Equity Accounting, Chapter 1, Advanced Accounting

Unless demonstrated not to be the case investors with ___________ % of ownership are presumed to have significant influence.

20

Unless it can be clearly demonstrated, investors holding less than ________% is presumed to not have significant influence.

20

Cost of acquiring additional interest in the investee is added to the current basis and the equity method is adopted. FASB ASC

323-10-35-33

FASB ASC Section_____________, Variable Interest Entities, include entities controlled through special contractural arrangements (not voting stock interests)

810-10-05

Dividend received on Equity Investment credit ___________, debit Dividend receivable

Cash

GAAP recognizes four methods to report investments in other companies: Fair-value method, Cost method for equity securities without readily determinable fair values, _______________ of financial statements, and Equity method.

Consolidation

Dividend declared on Equity Investment credit ____________, debit Investment in **** company

Dividend Receivable

Parent company -> Subsidiary company

Downstream

Downstream: Journal entry to record deferred gross profit on sale of inventory: Credit ________, Debit Investment in X Company

Equity in Investee Income

Use ________________ method when investor holds less than 20%, Investor cannot significantly affect investee's operations, investment is made in anticipation of dividends or market appreciation.

Fair-Value Method

___________ equity income will be offset by these losses prior to recording equity income in our results.

Future

_________________ associated with equity method investments, for the most part, is measured in the same manner as goodwill arising from a business combination, tested for declines in value and impairment.

Goodwill

Net Income reported by investee for Equity Investment with >= 20% credit__________, debit equity in Investee Income.

Investment in **** company

Downstream: Journal entry to reverse deferred gross profit on sale of inventory after it has sold: Credit ______________, Debit Equity in Investee Income

Investment in X Company

To record the amortization expense, the company reduces the investment balance using the following JE: Credit Equity in investee income, Debit ________________

Investment in X company

Equity method accounting requires that the investor record its share of investee _________ and irregular items traditionally found in net income.

OCI

Subsidiary company -> Parent company

Upstream

________________ sales of inventory are reported in the same manner as downstream sales.

Upstream

Fair Value Option improves financial reporting, provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related ________ and liabilities.

assets

differences may exist between a company's book value and fair value because: Asset and liability accounts on the ____________ tend to measure historical costs, not current value and reported figures are affected by accounting methods (LIFO vs FIFO or depreciation methods)

balance sheet

criteria for consolidated financial statements includes >50% ownership or primary _____________status- no ownership required

beneficiary

Regardless of investor's degree of ownership, the equity method is not appropriate if: the investor attempts but fails to obtain representation on the investee's _____________________.

board of directors

In upstream sales profit recognition is delayed until __________ disposes of goods.

buyer

If noncontrolling rights are so restrictive as to call into question whether control rests with the majority owner then equity method is used rather than _______________.

consolidation

Under the equity method, investor's share of investee dividends declared are recorded as___________ in the investment account, not income.

decreases

When this inventory is eventually consumed or sold to unrelated parties, the ________________ is no longer needed.

deferral

Investor decreases current equity income to reflect the ____ portion of the intra-entity profit.

deferred

An alternative treatment would be the ___________ reduction of the investor's inventory balance as a means of accounting for this deferred amount.

direct

Profit recognition is delayed until the buyer ________ of the goods.

disposes

When accumulated losses incurred and ______________ paid by the investee reduce the investment account to $ 0, no further loss can be accrued. A temporary decline is ignored.

dividend

The investor decreases its investment account's carrying value for its share of investee case ____________. When the investee declares a cash dividend, its owners' equity decreases.

dividends

Under Fair-Value option, changes in fair value of the elected financial items are included in _______________.

earnings

Consolidation of financial statements is required when: investor's ownership is > 50%, a majority of voting stock is held and relationship close that corps are viewed as a single ___________, and one set of financial statements are prepared to consolidate all accounts of parent company and controlled subsidiaries as single entity.

entity

If part of the investment is sold during the period the ___________ method is applied up to the transaction date.

equity

Other comprehensive income is defined as revenues, ________ gains and losses that under GAAP are included in comprehensive income but are excluded from net income.

expenses

A permanent decline in the investee's fair market value is recorded as an impairment loss and the investment account is reduced to __________.

fair value

Items included in Accumulated other comprehensive income on the balance sheet are accumulated derivative net gains and losses, _________ currency translation adjustments, and certain pension adjustments.

foreign

Extra payment that cannot be attributed to a specific asset or liability is assigned to __________________.

goodwill

The investor should recognize the deferred intra-entity ____________. Recognition shifts form the year of inventory transfer to the year in which the sale to unrelated customers occurred.

gross profit

A temporary drop in vair value of an investment is ________.

ignored

Fair -Value Method records purchase at cost, changes in FV as income, and dividends are recorded as _________.

income

Upstream: inventory decreases current equity income to reflect the deferred portion of the _____________________ profit.

inter-entity

_____________ transactions are business transactions that take place between a parent and subsidiary company.

intra-entity

Upstream: investory's own ______________ contains the deferred gross profit. Recognition of profit is deferred by decreasing the investment account rather than the inventory balance.

inventory account

investor increases the investment account as _____________ earns and reports income.

investee

Upstream year end entry to record intra-entity gross profit: Credit Equity in Investee Income, Debit ________________---

investment in X company

Assets may be undervalued on investee's books because: the FV of some of the assets and liabilities are different from BV, the ____________ may be willing to pay extra because future benefits are expected to accrue.

investor

Fair-Value Reporting Option allows for an entity to ________________ elect fair value as the initial and subsequent measurement for certain financial assets and financial liabilities, including investments accounted for under the equity method.

irrevocably

Payment relating to each asset - except ____________, good will, and other indefinite life intangibles- should be amortised over an appropriate time period.

land

FASB ASC Section 810-10-05 was intended to combat misuse of SPE's to keep large amounts of assets and ________ off the balance sheet known as "off balance sheet financing".

liabilities

The fair-value option matches asset valuation with fair-value reporting requirements for many ____________.

liabilities

When the original cost of the investment becomes 0, no additional ________________ can accrue to the investor.

losses

If significant influence is ___________, no retroactive adjustment is recorded as the investor changes from equity method to fair value method

lost

Exceptions where Equity method applies when ownership does not include if amounts are short or exceed 20-50% and despite _________________ interest

majority

Criticisms of the equity method include: Emphasizing the 20-50 percent of voting stock in determining significant influence, allowing _______________ financing, and potentially biasing performance ratios.

off-balance-sheet

Equity method is used when 20-50% ownership, investor has ability to exercise significant influence on investee _________________.

operations

Regardless of investor's degree of _______________, the equity method is not appropriate if: an agreement exist as between investor and investee by which the investor surrenders significant rights as a shareholder.

ownership

Upward adjustments in the asset balance are recorded as soon as the investee makes _______________ and is reduced if investee reports a loss.

profit

Gross profit x investor % of stock held = ___________________

profit deferred

Measurements of financial performance often affect: the firm's ability to ______________, managerial compensation, the ability to meet debt covenants and future interest rates, and managers' reputations.

raise capital

GAAP allows for two fair value assessments that may affect coast method amounts reported on the financial statements: Periodic assessment and _______________ of "observable price changes in orderly transactions for the identical or similar investment of the same issuer"

recognition

FASB ASC 323-10-35-32 requires that a loss in value of an investment which is other than a temporary decline shall be ________________.

recognized

On the transaction date (of investment sale) the Investment account is ____________ by the % of shares sold.

reduced

Regardless of investor's degree of ownership, the equity method is not appropriate if: a concentration of ownership operatites the investee without __________ for the views of the investor.

regard

If an entity can exercise control over investee,_________________ of ownership level, consolidation is required.

regardless

The nvestory shall recognize its share of the earnings or losses of and investee in the periods for which they are ______________ by the investee in its financial statements.

reported

Report a change in equity method if: the investment was originally recorded with FV because ownership not ________________.

significant

IASB defines__________________ as the power to participate in the financial and operating policy decisions of the investee, but it is not control or joint control over those policies.

significant influence

Upstream: when this inventory is eventually consumed or __ to unrelated parties, the deferral is reversed.

sold

differences may exist between a company's book value and fair value because: Fair Value is based on multiple factors and __________ prices are based, partially, on the perceived worth of a company's net assets- often varying from underlying book values

stock

AOCI is reported in _______________________ and represents a source of change in investee company net assets that is recognized under the equity method.

stockholder's equity

Significant Influence (FASB ASC Topic 323): Representation on board of directors, participation in policy-making process, material intra-entity transactions, interchange of managerial personnel, _________________ dependency, other investee ownership percentages.

technological