Professional Documents
Culture Documents
Stock Investments
Investor
Accounting and
Reporting
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
2-1
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Objectives (continued)
4. Identify factors beyond stock ownership
that affect an investor's ability to exert
influence or control over an investee.
5. Apply the equity method to stock
investments.
6. Learn how to test goodwill for impairment.
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1: LEVELS OF INFLUENCE OR
CONTROL
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Levels of Influence
Fair value
(cost)
method
Consolidated
financial
statements
Equity
method
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2: ACCOUNTING REFLECTS
ECONOMICS
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Lack of
significant
influence
Dividends declared
Significant
influence
Proportionate share
of investee's periodic
earnings*
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100,000
100,000
4,000
4,000
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21,000
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Equity Method
At acquisition: Pil buys 2,000 shares of Sud for
$100,000.
Investment in Sud (+A)
Cash (-A)
100,000
100,000
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4: ABILITY TO INFLUENCE OR
CONTROL
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Significant Influence
20% to 50% voting stock ownership is a
presumption of significant influence. Use the
equity method.
Don't use equity method if there is a lack of
significant influence.
Opposition by investee,
Surrender of significant shareholder rights,
Concentration of majority ownership,
Lack of information for equity method, and
Failure to obtain board representation
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
2-15
Control
More than 50% voting stock ownership is
presumptive evidence of control. Prepare
consolidated financial statements.
Don't consolidate if the parent lacks control
Legal reorganization or bankruptcy
Severe foreign restrictions
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5,000
2,000
2,000
1,000
50
100
150
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300
300
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(60)
60
Equipment
900
(45)
855
60
(12)
48
200
$1,400
0
($297)
200
$1,103
Note payable
Goodwill
Total
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603
603
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Bargain Purchase
When the acquisition cost is less than the fair
value of the identifiable net assets, a gain is
recognized on the acquisition.
The investment is recorded at the fair value of
the identifiable net assets
Investment in ABC
Cash, CS, APIC
Gain on bargain purchase
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
XXX
XXX
XXX
2-27
Interim Acquisitions
Book value of net assets = BV equity.
If equity is given as beginning of year, add
current earnings and deduct dividends to date.
Amortization for first, partial, year:
Take full amortization for inventory and other
current assets disposed of by year-end.
Take partial year's amortization for equipment,
buildings, and debt to be written off over multiple
years.
Record dividends if after the acquisition date.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
2-28
Acquisition in Stages
Also called a step-by-step acquisition.
Fair value (cost) method
equity method
Restate prior-period statements
Investee's growth in retained earnings is
Excess of income over dividends declared
Investment account desired balance using
equity method = original cost + share of
growth in investees retained earnings
amortization, if any
Investment in XYZ (+A)
Retained earnings (+SE)
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
XXX
XXX
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Disclosures
For significant equity investees
Name, percent ownership
Accounting policy
Difference between investment carrying value and
underlying equity in net assets
Aggregate market value
Summarized asset, liability, operations
Related party disclosures [FASB ASC 323-1050]
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6: GOODWILL IMPAIRMENT
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Goodwill Impairment
Test annually, and if significant events occur, twostep process [FASB ASC 350-20-35]
1. If the fair value of the whole reporting unit < the
carrying value of the reporting unit including its
goodwill, there might be impairment.
If no implied impairment, step 2 is not needed.
Use quoted market prices of reporting unit, or valuation
techniques applied to similar groups of assets and
liabilities.
2. If the implied fair value of the goodwill < the
carrying value of the goodwill, record an
impairment loss for the difference.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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