高级会计学(第10版)教师手册Beams10e_IM_1.pdf

2009 Pearson Education,Inc.publishing as Prentice Hall 13 Chapter 2 STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING Chapter Outline ACCOUNTING FOR STOCK INVESTMENTS A The equity method is required for investments of 50%or less that give the investor an ability to exercise significant influence over the investee.Illustration 2-1 Accounting for Investments%ownership Normal Accounting Method 0-19 Cost(adjusted to FMV as appropriate)20-50 Equity(presumed significant influence)51&up Consolidated Financial Statements(assumed controlling interest)(FASB 94)B In the absence of evidence to the contrary,an investment of 20%or more is presumed to give the investor an ability to exercise significant influence.This is a rebuttable presumption.1 The equity method should not be used if the ability to exercise significant influence is temporary or if the investee is a foreign company operating under severe exchange restrictions or controls.2 FASB Interpretation No.35 provides indicators of when the ability to exercise significant influence may be impaired:a Opposition by the investee that challenges the investors influence b Surrender of significant stockholder rights by agreement between investor and investee c Concentration of majority ownership 2009 Pearson Education,Inc.publishing as Prentice Hall 14 d Inadequate or untimely information to apply the equity method e Failure to obtain representation on the investees board of directors C The fair value/cost method is used for common stock investments of less than 20%unless it can be demonstrated that the investor company has the ability to exercise significant influence over the investee company.ACCOUNTING FOR NONCURRENT COMMON STOCK INVESTMENTS UNDER THE FAIR VALUE/COST METHOD:A If the stock is marketable,the investment should be accounted for at fair value according to the provisions of FASB Statement No.115,“Accounting for Certain Investments in Debt and Equity Securities.”1 Investment is initially recorded at cost 2 The investment is adjusted to fair value at the end of the fiscal period 3 Unrealized gains or losses are reported either in income or as an equity adjustment to the balance sheet,depending on the companys intention for holding the stock 4 Unrealized gains and losses associated with trading securities are recorded as part of income a Trading securities are very short term holdings,continued relationships are not expected.5 Unrealized gains and losses associated with available for sale securities are considered“other comprehensive income”and are reported on the balance sheet as an equity adjustment.a Only dividend income and realized gains and losses impact income and EPS for available for sale securities B If the stock is not marketable,the investment is accounted for using the cost method 1 Investment is initially recorded at cost 2 Dividends received are recorded as dividend income a An exception:Liquidating dividends are deducted from the investment account.Liquidating dividends are those dividends received 2009 Pearson Education,Inc.publishing as Prentice Hall 15 in excess of the investors share of earnings after the stock is acquired and are considered a return of capital.THE EQUITY METHOD AND FASB STATEMENT NO.94 FOR ACCOUNTING FOR INVESTMENTS IN COMMON STOCK UNDER THE EQUITY METHOD A FASB Statement No.94 1 Current GAAP requires consolidation of all majority-owned subsidiaries,except those for which control is temporary or does not rest with the parent company.2 An investment in an unconsolidated subsidiary is reported in the parent companys financial statements using the cost or equity method,according to the parents ability to exercise significant influence(more coverage in chapter 3).B Application of the equity method 1 The investment is initially recorded at cost 2 Subsequently,the investor records its share of the investees income as an increase to the investment account(losses will decrease the investment account)3 Dividends received from the investee are recorded as a decrease to the investment account a The investment account moves in the same direction as the investees net assets(for example,income increases assets for both)4 Additional adjustments are required a Intercompany profits and losses are eliminated until realized.b Cost-book value differentials are accounted for as if the investee were a consolidated subsidiary (1)The difference between the investment cost and the underlying equity is assigned to identifiable assets and liabilities based on their fair values with any remaining difference allocated to goodwill.2009 Pearson Education,Inc.publishing as Prentice Hall 16(2)The difference between investment cost and book value acquired will disappear over the remaining lives of identifiable assets and liabilities,except for amounts assigned to land,goodwill,and intangible assets having an indeterminate life,which are not amortized.(3)If the book value acquired is greater than the investment cost,the difference should be allocated against non-current assets other than marketable securities with any remaining amount treated as an extraordinary gain(negative goodwill).c The investment is reported on one line of the investors balance sheet and income on one line of the investors income statement,a one-line consolidation (1)Except extraordinary and other below-the-line items C Accounting for an interim investment 1 Absent evidence to the contrary,income of the investee is assumed to be earned proportionately throughout the year 2 The investees book value at an interim date is determined by adding income earned from the last statement date to beginning stockholders equity and deducting dividends declared to the date of purchase D Investments acquired step-by-step 1 An investor may acquire significant influence through a series of purchases 2 Prior to obtaining significant influence,the fair value/cost method is used.When an investment qualifies for the equity method,the investment account is adjusted to the equity method and the investors retained earnings are adjusted retroactively.a This is a change in reporting entity and is requires retroactive restatement if material E Sale of an equity interest 1 When an investor reduces its equity interest in an investee to below 20%,the retained investment is accounted for under the fair value/cost method 2009 Pearson Education,Inc.publishing as Prentice Hall 17 a Gain or loss from the equity interest sold is the difference between the selling price and the book value of the equity interest immediately before the sale b Immediately after the sale,the balance of the investment account becomes the new cost basis F Investees with preferred stock 1 Special adjustments are necessary when investees have both common and preferred stock outstanding 2 Investees stockholders equity must be allocated into its common and preferred stock components 3 Investees net income must also be allocated into common and preferred stock components 4 Call or liquidating premiums and dividends in arrears must also be considered 5 Further coverage in Chapter 10 DISCLOSURES FOR EQUITY INVESTMENTS A Material investments accounted for by the equity method require disclosure of 1 Summarized information about the investees assets,liabilities,and results of operations in financial statement notes 2 The investees name and percent of ownership in common stock,the investors accounting policies with respect to investments in common stock,the cost/book value differentials and accounting treatment 3 The aggregate value of each identified investment for which quoted market prices are available B Related party transactions 1 Related party transactions arise when one of the transacting parties has the ability to significantly influence the operations of the other 2 There is no presumption of arms-length bargaining between the related parties 2009 Pearson Education,Inc.publishing as Prentice Hall 18 3 Required disclosures include the nature of the relationship,a description of the transaction,the dollar amount of the transaction(and any change in the method used to establish the terms of the transaction),and amounts due to or due from related parties at the balance sheet date for each balance sheet presented.TESTING GOODWILL FOR IMPAIRMENT A FASB Statement No.142 eliminates former requirements to amortize goodwill,rather,goodwill must be periodically tested for impairment 1 Firms may find this valuable for two reasons a Firms may recognize significant impairment losses on initial adoption which are treated as a“cumulative effect of an accounting change”(appears after“income from operations”)b Firms will no longer report annual goodwill expense charges B Recognizing and measuring impairment losses is a two-step process 1 First,carrying value is compared to fair value at the business reporting unit level a If fair value is greater than carrying value,goodwill is deemed unimpaired and no further action is necessary b If carrying value is greater than fair value,the firm proceeds to step 2 2 Step 2,when necessary,requires a comparison of the carrying value of goodwill with its implied fair value 3 The implied fair value of goodwill is determined in the same manner used to originally record the goodwill at the business combination date a Allocate the fair value of the reporting unit to all identifiable assets and liabilities as if they had made the purchase on the measurement date,and any excess is the implied fair value of goodwill 4 The fair value of the reporting unit is the amount for which it could be purchased or sold in a current,arms-length transaction 2009 Pearson Education,Inc.publishing as Prentice Hall 19 a Current market prices(in an active market)are considered the most reliable indicator of fair value C Goodwill impairment testing must be done at least annually 1 More frequent testing may be required if certain events occur such as adverse changes in the legal or business climate,new and unanticipated competition,loss of key personnel,and other similar events D Reporting and disclosure 1 Material aggregate amounts of goodwill must be reported as a separate line item on the balance sheet 2 Goodwill impairment losses are shown separately in the income statement 2009 Pearson Education,Inc.publishing as Prentice Hall 20 E Equity method investments 1 Many of the rules regarding goodwill in purchase method business combinations(parent acquiring a controlling interest in a sub)also apply to goodwill arising from use of the equity method 2 One notable exception is the rule regarding goodwill impairments a Impairment tests for equity investments continue to follow guidance from APB Opinion No.18 which require impairment tests be performed based on fair value versus book value of the investment taken as a whole NEW STANDARD FAS Statement 159 The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No.115 1)Firms have option to record equity method investments at fair value.The option may be elected on an investment by investment basis.2)Option must continue as long as investment is owned.3)Fair Value is recalculated annually.Changes are included in investors net income with the offsetting cumulative amount recorded in a valuation allowance.4)Separate disclosure is required.Description of assignment material Minutes Questions(14)Exercises(16)E2-1 5 MC general 10 E2-2 AICPA 8 MC general and problem-type 35 E2-3 Trevor/Bowman Calculate percentage ownership and goodwill from 12 investment acquired directly from investee E2-4 Carson/Medley Calculate income for 30%midyear investment 15 E2-5 Dokey/Oakey Calculate income and investment balance for 40%full 15 year investment with allocation of excess to undervalued assets E2-6 Martin/Neighbors Journal entry to record income from 40%investee with 10 loss from discontinued operations E2-7 4 MC problem-type 20 E2-8 Raython/Treaton Calculate investment balance 4 years after acquisition 15 E2-9 Nickie/Runner Calculate income from investee and the investment 20 balance when the investees capital structure includes preferred stock 2009 Pearson Education,Inc.publishing as Prentice Hall 21 E2-10 Arbor/Tree Calculate income and investment balance for 25%midyear 15 investment E2-11 Ratterman/Twizzle Adjust investment account and determine investment 25 income when an additional investment qualifies investee for the equity method of accounting E2-12 River/Tall Journal entries(investment in previously unissued stock)15 E2-13 BIP/Crown Prepare journal entries and an income statement,and 20 determine the investment account balance(investee with extraordinary loss)E2-14 Valley/Water Calculate income and investment account balance 20 (investee has preferred stock)E2-15 Park/Steele Calculate implied fair value of goodwill 10 E2-16 Flash/Alpha/Beta Calculating and reporting impairment losses in the income statement 10 Problems(16)P2-1 Ritter/Telly Computations for a midyear purchase(investee has 25 an extraordinary gain)P2-2 Putter/Siegal Journal entries for midyear investment(cost and 20 equity methods)P2-3 Vatter/Zelda Computations for 30%investee(excess allocated 20 to inventories,building,and goodwill)P2-4 Diller/Dormer Journal entries for midyear 40%investment(excess 20 allocated to land,equipment,and goodwill)P2-5 Earth-Q/Tremor Prepare an allocation schedule,compute income 15 and the investment balance P2-6 Pauly/Stapleton Computations(midyear acquisition)20 P2-7 Dill/Larkspur Partial income statement(investee with extraordinary item)10 P2-8 Hazel/Brady Step-by-step acquisition of equity interest over several 25 years and purchase of stock from investee P2-9 Provo/Sigma Computations and journal entries(excess book value over 20 cost)P2-10 Creape/Tantani Prepare allocation schedules under two different stock 20 market price assumptions(negative goodwill)P2-11 Prudy/Spandix Computations(piecemeal acquisition of investment)25 P2-12 Pilot/Sassy Computations and a correcting entry(errors)25 P2-13 Publican/Samaritan Allocation schedule and computations(excess cost 25 over fair value)P2-14 Publican/Samaritan Allocation schedule and computations(excess fair 30 value over cost)P2-15 Cooper Calculating and reporting impairment losses 10 P2-16 Cardinal Calculating and reporting impairment losses and recoveries 10 2009 Pearson Education,Inc.publishing as Prentice Hall 22 Internet assignment Fords 2006 annual report is used to study Fords intercompany investments.Case Study Coca Colas 2006 annual report is used to understand the equity method.