12 31 equitymethod on january 1 2013 wilmer inc

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Unformatted text preview: count would have been reduced with a credit. 12-31 Equity Method On January 1, 2013, Wilmer Inc. purchased 25% of the common stock of Apex Inc. for $180,000. At the date of acquisition, the book value of the net assets of Apex was $400,000, and the fair value of these assets is $600,000. During 2013, Apex paid cash dividends of $40,000, and reported earnings of $100,000. Fair value of assets Percentage ownership Share of fair value of assets Cost of investment in Apex Excess of cost over fair value $ 600,000 25% 150,000 180,000 $ 30,000 12-32 Equity Method The excess of the fair value of net assets over book value of those net assets is 75% attributable to depreciable assets with a remaining life of 20 years and is 25% attributable to land. Wilmer uses the straight-line depreciation. Fair value of net assets $ 600,000 Book value of net assets 400,000 Difference 200,000 Percentage of net assets acquired × 25% Excess 50,000 Amount attributable to land (25% or excess) 12,500 Amount attributable to depreciable assets 37,500 Remaining life of depreciable assets 20 years Additional depreciation expense per year $ 1,875 12-33 Equity Method January 1, 2013 Investment in Apex stock Cash 2013 Cash 180,000 180,000 10,000 Investment in Apex stock Investment in Apex stock Investment revenue December 31, 2013 Investment revenue Investment in Apex stock $ 40,000 Dividends paid × 25% Percentage ownership $ 10,000 Share of dividends 10,000 25,000 25,000 1,875 1,875 $ 100,000 Reported earnings × 25% Percentage ownership $ 25,000 Share of earnings Changing From the Equity Method to Another Method When the investor’s level of influence changes, it may be necessary to change from the equity method to another method. At the transfer date, the carrying value of the investment under the equity method is regarded as cost. 12-34 Changing from Another Method to the Equity Method When the investor’s ownership level increases to the point where they can exert significant influence, the investor should change to the equity method. At the transfer date, the recorded value is the initial cost of the investment adjusted for the investor’s equity in the undistributed earnings of the investee since the original investment. Reported earnings – Dividends paid = Undistributed Earnings 12-35 Changing from Another Method to the Equity Method 12-36 The original cost, the unrealized holding gain or loss, and the valuation account are closed. A retroactive change is recorded to recognize the investor’s share of the investee’s earnings since the original investment. 12-37 Fair Value Option GAAP allows companies to use a “fair value option” for HTM, AFS, GAAP allows companies to use a “fair value option” for HTM, AFS, and equity method investments. and equity method investments. The investment is carried at fair value. The investment is carried at fair value. Unrealized gains and losses are included in income. Unrealized gains and losses are included in income. For HTM and AFS investments, this amounts to classifying the For HTM and AFS investments, this amounts to classifying the iinvestments as trading. nvestments as trading. For equity method investments, the investment is still classified on For equity method investments, the investment is still classified on tthe balance sheet with equity method investments, but the portion at he balance sheet with equity method investments, but the portion at ffair value must be clearly indicated. air value must be clearly indicated. The fair value option is determined for each individual investment, The fair value option is determined for each individual investment, and is irrevocable. and is irrevocable. Financial Instruments and Investment Derivatives 12-38 Financial Instruments: Financial Instruments: Investment Derivatives: Investment Derivatives: 1.Cash. 1.Cash. 2.Evidence of an 2.Evidence of an ownership interest iin an ownership interest n an entity. entity. 3.Contracts meeting 3.Contracts meeting certain conditions. certain conditions. 1. Value is derived from 1. Value is derived from other securities. other securities. 2. Derivatives are often 2. Derivatives are often used to “hedge” (offset) used to “hedge” (offset) risks created by other risks created by other iinvestments or nvestments or transactions transactions...
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