Investment Classification - Fair value vs. Equity method

(Fair Value) When is the fair value method used?

When ownership is less than 20%.

(Fair Value) How is an investment recorded initially under the fair value method?

At purchase price plus brokerage fees.

(Fair Value) How often is fair value adjusted?

At each reporting period.

(Fair Value) What journal entry is made when buying the investment?

Dr. Investment in Investee, Cr. Cash.

(Fair Value) What journal entry is made when dividends are received?

Dr. Cash, Cr. Dividend Income.

(Fair Value) What journal entry records fair value changes?

Dr./Cr. Investment in Investee, Cr./Dr. Unrealized Gain or Loss.

(Fair Value) How are investments shown on the balance sheet?

As current or noncurrent assets depending on how long they mature

(Fair Value) How are cash flows from these investments classified?

Generally as investing activities.

(Fair Value) What if fair value is not readily determinable? What method should you use to to record the investment?

Use the cost method or NAV per share if available.

(Equity method) What if losses reduce the investment balance to zero?

The investor stops applying the equity method unless recovery of losses is probable.

(Equity method) How is the investor’s share of dividends treated?

As a reduction of the investment account.

Are dividends income under the equity method?

No, dividends are not recognized as income.

(Equity method) Why are dividends not considered income?

Because the income was already recognized when earned by the investee.

(Equity method) What journal entry is made when purchasing the investment?

Dr. Investment in Investee, Cr. Cash.

(Equity method) What journal entry is made for the investor’s share of investee income?

Dr. Investment in Investee, Cr. Income from Investee.

(Equity method) What journal entry is made for the investor’s share of investee loss?

Dr. Loss from Investee, Cr. Investment in Investee.

(Equity method) What journal entry is made when dividends are received?

Dr. Cash, Cr. Investment in Investee.

(Equity method) How does investee income affect the balance sheet?

It increases the investment account.

(Equity method) How does investee loss affect the balance sheet?

It decreases the investment account.

(Equity method) When do you use the equity method?

When ownership is between 20% to 50%.