LN -Equity Method (Ch 1)

LN -Equity Method (Ch 1) - Ch 1 The Equity Method of...

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Ch 1: The Equity Method of Accounting for Investment (ASC 323) ACCT 501, SP 12 1. Three methods are principally used to account for an investment in equity securities along with a fair value option. The method is selected based upon the size of the investment and level of influence the investor is able to exercise over the investee. 1) Fair-value method : applied by an investor when only a small percentage of a company’s voting stock is held. 2) Equity method: applied when the investor has the ability to exercise significant influence over operating and financial policies of the investee. A. Ability to significantly influence investee is indicated by several factors including representation on the board of directors, participation in policy-making, etc. B. According to a guideline established by the Accounting Principles Board, the equity method is presumed to be applicable if 20 to 50 percent of the outstanding voting stock of the investee is held by the investor. * The discussion on equity method investments in this chapter assumes the company did NOT elect the fair value option for these investments. 3) Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock of a subsidiary or control through variable interests, one set of financial statements is prepared which consolidates all accounts of the parent company and all of its controlled subsidiary. Internally, Multiple ways in which the parent can account for the Equity Investment A. (Full) equity method B. Partial equity method C. Cost method/initial value method
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ACCT 501, SP 12 2 2. Accounting for an investment: the equity method 1) Investor records initial investment in the investee at “purchase price”. 2) Its proportionate (pro rata) share of the income is accrued by the investor as soon as it is earned by the investee. 3) Dividends declared by the investee create a reduction in the carrying amount of the Investment account.
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LN -Equity Method (Ch 1) - Ch 1 The Equity Method of...

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