12_2 Chapter 17 Notes

12_2 Chapter 17 Notes - Econ 136B ...

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Unformatted text preview: Econ 136B Chapter 17 12/2/10 Investments in Equity Securities (C/S) Holdings of < 20%  ­ ­> Assume not enough ownership to have signi<icant in<luence [[If you have a large percentage of C/S, large part of the vote… can exert signi<icant in<luence over the company.]] >> Use the FAIR VALUE METHOD. Holdings of 20% ­50%  ­ ­>Assume that the investor can exert signi<icant in<luence over the investee >>Use the EQUITY METHOD Holdings of >50%  ­ ­ ­> Subsidiary (essentially), covered in further accounting classes ***But it is possible to have less than 20% holding and still have a signi<icant in<luence. If there is signi<icant in<luence, use the EQUITY METHOD… if not, use FAIR VALUE METHOD. Fair Value Method >> Adjust the investment account to Fair Market Value at each Balance sheet date. >> Recognize corresponding unrealized holding gain/loss: :::If investment classi<ied as "trading" (will tell you in problem) * [[planning to hold short term and pro<it from <luctuations]] * Gain/loss goes on income statement ::If investment classi<ied as "available for sale" * They may hold it for years so we don’t want the <luctuations to <low through the income statement… will bypass this… * … and the gain of loss becomes part of other comprehensive income, and is recorded directly in the SE section of the balance sheet. * * * * Investent recorded at Fair Value each B/S date Corresponding holding gain/loss goes on I/S if trading, and goes on B/S if available for sale security. Dividends received/declared are recorded on the investor's income statement as Dividend Income. If a security is SOLD… a realized loss is recorded on the income statement (realized because now we have actually gotten rid of the security and got cash in exchange) Equity Method >>Acknowledges the economic relationship between investor and investee >>Adjust the investment account as the net assets of the investee company change [[as the EQUITY of the investee company changes]] +  ­  ­  ­ Investment Acct Cost Investor's % share of investee's NI Investor's % share of investee's NI Dividends from Investee Amort of excess paid over BV of investmt. $ X $ X **Remember: DON'T amortize goodwill! <$ X> <$ X> *Don't treat as income.. <$ X> treat as a reduction of the equity account, because ((^Decrease to the investment account.. Brings it more net assets of the company in line with the book value of the investment.)) have gone down. Investment Acct Cost Investor's % share of investee's NI Investor's % share of investee's NI Dividends from Investee Amort of excess paid over BV of investmt. $ X $ X * * <$ X> * <$ X> <$ X> * ((*= also recorded on investor's inc. stmt.)) *Don't worry about Fair Value Option… won't need to know for test. Example 1: * On 1/1/09, Co. A bought 40% of the O/S C/S of Co. B for $400,000.00 * At that date, Co. B had net assets with a book value of $700,000.00 * All assets and liabilities had a BV=FMV, except for the building with a fair value>book value of $80,000. * The building had a remaining life of 8 years. * For 2009, Co, B had net income of $160,000.00, and they paid total dividends of $125,000.00 * At 12/31/09, Co. A's investment had a FMV of $425,000.00 >>>Prepare all journal entries for the investment during 2009. Journal Entries 1/1/09: Investment in Company B $400,000 *Use Equity Cash $400,000 Method  ­ ­ ­> 12/31/09: Cash $50,000 * stake >20% Investmt. in Co. B * $50,000 *Total Div was $125,00; Company B entitled to 40% 12/31/09: Investment in Company B $64,000 Rev from invstmt. $64,000 *Equity in NI: NI is $160,000, so x 40%… =$64,000) Next, <igure out if there is an excess…. [[Company paid 400,000 for investment, when the assets had a book value of 700,000.. If they bought 40%, they shouldv'e paid $280,000. Why didn't they?? Do an analysis.]] *Know that all assets have FMV=BV except building *DON'T AMORTIZE GW 12/31/09: *FMV of $425,00 never enter the picture. Cost of Investment $400,000.00 BV of Investment $280,000.00 *40% of $700k Total Excess: $180,000.00 Allocation of Excess Bldg FMV>BV(40% of 80k) $32,000.00 Unrecorded GW (plug) $88,000.00 $120,000.00 Revenue from Invstmt. 4,000 Invstmt in Co. B (($32,000.00/8 years = $4,000/year)) $4,000.00 Investment 12/31/09: $400,000  ­ $50,000 + $64,000  ­ $4,000 = $410,000 Revenue from Investment on 2009 I/S: $64,000  ­ $4,000 = $60,000 **To <ind the change in the investment account over the period… ending balance is $410,000, investment revenue is $60,000, and there is a $10,000 increase in the account. Example 2: Same as Example 1, except Company A was not able to exercise signi<icant in<luence over Company B. Company A's 2009 J/E's: 1/1/09: 12/31/09: Invstmt in Co. B $400,000 Cash Cash $50,000 Div. Income (I/S) Invstmt in Co. B $25,000 Unrealized Holding Gain [[To I/S if "Trading"]] [[To S/E if "Avail. for Sale"]] >>>>$425,000 $400,000 $400,000 $50,000 $25,000 FINAL EXAM: 2 hours only (8am ­10am on Wednesday, Dec 8) Bring a Scantron No separate written out problem from Chapter 17 (what we covered today) Other assorted MC questions from other material (practice by doing problems) 2 problems 1 J/E to record equity transactions… Ch's 15 &16, + Bonds from 14. ((Look at old exams… lots of example problems, big)) Effective interest method get cv bonds issuance proceeds Won't have SE section of the balance sheet No appendices to the chapters Some stuff in 16 we didn't cover… (recover stock and employee stock purchases. 1 EPS problem (everything; dilutive, etc etc) ...
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