The equity method would be inappropriate and the

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Unformatted text preview: d, Newjohn must be able to exercise significant influence over the affiliated company. If the ownership is less than 20%, then the lack of significant influence would generally be presumed. The equity method would be inappropriate and the securities would be classified as available for sale. If Newjohn can control the investee, generally represented by an ownership interest greater than 50%, then consolidation would be appropriate. • Recording the sale of securities. • Recording interest and dividends. • Recording changes in value of the securities • Recording the purchase The four major recording activities are: 182. The three categories listed apply to all investments in debt securities and investments in equity securities with a readily determinable fair value that are not accounted for under the equity method or using consolidation procedures. In other words, equity securities where the investor owns less than 20% of the voting stock are included in one of these three categories. Held to maturity securities must be debt securities. Trading and available for sale securities may be debt or equity securities. • Investor is unable to obtain the information necessary to apply the equity method. • Majority ownership is concentrated among a small group of investors. • Investor tries and fails to obtain representation on the board of investee. (2.) Some factors indicating lack of significant influence: • Participation in the policy setting process of the company. • Material intercompany transactions. • Representation on the board of directors. 183. (1.) Some factors indicating significant influence: 184. When a firm owns more than 50% of the voting stock in another corporation, then consolidation procedures are required. Owning more than 50% of an investee company ensures, in most cases, that the parent company has control of the management decisions of the subsidiary by holding over half of the votes at stockholder meetings. Control involves the presence of two essential characterist...
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This document was uploaded on 07/05/2013.

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