Stock Investments – Investor
Accounting and Reporting
Chapter 2
01
02
03
Apply the equity method to
purchase price allocations
Learn how to test goodwill for
impairment
Understand the push-down
accounting
Objectives
Stock Investments –
Investor Accounting
and Reporting
Levels of Influence or Control
1
Accounting for the Investment
Degree of influence Accounting
Lack of significant
influence Financial assets
cost method
trading securities
available-for-sale securities
long-term investment
Significant influence
/ joint control Equity method Associates(联营)
Joints ventures（合营）
Control
FASB: Equity Method
IASB: Cost method or
Equity Method
CASC: Cost method
Subsidiary（子公司）
Consolidated financial
statements
Cost / Equity Method
2
Cost /Equity Method
Cost Method Equity Method
1-Jul Pilzner buys 2,000 shares of the 10,000 shares of Sud for $100,000.
1-Nov Pilzner receives $4,000 in dividends from Sud
31-Dec Sud’s NI:$50,000
Cost /Equity Method
Cost Method Equity Method
1-Jul Pilzner buys 2,000 shares of the 10,000 shares of Sud for $100,000.
Investment in Sud 100,000 Investment in Sud 100,000
Cash 100,000 Cash 100,000
1-Nov Pilzner receives $4,000 in dividends from Sud
Cash 4,000 Cash 4,000
Dividend income 4,000 Investment in Sud 4,000
31-Dec Sud’s NI:$50,000
No entry Investment in S 5,000
Income from S 5,000
Equity Method, at Year-end
The ending balance in the Investment in Sud is:
$100,000 cost + $5,000 income – $4,000 dividends
= $101,000.
S: S/E: 500,000+25,000-20,000=505,000
Applying the Equity Method
3
Both the investor and investee continue to exist as separate
legal entities with their own accounting systems (an
acquisition of common stock).
The equity method applies to only one of the entities — the
investor.
The ―investment‖ is reported in a single amount on one line
Equity Method— a one-line consolidation
