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9 Cards in this Set
- Front
- Back
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What is the cost method? |
AKA Fair value/available for sale method. Should be used when investor owns < 20% of voting stock & does not have significant influence. If a company owns less than 20% but outside evidence shows that it has significant influence, the equity method must be used. |
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Using the cost method, how is the carrying amount of an investment presented on the balance sheet (investment in investee)? |
Carrying amount of the investments account is "original cost." The investment account stays the same from the date of acquisition unless: a. Shares of stock are purchased or sold. b. Acc. dividend in excess acc. earnings resulting in return of capital (liquidating dividend) c. Basis is adjusted to FV (by requirement) d. The investe incurs losses that substantially reduce net worth from the date of acquisition. |
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Using the cost method, what is the journal entry for recording the acquisition of an investment presented on the balance sheet (investment in investee)? |
Record at Cost Dr: Investment in investee Cr: Cash
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Using the cost method, what are the journal entries for recording marketable securities adjusted to fair value on the balance sheet (investment in investee)? |
Unrealized loss & adjust to FV at year-end Dr: Unrealized holding losses (OCI) Cr: Investment in investee (or valuation account) Unrealized Gain & adjust to FV at year-end Dr: Investment in investee (or valuation account) Cr: Unrealized holding gains |
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Using the cost method, what is the journal entry for reducing the investment in investee for return of capital distributions? |
Record a return of capital distribution or liquidating dividend is a dividend in excess of investor's share of retained earnings.
Dr: Cash Cr: Investment in Investee |
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How are cash dividends recorded on the income statement? |
Record cash dividends from the investee's retained earnings. Do not recognize stock dividends. |
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What are the journal entries to record cash dividends? |
1. Dividends to Investor/Parent (from Investee) are Income (Earnings) to Investor/Parent Dr: Cash Cr: Dividend Income 2. Distribution that exceed's investor's share of the investee's retained earnings Dr: Cash Cr: Investment in investee |
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Pal Corp.'s Year 1 dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal's carrying amount for its Ima investment. This reflects that Pal accounts for its Ima investment by the: |
Cost method, and only a portion of Ima's Year 1 dividends represent Pal's earnings after Pal's acquisition. The facts indicate a portion of the dividends were considered income & a portion a return of capital. This implies the cost method and dividends in excess of earnings.Rule: Under the cost method, dividends (not earnings) are reflected as income by the investor. |
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An investor uses the cost method to account for an investment in common stock. Dividends received this year exceeded the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be: |
The portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be the portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment. Rule: Dividend revenue, under the cost method, should be recognized to the extent of cumulative earnings since acquisition and return of capital beyond that point. |
