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Stock Investments - Investor Accounting
Stock Investments - Investor Accounting
Investor Accounting
Chapter 2
2-1
Learning Objective 1
Recognize investors varying
levels of influence or control
based on the level of
stock ownership.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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Equity method
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Learning Objective 2
Anticipate how accounting adjusts
to reflect the economics underlying
varying levels of investor influence.
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Learning Objective 3
Apply the fair value/cost and
equity methods of accounting
for stock investments.
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1,000
1,000
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Equity Method
July 1
Investment in Sud
Cash
November 1
Cash
Investment in Sud
100,000
100,000
4,000
4,000
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Equity Method
December 31
Investment in Sud
5,000
Income from Sud
5,000
$50,000 20% = $5,000
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Learning Objective 4
Identify factors beyond stock
ownership that affect an
investors ability to
exert influence or control.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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Influence or Control
An investment of 20% or more of the
voting stock of an investee should
lead to a presumption that an investor
has the ability to exercise significant
influence over an investee.
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Influence or Control
The equity method should be followed
by an investor whose investment in
voting stock gives it the ability to
exercise significant influence over
operating and financial policies on
an investee even though the investor
does not control the investee.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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Influence or Control
An investor may be able to exert significant
influence over its investee with an
investment interest of less then 20%.
The equity method should not be applied if
the investors ability to exert significant
influence is temporary or if the investees
are foreign companies operating under
severe exchange restrictions or controls.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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Learning Objective 5
Apply the equity method to
purchase price allocations.
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Equity Method:
A One-Line Consolidation
Investment is reported in a single
amount on one line of the investor
companys balance sheet
Investment income is reported in
a single amount on one line of the
investors income statement.
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Investment in SR
5,000,000
Common Stock, $10 par
2,000,000
Additional Paid-in Capital
1,000,000
Cash
2,000,000
To record acquisition of a 30% equity investment
in SR
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Investment in SR
100,000
Additional Paid-in Capital 50,000
Cash
150,000
To record additional direct costs of purchasing
a 30% equity interest in SR
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Illustration of a Purchase
Combination
Assets
Cash
Net receivables
Inventories
Other current assets
Equipment, net
Total assets
Book
Value
Fair
Value
$ 1,500
2,200
3,000
3,300
5,000
$15,000
$ 1,500
2,200
4,000
3,100
8,000
$18,800
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Illustration of a Purchase
Combination
Liabilities
Accounts payable
Note payable
Common stock
Retained earnings
Total liabilities and
stockholders equity
Book
Value
Fair
Value
$ 1,000
2,000
10,000
2,000
$ 1,000
1,800
$15,000
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BV
$3,600
FMV
$4,800
Cost
$5,100
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$5,100,000
3,600,000
$1,500,000
$1,200,000
$ 300,000
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Inventories
Other current assets
Equipment
Note payable
Total
$ 300,000
(60,000)
900,000
60,000
$1,200,000
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December 31
Investment in SR
900,000
Income from SR
900,000
To record equity in income of SR
December 31
Income from SR
300,000
Investment in SR
300,000
To write off excess allocated to inventory
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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Income from SR
300,000 900,000
45,000 60,000
12,000
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BV
$50,000
FMV
+
Cost
$40,000
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Negative Goodwill
Post acquires a 25% interest in
Saxon for $110,000
Saxon net income and dividends for
the year are $60,000 and $40,000
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Illustration of a Purchase
Combination
Saxons net assets
Assets
Inventories
Other current assets
Equipment, net
Building, net
Total assets
Liabilities
Net assets
Book
Value
Fair
Value
$240,000
100,000
50,000
140,000
$530,000
130,000
$400,000
$260,000
100,000
50,000
200,000
$610,000
130,000
$480,000
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BV
$100,000
FMV
$120,000
Cost
$110,000
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Negative Goodwill
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Interim Acquisitions of an
Investment Interest
Accounting for equity investments
becomes more specific when the
firm makes acquisitions within
an accounting period.
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Investment in a Step-by-Step
Acquisition
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End of Chapter 2
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