Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Tamara Branch. Anisa Nur Fanri. A short summary of this paper. The investor records the investment at its cost. Since the investee company is not a party to the transaction, its accounts are not affected. Both investor and investee accounts are affected when unissued stock is acquired directly from the investee.
Under the equity method, the investment is presented on one line of the balance sheet in accordance with the one-line consolidation concept. Such dividends are considered a return of a part of the original investment. In addition, the investment and investment income accounts are adjusted for amortization of any investment cost-book value differentials related to the interest acquired.
Adjustments to the investment and investment income accounts are also needed for unrealized profits and losses from transactions between the investor and investee companies. The equity method reports investment income on one line of the income statement whereas the details of revenues and expenses are reported in the consolidated income statement. The amount of the adjustment is the difference between the investment income reported under the cost method in prior years and the income that would have been reported if the equity method of accounting had been used.
The allocation is not necessary when the investee has only common stock outstanding. For each reporting unit, the company must first determine the fair values of the net assets.
The fair value of the reporting unit is the amount at which it could be purchased in a current market transaction. Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company must first determine the fair values of the net assets.
The fair value of the reporting unit is the amount at which it could be purchased in a current market transaction. This may be based on market prices, discounted cash flow analyses, or similar current transactions.
This is done in the same manner as is done to originally record a combination. The first step requires a comparison of the carrying value and fair value of all the net assets at the business reporting level.
If the fair value exceeds the carrying value, goodwill is not impaired and no further tests are needed. If the carrying value exceeds the fair value, then we proceed to step two. In step two, we calculate the implied value of goodwill. Any excess measured fair value over the net identifiable assets is the implied fair value of goodwill.
Impairment losses for subsidiaries are computed as outlined in the solution to question Companies compare fair values to book values for equity method investments as a whole. Firms may recognize impairments for equity method investments as a whole, but perform no separate goodwill impairment tests. They are not a part of the cost of the investment.
Solution E Goodwill impairments are calculated at the business reporting unit level. Increases and decreases in fair values across business units are not offsetting. Excess allocated Overvalued plant assets Undervalued inventories Excess book value over fair value. Correcting entry before closing for Retained earnings 20, Investment in Sue 20, To record investment and retained earnings accounts for prior error.
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