2050% ownership (us) control the financial and operating policies of the investee: over 50% ownership if no influence or control, even more than 20% or 50% ownership interest held, only cost method is used13. compariso

6、n of cost method to equity method 11/29/20213 percentage of outstanding voting stock acquired0% 20% 50% 100%1. level of economic influence | nominal |sig. influence| control |2. valuation basis | cost m. | equity method |3. balance sheet presentation | investment account | cfs |illustration (p46-47)

7、2. equity method (one-line consolidation)21. equity method and full consolidation1) one-line consolidation investment account is reported in a single amount on one line of the investors b/s11/29/20214 11/29/202154) illustration assumptions* no cost-bv differential * no intercompany transactiontable

8、2-1: balance sheet p (equity m) s (80%) consolidated e.other assets 520 200 720investment in s 80 - - total assets 600 200 720 liabilities 100 100 200minority interest - - 20owners equity 500 100 500 total equity 600 200 72011/29/20216table 2-2: income statement p (ex. s) s (80%) p (e.m) c. e.sales

9、100 30 100 130cost of sales 50 10 50 60gross profit 50 20 50 70 other expenses 20 10 20 30operating income 30 10 30 40income from s - - 8 -income before mii - - - 40mi income - - - (2)net income 30 10 38 38 the difference between the two procedures stems from * consolidated statements focus on econo

10、mic entity* equity method focuses on parent (investor) company11/29/2021722. application of the equity method 1) equity method at acquisition valuation: fmv of considerations given up equity securities exchange: registration and issuance costs are charged against addl pic other direct costs are adde

11、d to the acquisition cost 2) assignment and amortization of cost-bv differentials fmv-bv differential: be assigned to related assets and liabilities cost-fmv differential: goodwill or negative goodwill if bvcost, check whether assets are overvalued examples: p.4853 11/29/202183) disclosures for equi

12、ty investees the name of each investee and ownership percentage accounting policies of stock investment cost-bv differential and accounting for the differential related party transactions (p.58-60) other important information3. interim acquisition of an investment interest31. determination of the un

13、derlying equity1) investees stockholders equity= beginning balance + income earned from year beginning to acquisition date-dividends declared during the period underlying equity=investees stockholders equity%11/29/202192) basic assumptioninvestees income is earned evenly thru. the year32. determinat

14、ion of the investment income1) investment income = investees income realized from the acquisition date to the year end %+/- amortization of fmv-bv differential2) example: p.54-5533. stock purchases directly from the investee1) the number of shares increases when investor purchases stock directly fro

15、m the investee2) interest % = shares acquired total shares after acquisition11/29/2021104. changes in ownership interest41. from cost method to equity method par.19m of apb opinion no. 18 requires retroactive application of the equity method of accounting when an investors ownership interest reaches 20%1) to convert the investment cost t