Morgan Bertone Chapter One Short Answer Advanced Accounting 1.

The requirements for the equity method are: a. The owner exerts significant influence to the investees operating and financials decisions. b. Significant influence Is 20-50% percent ownership level. c. Clos relationships between the investor and the investee 2. Investors ability to significantly influence the decision- making process: a. Investor representation on the board of directors of the investee b. Investors participation in the policy making process of the investee c. Material intercompany transactions d. Interchange of managerial personnel e. Technological dependency f. Extent of ownership by the investor in relation to the size and concentration of the other ownership interests in the investee. 3. The dividends are recorded as a reduction in the investment account not as dividend income because distribution of cash dividends reduces the book value if the investee company, the investor mirrors this change by recording the receipt as a decrease in the carrying value of investments rather than revenue. 4. The equity method is not appropriate: An agreement exists between the investor and the investee by which the investor surrenders significant rights if shareholders A concentration of ownership operates the investee without regard for the views of the investor The investor attempts but fails to obtain the representation of the investees board of directors 5. Transaction that change the balance in the investment account are a. Reporting a change in the equity method b. Reporting investee income from the sources other then continuing operations c. Reporting an investee losses/gains d. Reporting the sale of an equity investment 6. Theoretical problems with equity method: a. Emphasizing the 20-50 percent of voting stock in determining significant influence verus control b. Allowing off-balance sheet financing c. Potentially biasing performance ratios d. Firms can exert another firms can tell if one firm controls another consolidation is the appropriate financial reporting technique. 7. Changing from fair value to equity method included the following changes:

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a. The investments, Result of operations both should be adjusted retrospectively b. All accounts are restated so that the investors financial statements appear to be in the equity method had been applied since the date of acquisition. An extraordinary gain would affect the investors financial records by debiting the investment account and crediting both the extraordinary gains of investee and equity in investee income. Therefore the investment account would affect the balance sheet. The gains and the equity account would raise both accounts on the income statement. A loss would affect the investors financial reports by the appropriate percent of the loss and reduces the carrying value of the investment. Investments on the balance sheet therefore are reduced which means their assets will be smaller and there will be a loss on the income statement which will lessen the income for that year. Since this investment was made at a low bargain price and they were expecting a loss, the investment account could conceivably be eliminated in total. The investment account is reduced to zero and the investor should discontinue using the equity method rather then establishing a negative balance. The investment is zero until the investee profits eliminate all unrealized losses. Good ill which is an extra payment can attribute to goodwill for a specific asset or liability. The number is configured by taking what is was under or overvalued for and multiplying by the percent of ownership you own. Then each year it is amortized by debiting the equity in investee income and crediting the investment account. On the sale date of June 19 Princeton company should debit the investment account and credit the equity account to accrue the income for the first 6 months. Then do the cash debit and credit the investment account for the dividends for the first 6 months. Then for the reminder of the year to record the sale Princeton company will debit cash and credit the investment accounting and credit a gain or debit a loss. Down streaming sales is an investor selling to an investee while up streaming sale is an investee selling to an investor. They are reported the same way in the equity method which s unrealized profits reaming in ending inventory are deferred until the items are used or sold. The journal entry is debit equity and credit investment for the unrealized gross profit and then debit investment and credit equity to recognize income on intra-entity sale. They have no effect on the final amounts reported in the financial statement s. Unrealized gross profit on intra-entity sales are calculated by taking the ending inventory and multiplying by the gross profit percentage and then that number equals the gross profit in ending inventory. After that you take that number and multiply by the investor ownership percentage to find the intra-entity gross profit. This affects the investment account by debiting the investment account which is an increase and crediting the equity which is a decrease. The intra-entity transfers are reported in an investees separate financial statements by the investee not showing the reported balances are altered at all from the purchase or sale. The readers of the financial statements need to be made aware of this transaction because of the income statement, therefore u needs ti be disclosed to certain related parties.