CCFC 513 Study Guide - Winter 2018, Comprehensive Midterm Notes - Income Statement, Balance Sheet, Canada
12 Oct 2018
School
Department
Course
Professor
CCFC 513
MIDTERM EXAM
STUDY GUIDE
Fall 2018
CHAPTER 2: INVESTMENTS IN EQUITY SECURITIES
Equity investments: If company P wants to invest in company S, P can
- Buy shares
- Buy the assets
- Issue bonds / debenture
Assets – Liability = Shareholders’ Equity
Inside shareholders’ equity, there is
- Capital stock (preferred or common)
- Retained earnings (beginning balance + net income – dividends = ending balance)
Focus on common shares because those are the ones that have voting rights
In the next chapters, we will be discussing about:
1) Accounting: cost method and equity method
2) Disclosure: consolidation where you have to disclose everything under the control of
company P
P wants to buy shares of S issue of control (controlling another company)
- How many common shares can we own? 0 to 100%
- P wants to control (dictate all activities): it will buy more than 50% of outstanding voting
common shares to get voting rights. To control the Board of Director, you get enough votes
to elect representatives of the investee into the Board
- Example: Company P bought 100% of outstanding voting common share from the
shareholders on the open market, not from company S. This transaction will not affect the
books of S. Company P will write a cheque to the shareholders
How do you do the accounting for this investment? The investment is either reported using the
cost method or equity method
find more resources at oneclass.com
find more resources at oneclass.com
2.1 Cost method
To record the investment on the actual books of company P
Investment in S 1,000,000
Cash 1,000,000
To record the receipt of dividends declared by S
Cash (A/R) 100,000
Net income 100,000
If you get dividends, put it in net income. If S declares a dividend, cheque goes to shareholder of
P of $1M
If at end of year 5, the investment is still worth 1M$, then it is probably cost method
Cost method is for investment that are less than 20%
2.2 Equity method
Q1: If company S had a loss during the year, can they declare a dividend?
A1: Yes. Dividend paid out from R/E
Q2: If R/E is in a deficit, can we declare a dividend?
A2: Yes.
Q3: When can you NOT declare a dividend?
A3: When paying dividend makes the company unable to pay regular liabilities. Therefore, you
cannot dividend yourself into bankruptcy
**DO NOT assume that more than 20% of ownership, it is equity method. You need to go check
in the problem
Control on invested company
50
100%
0%
20
Significant influence (no requirement to prove it)
Equity method applies
Cost method applies
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Equity investments: if company p wants to invest in company s, p can. Retained earnings (beginning balance + net income dividends = ending balance) Focus on common shares because those are the ones that have voting rights. In the next chapters, we will be discussing about: accounting: cost method and equity method, disclosure: consolidation where you have to disclose everything under the control of company p. P wants to buy shares of s issue of control (controlling another company) P wants to control (dictate all activities): it will buy more than 50% of outstanding voting common shares to get voting rights. To control the board of director, you get enough votes to elect representatives of the investee into the board. The investment is either reported using the cost method or equity method. To record the investment on the actual books of company p. To record the receipt of dividends declared by s.
