McGraw-Hill/Irwin
LO 1
1-3
1-4
1-4
1-5
LO 2
Equity Method
Use when: Investor has the ability to exercise significant influence on the investee operations (whether influence is applied or not) Generally used when ownership is between 20% and 50%. Significant Influence might be present with much lower ownership percentages.
1-5
1-6
Fair Value
Equity Method
0%
20%
50%
100%
1-7
LO 3
1. Investor records investment at cost. 2. Investor recognizes cash dividends from investee as income.
1: Same as Fair Value 2: Investor recognizes its share (% of owner-ship) of investees net income (net loss) as an increase (decrease) in the investment account and dividends as a decrease.
1-8
1-9
1-9
1-10
LO 4
1-10
LO 5
At the transaction date, the Investment account balance is reduced by the percentage of shares sold.
If significant influence is lost, NO RETROACTIVE ADJUSTMENT is recorded, but the equity method is no longer applied.
1-11
1-12
LO 6
INVESTOR
Downstream Sale
INVESTOR
Upstream Sale
INVESTEE
INVESTEE
1-12
LO 7
1-13
After 2007, under the Fair-value Option, changes in the fair value of these assets are reported in earnings.
1-14