Session 20 Investment III0 (1) - Session20:InvestmentsIII...

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Session  Session  20: Investments III 20: Investments III Hye Sun Chang ACCY 303  
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Outline Outline 1. Equity method 2. The effects of SFAS 159 on the  accounting of equity method investments.
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What Is Significant Influence? What Is Significant Influence? If an investor owns more than 20% of the voting stock of an investee, it is  presumed that the investor has significant influence over the financial and  operating policies of the investee. The presumption can be overcome if : – the investee challenges the investor’s ability to exercise significant  influence through litigation or other methods. – the investor surrenders significant shareholder rights in a signed  agreement. – the investor is unable to acquire sufficient information about the investee  to apply the equity method. – the investor tries and fails to obtain representation on the board of  directors of the investee.
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Equity Method:  Equity Method:  One-Line Consolidation One-Line Consolidation 1. The investment account is    increased by: Original investment cost. Proportionate share of investee's earnings. 1. The investment account is decreased by: Dividends received. 1. The investment account is     increased   by: Original investment cost. Proportionate share of investee's earnings. 1. The investment account is  decreased   by: Dividends received. Much like consolidation, the equity method views the investor and  investee collectively as a special type of single entity (as if the two  companies were one company).  The investment account is reported on the balance sheet as a single  amount. The investor’s share of the investee’s earnings from date of acquisition  is reported as a single item on the investor’s income statement.
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Equity Method  Equity Method  On January 1, 2009, Matrix, Inc. acquired 45% of the  equity securities of Apex, Inc. for $1,350,000.  On  the acquisition date, Apex’s net assets had a fair  value of $3,000,000.  During 2009, Apex paid cash  dividends of $150,000 and reported net income of  $1,750,000.   What amount will Matrix, Inc. report on the balance  sheet as Investment in Apex, Inc.?  On January 1, 2009, Matrix, Inc. acquired 45% of the  equity securities of Apex, Inc. for $1,350,000.  On 
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Session 20 Investment III0 (1) - Session20:InvestmentsIII...

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