Accounting Advanced | Course Paper

Advanced Accounting

Thirteenth Edition, Global Edition

Chapter 2

Stock Investments –

Investor Accounting

and Reporting

Stock Investments: Objectives

2.1 Recognize investors’ varying levels of influence or

control, based on the level of stock ownership.

2.2 Understand how accounting adjusts to reflect the

economics underlying varying levels of investor

influence.

2.3 Identify factors beyond stock ownership that affect

an investor’s ability to exert influence or control over

an investee.

2.4 Apply the fair value/cost and equity methods of

accounting for stock investments.

2.5 Apply the equity method to stock investments.

2.6 Learn how to test goodwill for impairment.

2.1: Levels of Influence or Control

Stock Investments –Investor Accounting and Reporting

Levels of Influence

Fair

value

(cost)

method

Equity

method

Consolidated

financial

statements

<20%

presumes lack of

significant influence

➔fair

value (cost) method

20% to 50%

presumes

significant influence

➔equity

method

>50%

presumes control ➔

consolidated financial

statements

2.2: Accounting Reflects Economics

Stock Investments –Investor Accounting and Reporting

Accounting for the Investment

Degree of

influence

Investment’s

carrying value

Investment

income

Lack of

significant

influence

Fair value (cost, if

nonmarketable)

Dividends declared

Significant

influence

Original cost adjusted

to reflect periodic

earnings and

dividends, e.g., a

proportionate share of

investee’s net assets

Proportionate share

of investee’s

periodic earnings

*

* The investor could manipulate its own investment income if income is measured by dividends.

Significant Influence

20% to 50% voting stock ownership is a

presumption of significant influence. Use the equity

method. Equity method is consistent with accrual-