12 25 investorhassignificantinfluence extent of

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Unformatted text preview: ins and losses included in earnings. 12-25 Investor Has Significant Influence Extent of Investor Influence Lack of significant influence (usually < 20% equity ownership) Significant influence (usually 20% - 50% equity ownership) Has control (usually > 50% equity ownership) Reporting Method Varies depending on classification previously discussed Equity method Consolidation 12-26 What Is Significant Influence? If an investor owns 20% of the voting stock of an investee, it is If an investor owns 20% of the voting stock of an investee, it is presumed that the investor has significant influence over the financial presumed that the has significant influence over the financial and operating policies of the investee. The presumption can be and operating of investee. presumption can be overcome if overcome if 1.the investee challenges the investors ability to exercise significant 1.the challenges the investor’s ability exercise significant iinfluence through litigation or other methods. nfluence through litigation or other methods. 2.the investor surrenders significant shareholder rights in a signed 2.the investor surrenders significant shareholder a agreement. agreement. 3.the investor is unable to acquire sufficient information about the 3.the investor is unable to acquire sufficient information about the iinvestee to apply the equity method. nvestee to apply the equity method. 4.the investor tries and fails to obtain representation on the board of 4.the and to obtain representation on the board of directors of the investee. directors investee. 12-27 A Single Entity Concept Under the equity method . . . 1.The investor recognizes investment income equal to its percentage share (based on stock ownership) of the net income earned by the investee rather than the portion of that net income received as cash dividends. 2.Initially, the investment is recorded at cost. The carrying amount of this investment subsequently is: a) Increased by the investor’s percentage share of the investee’s net income (or decreased by its share of a loss). b) Decreased by dividends paid. 12-28 Equity Method On January 1, 2013, Wilmer 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 2013, Apex paid cash dividends of $150,000 and reported net income of $1,750,000. What amount will Wilmer Inc. report on the balance sheet as Investment in Apex Inc. on December 31, 2013? 12-29 Equity Method January 1, 2013 Investment in Apex Inc. stock Cash 1,350,000 1,350,000 $ 3,000,000 Fair value of net assets × 45% Percentage ownership $ 1,350,000 Fair value of assets purchased 2013 Investment in Apex Inc. stock Investment revenue $ × $ 787,500 787,500 1,750,000 Reported earnings 45% Percentage ownership 787,500 Share of earnings 2013 Cash 67,500 Investment in Apex Inc. stock $ × $ 150,000 Dividends paid 45% Percentage ownership 67,500 Share of dividends 67,500 12-30 Equity Method Investment in Apex Inc. Investment 1,350,000 45% Earnings 67,500 45% Dividends 787,500 Reported amount 2,070,000 If the investee had a loss, the investment ac...
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