Shared Flashcard Set

Details

FAR-1 Cost and Equity Method
Roger CPA Review 2012, FAR
8
Accounting
Professional
08/01/2012

Additional Accounting Flashcards

 


 

Cards

Term
Common Stock of another company - Accounting Methods
Definition
0-20% Cost method (Private company) or marketable securities (Public Company)
20 - 50% Equity method
50%+ Consolidation
Term
Equity Method used when?
Definition
***The investor has significant influence over the operating and financial policies over investee.***
+ 20% (But not if another shareholder or small voting block owns a majority and exercises total control)
+significant intercompany transactions or tech dependency
+officers of one company also over another or board members
+investor intends to acquire enough stock to get to 20%
Term
Equity Method
Definition
+The investment is originally recorded at Cost
+As the investee earns money, this is recorded as an increase on the investor's books based on the % the investor owns.
+DIV received are considered a reduction of the investment account and do NOT show up on the income statement
+Any difference paid b/t the purchase price paid for the investee and the book value of the investee's net assets must be accounted for
Term
Any difference paid b/t the purchase price and bv of investee
Definition
mark up to FMV
PP&E - depreciated
Inventory - written off when sold
Land
Goodwill - Impairment loss
Term
Cost Method
Definition
No significant influence exists.
+ Use Market value if available
+ Use Cost method if not
+The original investment is recorded at cost
+Dividends are recorded as dividend income
+Liquidating Dividend reduces investment
+No difference b/t BV and purchase price is recorded.
Term
Cost Method - Stock Dividends
Definition
If an investee declares a stock dividend or issues stock rights, no income is reported.
Term
Cost Method - Life Insurance
Definition
If the life insurance on an officer builds up cash surrender value - the portion of the premium that increases the cash value is accumulated as an asset on the balance sheet, the rest is life insurance expense. If the officer dies, the proceeds from the policy are recognized as income only to the extent they exceed the cash value.
Term
What method used when changes in ownership percentages?
Definition
Equity to Cost - No more significant influence - change statements prospectively
Cost to Equity - change statements retrospectively - apply the equity method but only for the % you previously owned (e.g. 10%) this requires a prior period adjustment to reported income.
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