Advanced Accounting Exam 2

Under the equity method, the investment account

is continually adjusted to reflect current owner’s equity of acquired company

Under the initial value method, the investment account

remains at acquisition-date value assigned ("cost")

Under the partial equity method, the investment account

is adjusted only for accrued income and dividends declared by the acquired company

How is the income account treated under the equity method?

income accrued as earned; amortization and other adjustments are recognized

How is the income account treated under the initial value method?

dividends declared recorded as dividend income

How is the income account treated under the partial equity method?

income accrued as earned; no other adjustments recognized (no amortization entry)

What are the advantages of using the equity method?

acquiring company totals give a true representation of consolidation figures. subsidiary at accrual acct.

What are the advantages of using the initial value method?

it is easy to apply; it often reflects cash flows from the subsidiary

What are the advantages of the partial equity method?

it usually gives balance approximating consolidation figures, but it is easier to apply than full method

The valuation method adopted affects

separate financial records

What accounting basis is used for the equity method?

full accrual

Entry S

offsets the subsidiary’s stockholders’ equity accounts (CAR) against the book value component of the Investment account

Entry A

recognizes the excess fair value over book value allocations made to specific subsidiary accounts (assets and/or liabilities and/or to goodwill)

Entry I

eliminates the investment income balance accrued by the parent “subsidiary income”

Entry D

removes intra-entity dividend declarations. subsidiary dividends

Entry E

recognizes the current excess amortization expenses on the excess fair over book value allocations

Entry P

eliminates any intra-entity payable/receivable balances

What part of entry S will differ each period to reflect the balance as of the beginning of the current year, assuming that the acquisition was made during a previous fiscal year?

the amount of subsidiary’s stockholders’ equity

In Entry A, if the acqusition was made during a previous fiscal year, only the _______ balances remaining as of the beginning of the current period are recognized in this entry.

unamortized

What entries for the initial value method are the same as the equity method?

entry S, entry A, and Entry E

What entries for the initial value method are different than those for the equity method?

entry I and entry D

How is entry I different when using the initial value method as compared to using the equity method?

it eliminates the parent’s dividend income account and the sub’s dividends paid account

How is entry D different when using the initial value method as compared to using the equity method?

there is no entry D

Entry *C

for consolidation purposes, the beginning retained earnings account must be increased (initial value method) or decreased (partial equity method) to create the same effect as the equity method

When should entry *C be recorded?

before the other worksheet entries

Why should entry *C be recorded before the other worksheet entries?

to align with the beginning balances for the year

What does the C refer to in entry *C?

the conversion being made to the equity method totals

What does the asterisk indicate in entry *C?

that this entry relates solely to transactions of prior periods

What entries are the same when using the partial equity method as compared to the equity method?

entry S, entry A, and entry E

How is entry I different when using the partial equity method as compared to the equity method?

it eliminates the parent’s equity in the sub’s income and reduces the investment account (but uses different amounts)

What does entry D do in the partial equity method?

eliminates the dividend income account

When is Goodwill considered impaired?

when the fair value of its related reporting unit falls below its carrying value

How often is goodwill tested for impairment?

at least annually, but interim impairment testing is necessary in the presence of negative indicators

What are some negative indicators of impairment?

adverse change in the business climate or market, legal factors, regulatory action, an introduction of competition, or a loss of key personnel

The aggregate amount of goodwill impairment losses should be presented as

a separate line item in the operating section of the income statement

If the goodwill impairment loss is associated with a discontinued operation it should be

include (on a net-of-tax basis) within the results of discontinued operations

If contingency results in a liability (typically a cash payment), changes in fair value of the contingency are recognized in

income as they occur