,ACCESS bTest bBank bfor bAdvanced bAccounting b15th bEdition bHoyle
Chapter b01 b- bThe bEquity bMethod bof bAccounting bfor bInvestments b– bHoyle, bSchaefer, bDoupnik,
bAdvanced bAccounting, b15e
CHAPTER b1
b THE bEQUITY bMETHOD bOF bACCOUNTING bFOR bINVESTMENTS
Chapter bOutline
I. Four bmethods bare bprincipally bused bto baccount bfor ban binvestment bin bequity
bsecurities balong bwith ba bfair bvalue boption.
A. Fair bvalue bmethod: bapplied bby ban binvestor bwhen bonly ba bsmall
bpercentage bof ba bcompany’s bvoting bstock bis bheld.
1. The binvestor brecognizes bincome bwhen bthe binvestee bdeclares ba bdividend.
2. Portfolios bare breported bat bfair bvalue. bIf bfair bvalues bare bunavailable,
binvestment bis breported bat bcost.
B. Cost bMethod: bapplied bto binvestments bwithout ba breadily bdeterminable bfair bvalue.
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mynursytest.store
, bWhen bthe bfair bvalue bof ban binvestment bin bequity bsecurities bis bnot breadily
bdeterminable, band bthe binvestment bprovides bneither bsignificant binfluence bnor
bcontrol, bthe binvestment bmay bbe bmeasured bat bcost. bThe binvestment bremains
bat bcost bunless
1. A bdemonstrable bimpairment boccurs bfor bthe binvestment, bor
2. An bobservable bprice bchange boccurs bfor bidentical bor bsimilar binvestments bof
bthe bsame bissuer.
The binvestor btypically brecognizes bits bshare bof binvestee bdividends bdeclared bas
bdividend bincome.
C. Consolidation: bwhen bone bfirm bcontrols banother b(e.g., bwhen ba bparent bhas ba
bmajority binterest bin bthe bvoting bstock bof ba bsubsidiary bor bcontrol bthrough
bvariable binterests, btheir bfinancial bstatements bare bconsolidated band breported
bfor bthe bcombined bentity.
D. Equity bmethod: bapplied bwhen bthe binvestor bhas bthe bability bto bexercise
bsignificant binfluence bover boperating band bfinancial bpolicies bof bthe
binvestee.
1. Ability bto bsignificantly binfluence binvestee bis bindicated bby bseveral bfactors
bincluding brepresentation bon bthe bboard bof bdirectors, bparticipation bin
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, bpolicy-making, betc.
2. GAAP bguidelines bpresume bthe bequity bmethod bis bapplicable bif b20 bto b50
bpercent bof bthe boutstanding bvoting bstock bof bthe binvestee bis bheld bby bthe
binvestor.
Current bfinancial breporting bstandards ballow bfirms bto belect bto buse bfair bvalue bfor bany
bnew binvestment bin bequity bshares bincluding bthose bwhere bthe bequity bmethod bwould
botherwise bapply. bHowever, bthe boption, bonce btaken, bis birrevocable. bThe binvestor
brecognizes bboth binvestee bdividends band bchanges bin bfair bvalue bover btime bas
bincome.
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mynursytest.store
Chapter b01 b- bThe bEquity bMethod bof bAccounting bfor bInvestments b– bHoyle, bSchaefer, bDoupnik,
bAdvanced bAccounting, b15e
CHAPTER b1
b THE bEQUITY bMETHOD bOF bACCOUNTING bFOR bINVESTMENTS
Chapter bOutline
I. Four bmethods bare bprincipally bused bto baccount bfor ban binvestment bin bequity
bsecurities balong bwith ba bfair bvalue boption.
A. Fair bvalue bmethod: bapplied bby ban binvestor bwhen bonly ba bsmall
bpercentage bof ba bcompany’s bvoting bstock bis bheld.
1. The binvestor brecognizes bincome bwhen bthe binvestee bdeclares ba bdividend.
2. Portfolios bare breported bat bfair bvalue. bIf bfair bvalues bare bunavailable,
binvestment bis breported bat bcost.
B. Cost bMethod: bapplied bto binvestments bwithout ba breadily bdeterminable bfair bvalue.
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mynursytest.store
, bWhen bthe bfair bvalue bof ban binvestment bin bequity bsecurities bis bnot breadily
bdeterminable, band bthe binvestment bprovides bneither bsignificant binfluence bnor
bcontrol, bthe binvestment bmay bbe bmeasured bat bcost. bThe binvestment bremains
bat bcost bunless
1. A bdemonstrable bimpairment boccurs bfor bthe binvestment, bor
2. An bobservable bprice bchange boccurs bfor bidentical bor bsimilar binvestments bof
bthe bsame bissuer.
The binvestor btypically brecognizes bits bshare bof binvestee bdividends bdeclared bas
bdividend bincome.
C. Consolidation: bwhen bone bfirm bcontrols banother b(e.g., bwhen ba bparent bhas ba
bmajority binterest bin bthe bvoting bstock bof ba bsubsidiary bor bcontrol bthrough
bvariable binterests, btheir bfinancial bstatements bare bconsolidated band breported
bfor bthe bcombined bentity.
D. Equity bmethod: bapplied bwhen bthe binvestor bhas bthe bability bto bexercise
bsignificant binfluence bover boperating band bfinancial bpolicies bof bthe
binvestee.
1. Ability bto bsignificantly binfluence binvestee bis bindicated bby bseveral bfactors
bincluding brepresentation bon bthe bboard bof bdirectors, bparticipation bin
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mynursytest.store
, bpolicy-making, betc.
2. GAAP bguidelines bpresume bthe bequity bmethod bis bapplicable bif b20 bto b50
bpercent bof bthe boutstanding bvoting bstock bof bthe binvestee bis bheld bby bthe
binvestor.
Current bfinancial breporting bstandards ballow bfirms bto belect bto buse bfair bvalue bfor bany
bnew binvestment bin bequity bshares bincluding bthose bwhere bthe bequity bmethod bwould
botherwise bapply. bHowever, bthe boption, bonce btaken, bis birrevocable. bThe binvestor
brecognizes bboth binvestee bdividends band bchanges bin bfair bvalue bover btime bas
bincome.
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mynursytest.store
