accounting 406 chapter 1 - Chapter 1 1 Fair-Value method a...

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Chapter 1 1. Fair-Value method a. Only a small percentage of an investee company’s b. No significant influence on decisions made c. SFAS 115 i. Initial investments in equity securities are recorded at COST and subsequently ADJUSTED OT FAIR MARKET VALUE 1. if FMV is not determinable they remain at cost ii. Trading securities 1. equity securities held for sale in the short term 2. reported at Fair Value 3. unrealized gains/losses are included in earnings 4. dividends are recognized as income iii. Available for sale securities 1. equity securities that are not classified as trading 2. reported at Fair Value 3. Unrealized gains/losses are excluded from earnings and reported in a separate component of shareholders equity as part of OTHER COMPREHENSIVE INCOME 4. dividends are recognized as income 2. Consolidation of Financial Statements a. When an investor has actual control over investee’s operation b. Recognized whenever a stockholder accumulates more than 50% percent of an organization’s outstanding voting stock c. A single set of financial statements is created d. Special purpose entities (SPEs) i. Firms own little or no voting stock but have control over other companies through special contracts ii. Vehicle for firms to keep large amounts of assets and liabilities off their consolidated financial statements 3. Equity Method a. Applied when investor has significant influence i. Does not need to have a 50% interest in voting stock ii. 20%-50% b. Investor has the ability to influence the timing of dividend distribution i. Because of this divided from an investee does not qualify as income to the investor ii. Income is reported by the investor when it is recognized by the investee 4.
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