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Reporting
Intercorporate
Investments in
Common Stock
Irwin/McGraw-
The McGraw-Hill
The McGraw-Hill
Companies,
Inc., 1999
Companies,
Level of Ownership
0%
20%
Influence not
significant
Irwin/McGraw-
50%
Significant
influence
100%
Control
Level of Ownership
0%
20%
Influence not
significant
Cost
Method
Irwin/McGraw-
50%
100%
Significant
influence
Control
Equity
Method
Consolidation
Influence determined to
be not significant
Irwin/McGraw-
4,000
4,000
20% of $20,000
Irwin/McGraw-
Liquidating Dividends
Investor
InvestorCompany
Companyowns
owns10
10percent
percentof
ofInvestee
Investee
Companys
Companyscommon
commonstock.
stock. By
Bythe
theend
endof
ofthe
thesecond
second
year,
year,net
netincome
incometotals
totals$200,000
$200,000and
anddividends
dividendsdeclared
declared
total
total$190,000.
$190,000. In
Inthe
thethird
thirdyear,
year,Investees
Investeesnet
netincome
incomeisis
$100,000
$100,000and
anddividends
dividendsare
are$120,000.
$120,000.
Cash
Investment in Investee Company Stock
Dividend Income
12,000
1,000
11,000
10% of
$120,000
Irwin/McGraw-
10% of
$110,000
Liquidating Dividends
Investor
InvestorCompany
Companyowns
owns10
10percent
percentof
ofInvestee
Investee
Companys
Companyscommon
commonstock.
stock. By
Bythe
theend
endof
ofthe
thesecond
second
year,
year,net
netincome
incometotals
totals$200,000
$200,000and
anddividends
dividendsdeclared
declared
total
total$190,000.
$190,000. In
Inthe
thethird
thirdyear,
year,Investees
Investeesnet
netincome
incomeisis
$100,000
$100,000and
anddividends
dividendsare
are$120,000.
$120,000.
Cash
Investment in Investee Company Stock
Dividend Income
12,000
1,000
11,000
Irwin/McGraw-
Equity Method
APB
APB18
18requires
requiresthat
thatthe
theequity
equity
method
methodbe
beused
usedfor
forreporting
reporting
investments,
investments,other
otherthan
than
temporary,
temporary,in
incommon
commonstock...
stock...
Irwin/McGraw-
Equity Method
...of
...ofthe
the
following:
following:
Equity Method
10
But,
But, what
what isis
significant
significant
influence?
influence?
Irwin/McGraw-
11
Equity Method
APB
APB 18
18 states,
states, An
An investment
investment (direct
(direct or
or
indirect)
indirect) of
of 20%
20% or
or more
more of
of the
the voting
voting
stock
stock of
of an
an investee
investee should
should lead
lead to
to the
the
presumption
presumption that
that in
in the
the absence
absence of
of
evidence
evidence to
to the
the contrary
contrary an
an investor
investor has
has
the
the ability
ability to
to exercise
exercise significant
significant
influence
influence over
over an
an investor.
investor.
Irwin/McGraw-
12
Equity Method
ABC
ABCCompany
Companyacquires
acquiressignificant
significantinfluence
influenceover
overXYZ
XYZ
Company
Companyby
bypurchasing
purchasing20
20percent
percentof
ofthe
thecommon
common
stock
stockof
ofXYZ
XYZat
atthe
thebeginning
beginningof
ofthe
theyear.
year.
XYZ
XYZreports
reportsnet
netincome
incomeof
of$60,000.
$60,000.
Investment in XYZ Common Stock
Income from Investee
12,000
12,000
20% x $60,000
Irwin/McGraw-
13
Equity Method
ABC
ABCCompany
Companyacquires
acquiressignificant
significantinfluence
influenceover
overXYZ
XYZ
Company
Companyby
bypurchasing
purchasing20
20percent
percentof
ofthe
thecommon
common
stock
stockof
ofXYZ
XYZat
atthe
thebeginning
beginningof
ofthe
theyear.
year.
XYZ
XYZdeclares
declaresand
andpays
paysaa$20,000
$20,000dividend.
dividend.
Cash
Investment in XYZ Company Stock
4,000
4,000
20% x $20,000
Irwin/McGraw-
14
Ajax
AjaxCorporation
Corporationpurchases
purchases40
40percent
percentof
ofthe
thecommon
common
stock
stockof
ofBarclay
BarclayCompany
Companyon
onJanuary
January1,1,19X1,
19X1,for
for
$200,000.
$200,000. Barclay
Barclayhas
hasnet
netassets
assetswith
withaabook
bookvalue
value
of
of$400,000
$400,000and
andaafair
fairvalue
valueof
of$465,000.
$465,000.
Cost of investment to Ajax
Book value of Ajaxs share of Barclays net
assets (.40 x $400,000)
Differential
Irwin/McGraw-
$200,000
(160,000)
$ 40,000
15
Barclay
Barclayreports
reportsnet
netincome
incomeof
of$80,000
$80,000in
in19X1.
19X1.
Investment in Barclay Stock
Income from Investee
32,000
32,000
40% x $80,000
Irwin/McGraw-
16
Barclay
Barclayreports
reportsnet
netincome
incomeof
of$80,000
$80,000in
in19X1.
19X1.
Investment in Barclay Stock
Income from Investee
32,000
32,000
Barclay
Barclaydeclares
declaresaadividend
dividendof
of$20,000
$20,000in
in19X1.
19X1.
Cash
Investment in Barclay Stock
8,000
8,000
40% x $20,000
Irwin/McGraw-
17
The
The$40,000
$40,000excess
excesspaid
paidby
byAjax
Ajaxisisassigned
assignedto
toLand,
Land,$6,000,
$6,000,
Equipment,
Equipment,$20,000,
$20,000,and
andGoodwill,
Goodwill,$14,000.
$14,000. Because
Becauseland
land
has
hasunlimited
unlimitedlife,
life,only
onlyequipment
equipmentand
andgoodwill
goodwillare
areamortized.
amortized.
Equipment ($20,000/5 years)
Goodwill ($14,000/7 years)
Total Amortization
Income from Investee
Investment in Barclay Stock
Irwin/McGraw-
$4,000
2,000
$6,000
6,000
6,000
18
ABC
ABCCompany
Companypurchases
purchases20
20percent
percentof
ofXYZs
XYZscommon
commonstock
stock
on
onJanuary
January2,2,19X1,
19X1,and
andanother
another10
10percent
percenton
onJuly
July1,1,19X1,
19X1,
and
andthe
thestock
stockpurchases
purchasesare
areat
atbook
bookvalue.
value.
XYZ
XYZCompany
Companyearns
earnsincome
incomeof
of$20,000
$20,000from
fromJanuary
January22
to
toJune
June30
30and
andearns
earns$30,000
$30,000from
fromJuly
July11to
toDecember
December31.
31.
Income, January 2 to June 30: $20,000 x .20
Income, July 1 to December 31: $30,000 x .30
Income from Investment, 19X1
Irwin/McGraw-
$ 4,000
9,000
$13,000
19
XYZ
XYZdeclares
declaresand
andpays
paysaa$10,000
$10,000dividend
dividendon
onJanuary
January15
15
and
andagain
againon
onJuly
July15.
15.
January 15 dividend: $10,000 x .20
July 15 dividend: $10,000 x .30
Reduction in Investment, 19X1
$2,000
3,000
$5,000
2,000
3,000
Irwin/McGraw-
2,000
3,000
The McGraw-Hill Companies, Inc., 1999
20
Irwin/McGraw-
21
Irwin/McGraw-
22
Irwin/McGraw-
23
24
Differential
Cost
CostMethod
Method
Not amortized
Irwin/McGraw-
25
Differential
Equity
EquityMethod
Method
Amortized if related to limited-life or
intangible assets of investee
Irwin/McGraw-
26
27
28
Irwin/McGraw-
29
Irwin/McGraw-
30
Irwin/McGraw-
31
Irwin/McGraw-
32
Opposition
Opposition by
by the
the investee
investee
Investor
Investor and
and investee
investee sign
sign an
an agreement
agreement under
under
which
which the
the investor
investor surrenders
surrenders significant
significant rights
rights
as
as aa shareholder
shareholder
Investor
Investor tries
tries and
and fails
fails to
to obtain
obtain more
more financial
financial
information
information than
than available
available to
to other
other
shareholders
shareholders
Investor
Investor tries
tries and
and fails
fails to
to obtain
obtain representation
representation
on
on the
the investees
investeesboard
board of
of directors
directors
Irwin/McGraw-
33
Chapter Two
The
The
End
End
Irwin/McGraw-