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ACCT415 Midterm: Equity Method ACCT 415 Chapter 1

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copperelk215
8 Mar 2017
School
University of Delaware
Department
Accounting
Course
ACCT415
Professor
Van Leer Michael

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Document Summary

Fair-value method: when investor possesses only a small share of the invests company"s outstanding stock. These investments are recorded at cost and periodically adjusted to fair value. Includes: equity securities held for sale in the short term and classified as trading securities, equity securities not classified as trading securities called available-for- sale securities, dividends from the investments are recognized as income. Equity method: when our investment provides us with the ability to exercise significant influence over operating and financial policies of the investee (voting share majority). Not looking for control: investors share of invests dividends declared are recorded as decreases in the investment account, not as income. *if an investor holds between 20 and 50 percent of the voting stock of the invested, significant influence is normally assumed and the equity method is applied. Applying the equity method: the investors investment account increases as the invested earns and reports income.

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Related Questions

1) Post answers here regarding two of the following statements:

Chapter 15

This module focuses on how to classify, account for, and report investments in both debt and equity securities. You will not be tested over the foreign currency section.

Discuss the reasons companies make investments.

Identify the classifications for non-influential investments in securities. What are the accounting basics for non-influential investments in securities, including acquisition, dividends earned, and disposition?

Explain how equity securities having significant influence are accounted for and reported in the financial statements. Include a discussion of the criterion for these securities in terms of an investee's voting stock.

Chapter 16

This module focuses on reporting and analyzing a company's cash flows. Special emphasis is directed at the statement of cash flows reported under the indirect method.

Explain the purpose and format of the statement of cash flows. Also describe its relevance to decision makers.

Define and discuss the differences between operating, investing, and financing activities.

Explain how cash flows from investing and financing activities are determined.

On January 1, 2014, Palsoe Corp. acquired 30 percent (13,000shares) of Nostay Services Inc. com-mon stock for $1,300,000 as along-term investment. Data from Nostay's 2014 financial statementsinclude the following:

Net income . ...........................................$330,000

Less cash dividends paid . .............................160,000

Increase in retained earnings . ........................$170,000

The market value of Nostay Services Inc. common stock onDecember 31, 2014, was $98 per share. Palsoe does not have anyother noncurrent investments in securities. Prepare the necessaryjournal entries for Palsoe's investment in Nostay Services Inc.common stock under

(1) the cost method classified as available-for-salesecurities.

(2) the equity method

Dewey Corporation owns 30 percent of the common stock of Jimm Company, which it purchased at underlying book value on January 1, 20X5. Dewey reported a balance of $265,000 for its investment in Jimm Company on January 1, 20X5, and $298,000 at December 31, 20X5. During 20X5, Dewey and Jimm Company reported operating income of $347,000 and $77,000, respectively. Jimm received dividends from investments in marketable equity securities in the amount of $9,000 during 20X5. It also reported an increase of $16,000 in the market value of its portfolio of trading securities and an increase in the value of its portfolio of securities classified as available-for-sale. Jimm paid dividends of $27,000 in 20X5. Ignore income taxes in determining your solution.

Required:
a.

Assuming that Dewey uses the equity method in accounting for its investment in Jimm, compute the amount of income from Jimm recorded by Dewey in 20X5.

b.

Compute the amount reported by Jimm as other comprehensive income in 20X5.

c.

If all of Jimm’s other comprehensive income arose solely from its investment in available-for-sale securities purchased on March 10, 20X5, for $137,000, what was the market value of those securities at December 31, 20X5?