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Unformatted text preview: The first several chapters of this text present the accounting and re- porting for investment activities of businesses. The focus is on invest- ments when one firm possesses either significant influence or control over another through ownership of voting shares. When one firm owns enough voting shares to be able to affect the decisions of another, ac- counting for the investment can become challenging and complex. The source of such complexities typically stems from the fact that transac- tions among the firms affiliated through ownership cannot be con- sidered independent, arm’s-length transactions. As in many matters relating to financial reporting, we look to transactions with outside parties to provide a basis for accounting valuation. When firms are af- filiated through a common set of owners, measurements that recog- nize the relationships among the firms help to provide objectivity in financial reporting. THE REPORTING OF INVESTMENTS IN CORPORATE EQUITY SECURITIES In a recent annual report, JB Hunt Transport Services describes the cre- ation of Transplace, Inc. (TPI), an Internet-based global transportation logistics company. JB Hunt contributed all of its logistics segment busi- ness and all related intangible assets plus $5 million of cash in exchange for an approximate 27 percent initial interest in TPI, which it subse- quently increased to 37 percent. JB Hunt accounts for its interest in TPI utilizing the equity method of accounting and stated, “The financial re- sults of TPI are included on a one-line, nonoperating item included on the Consolidated Statements of Earnings entitled ‘equity in earnings of asso- ciated companies.’ ” Such information is hardly unusual in the business world; corporate in- vestors frequently acquire ownership shares of both domestic and foreign businesses. These investments can range from the purchase of a few shares to the acquisition of 100 percent control. Although purchases of corporate equity securities (such as the one made by JB Hunt) are not uncommon, they pose a considerable number of financial reporting issues because a close relationship has been established without the investor gaining actual control. These issues are currently addressed by the equity method. This chapter deals with accounting for stock investments that fall under the ap- plication of this method. 1 chapter 1 The Equity Method of Accounting for Investments LEARNING OBJECTIVES After studying this chapter, you should be able to: LO1 Describe in general the various methods of accounting for an investment in equity shares of another company. LO2 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met....
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This note was uploaded on 03/19/2012 for the course ACCT 101 taught by Professor Yiyunchu during the Fall '09 term at American InterContinental University Dunwoody.
- Fall '09