Chapter 17 Continuing Case Solution Judgment Necessary Assess The

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Continuing Case Solution

Chapter 17

(a)

1. Stock investment in Infrared of 10% of the outstanding voting stock:

DR CR

Cash ($24,000 x 10%) 2,400

2. Stock investment in Infrared of 30% of the outstanding voting stock:

DR CR

Cash ($24,000 x 30%) 7,200

Investment in Infrared (asset)

7,200

Continuing Case Solution

(b)

Memorandum

To: Eric Conner and Phil Martin, CM2

From: L. Harbach

Re: Stock Investments in Publicly-held Companies

Date: January 31, 2013

Below you will find the specific authoritative literature guidance on the accounting

for stock investments of publicly-held companies when there are differing levels

of ownership of the voting stock.

Stock investments of 20% or more and up to 50% of the voting stock:

The equity method. An investor initially records an investment in the stock of an investee

at cost (FASB ASC 323-10-30-2), and adjusts the carrying amount of the investment to

recognize the investor‘s share of the earnings or losses of the investee after the date of

FASB ASC 323-10-15-6 describes the conditions for which the equity method

would be appropriate:

The Board concludes that the equity method of accounting for an investment in

common stock should also be followed by an investor whose investment in voting

stock gives it the ability to exercise significant influence over operating and

financial policies of an investee even though the investor holds 50% or less of the

Continuing Case Solution

judgment is necessary to assess the status of each investment (FASB ASC 323-10-

15-7). In order to achieve a reasonable degree of uniformity in application, the

Board concludes that an investment (direct or indirect) of 20% or more of the

Stock investments of 20% or less of the voting stock:

FASB ASC 320-10-35 describes the accounting for stock investments of less

than 20% of the voting stock:

For investments in debt securities that management does not have the positive

intent and ability to hold to maturity, and for investments in equity securities with

All investments in equity securities are valued at fair value and are classified as

trading securities or available-for-sale securities (FASB ASC 320-10-35-1).

Unrealized holding gains and losses on trading securities are included in the

Summary

If a company owns less than 20% of a publicly-

the stock has a ready fair market value (e.g., the stock is traded on a national

exchange), that fair market value should be reported on the balance sheet for

this stock investment.

Continuing Case Solution

revenue. If the investment declines in value and management believes this value

is permanent, the company must write down the asset and record a realized loss.

the assumption is that the company can exert significant influence over the

affairs of the investee corporation, and therefore the equity method is required.