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Beams - Chapter 02
Beams - Chapter 02
Advanced Accounting
Thirteenth Edition, Global Edition
Chapter 2
Stock Investments –
Investor Accounting
and Reporting
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Levels of Influence
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* The investor could manipulate its own investment income if income is measured by dividends.
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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
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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Equity Method
At acquisition, Pop buys 2,000 shares of Son for
$50,000.
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$50,000 cost
- $2,000 dividends
+ $2,500 income
= $50,500
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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.
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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.
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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
investee’s retained earnings – amortization, if any
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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 assets, liabilities, results of
operations
Related party disclosures
FASB ASC 850-10-50-5
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Goodwill Impairment
Test annually, and if significant events occur, then
use this two-step process:
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.
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