Exam 23: Equity Method for Unconsolidated Investments

The percentage of ownership in an investment is not a required disclosure for equity method investors.

If the market value of an equity method investment falls below its book value, it is written down if the decline is considered permanent with no subsequent increase in value other than regular equity method adjustments.

Under the equity method of accounting, items affecting the investment income account include all but the investor's portion of:

Company P Company uses the equity method to account for its January 1, 20X1, purchase of 30% of Company S's common stock.On January 1, 20X1, the market values of Company S's FIFO inventory and land exceed their book values.How do these excesses of market values over book values affect Company P's reported equity in Company S's 20X1 earnings? ​ Inventory Excess Land Excess

If the market value of an equity method investment falls below its book value:

Company P purchased a 30% interest in Company S for $120,000 on January 1, 20X7, when Company S had the following stockholders' equity: ? ? Common stock ( \ 10 par) \ 100,000 Paid-in capital in excess of par 200,000 Retained earnings (deficit) (20,000) Total \ 280,000 Any excess cost was due to equipment that is being depreciated over 5 years using straight-line depreciation. ? Since the investment, Company P has consistently sold goods to Company S to realize a 30% gross profit.Such sales totaled $50,000 during 20X9.Company S had $10,000 of such goods in its beginning inventory and $40,000 in its ending inventory. ? On January 1, 20X9, Company S sold a machine with a book value of $15,000 to Company P for $30,000.The machine has a 5-year life and is being depreciated on a straight-line basis. ? Company S reported income of $75,000 before taxes for 20X9.Both firms are subject to a 30% corporate tax rate.Company S paid no dividends in 20X9.An 80% dividend earned exclusion rate applies. ? Required: ? Prepare all entries caused by Company P's investment in Company S for 20X9 (including tax ramifications).Assume that Company P has recorded the tax on its internally generated income.Company P has properly recorded the investment in previous periods.Assume that sufficient previously recorded tax liability exists to offset any deferred tax expense. ?

Company P purchased a 30% interest in Company S for $120,000 on January 1, 20X7, when Company S had the following stockholders' equity: ? ? Common stock ( \ 10 par) \ 100,000 Paid-in capital in excess of par 200,000 Retained earnings (deficit) (20,000) Total \ 280,000 Any excess cost was due to equipment that is being depreciated over 5 years using straight-line depreciation. ? Since the investment, Company P has consistently sold goods to Company S to realize a 30% gross profit.Such sales totaled $50,000 during 20X9.Company S had $10,000 of such goods in its beginning inventory and $40,000 in its ending inventory. ? On January 1, 20X9, Company S sold a machine with a book value of $15,000 to Company P for $30,000.The machine has a 5-year life and is being depreciated on a straight-line basis. ? Company S reported income of $75,000 before taxes for 20X9 and paid dividends of $20,000. ? Required: 1.Prepare all entries caused by Company P's investment in Company S for 20X9 (ignoring tax ramifications).Company P has properly recorded the investment in previous periods. ?2.Determine the balance of the investment account.

Under the fair value option, the investor's share of dividends received from the investee and fair value adjustments are recorded as income.

Per the FASB, all but the following are characteristics of an influential investment:

Land is depreciated typically on a ten-year life.

Under the equity method, investee dividends are recorded as a reduction of the investment account.

Per the FASB< to be considered an influential investment the investor must own at least 50% of the total ownership position.

Under the fair value option, the investor's share of dividends received from the investee and fair value adjustments are recorded as APIC.

Company P owns a 30% interest in Company S and accounts for the investment under the sophisticated equity method.The investment was purchased at underlying book value, and there is no excess of cost or book value.Company S sells merchandise to Company P at cost plus 25%.Intercompany sales during 20X1 were $100,000.There were $20,000 worth of such goods in Company P's beginning inventory and $30,000 worth of such goods in Company P's ending inventory.Company S's reported income for 20X1 is $40,000, and no dividends were paid.What amount will Company P record as investment income in 20X1?

On January 1, 20X1, Company P purchased a 30% interest in the Company S for $345,000.At that time, Company S had stockholders' equity of $1,000,000.Any excess cost over book value was attributed to a patent with a 15-year life.During 20X1, Company S earned $60,000 and paid dividends of $15,000.What is the balance in the investment account on December 31, 20X1, using the sophisticated equity method?

Assume that Company P purchases a 10% common stock interest in Company S for $12,000 on January 1, 20X2, and an additional 20% interest on January 1, 20X3, for $26,000.There was no excess of cost or book value on either investment.The balance sheets of Company, S which pays no dividends, follow: ? 12/31/3 12/31/2 01/01/2 Total assets \ 160,000 \ 130,000 \ 120,000 Common stock \ 100,000 \ 100,000 \ 100,000 Retained eamings Total equity \ 160,000 \ 130,000 \ 120,000 For 20X3, Company P reports investment income of ____.

The market value of an investment is not a required disclosure for equity method investors.

Under the equity method, the investor's share of earnings is reported as income.

For each of the following accounting methods, indicate how the investor's investment account will be affected by the investor's share of the investee's earnings after the date of acquisition ​ ​ Fair Value Option Equity Method

Company P acquired 30% of Company S's common stock on January 1, 20X8, for $100,000.Company P's 30% interest constitutes significant influence.There is no excess of cost over book value.During 20X8, Company S earned $40,000 and paid dividends of $25,000.During 20X9, Company S's $50,000 income was earned evenly, and the company paid dividends of $15,000 on April 1 and $15,000 on October 1.On July 1, 20X9, Company P sold half of its interest in Company S for $66,000 cash; thus, Company P no longer had significant influence The gain on the sale of the investment in Company P's 20X9 income statement should be ____.