Wiley CPAexcel Exam Review 2014 Focus Notes: Financial Accounting and Reporting

Focus on: Investments—Module 16

METHODS OF REPORTING INVESTMENTS

Method	Conditions
Consolidation	Majority owned (> 50%)
Equity	Less than majority owned
Ability to exercise significant influence
Ownership generally ≥ 20%
Cost	Less than majority owned
Unable to exercise significant influence
Ownership generally < 20%
Not an investment in marketable securities
Special Rules	Less than majority owned
(ASC 320/FASB #115)	Unable to exercise significant influence
Ownership generally < 20%
Investment in marketable securities

Equity Method

Carrying Value of Investment

Cost

+ Earnings

– Dividends

= Carrying value of investment

Earnings

Income reported by investee

× % of ownership

= Unadjusted amount

– Adjustments

= Investor’s share of investee’s earnings

Adjustments to Earnings

1. Compare initial investment to FMV of underlying net assets

2. Portion of excess may be due to inventory

Deduct from income in the first year (unless inventory not sold during year)

3. Portion of excess may be due to depreciable asset

Divide by useful life and deduct from income each year

4. Portion of excess may be due to land

No adjustment (unless land sold during year)

5. Remainder of excess attributed to goodwill

Test each year for impairment and deduct from income if it has occurred

Application of Equity Method

Information given:

Investment	25%
Cost	$400,000
Book value of investee’s underlying net assets	$900,000
Undervalued assets:
Inventory	100,000 ...