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Questions and Answers
In financial accounting, when is control over an investee's operation recognized?
In financial accounting, when is control over an investee's operation recognized?
According to FASB ASC Section 810-10-05, what allows for the use of consolidated financial statements?
According to FASB ASC Section 810-10-05, what allows for the use of consolidated financial statements?
Under the cost method for equity investments, how are unrealized holding gains or losses treated?
Under the cost method for equity investments, how are unrealized holding gains or losses treated?
What conditions allow for financial statement recognition under the cost method for equity investments?
What conditions allow for financial statement recognition under the cost method for equity investments?
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How are assets and liabilities treated in financial reporting when two companies are combined due to investor control?
How are assets and liabilities treated in financial reporting when two companies are combined due to investor control?
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According to the passage, which statement is true regarding investments in equity securities without readily determinable fair values?
According to the passage, which statement is true regarding investments in equity securities without readily determinable fair values?
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How are investments in equity securities that employ the cost method typically reported over time?
How are investments in equity securities that employ the cost method typically reported over time?
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What typically constitutes the income from cost method equity investments?
What typically constitutes the income from cost method equity investments?
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According to the passage, when must cost method equity investments be assessed for impairment?
According to the passage, when must cost method equity investments be assessed for impairment?
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If impairment is deemed likely for a cost method equity investment, what must an entity do according to the passage?
If impairment is deemed likely for a cost method equity investment, what must an entity do according to the passage?
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Study Notes
Control Over Investee's Operations
- Control over an investee's operations is recognized when an investor has the power to direct the activities of the investee that significantly affect the investee's returns.
Consolidated Financial Statements
- According to FASB ASC Section 810-10-05, consolidated financial statements are appropriate when an investor has a controlling financial interest in an investee.
Cost Method for Equity Investments
- Unrealized holding gains or losses under the cost method are not recognized in the investor's financial statements.
Conditions for Recognition under Cost Method
- Recognition under the cost method occurs when the investment represents less than 20% of the investee's voting stock and does not provide the investor with significant influence over the investee.
Combining Assets and Liabilities
- When two companies are combined due to investor control, assets and liabilities are consolidated on the investor's books in accordance with the acquisition method.
Investments Without Readily Determinable Fair Values
- Investments in equity securities without readily determinable fair values are typically reported at cost, with any changes in value reflected in the statement of comprehensive income, but are not reflected as part of net income.
Cost Method Equity Investments Reporting
- Investments in equity securities using the cost method are typically reported at cost over time unless there is an impairment.
Income from Cost Method Equity Investments
- Income from cost method equity investments typically consists of dividends received from the investee.
Assessment for Impairment
- Cost method equity investments must be assessed for impairment when circumstances indicate that the investment may be impaired.
Impairment of Cost Method Equity Investments
- An entity must recognize an impairment loss if the fair value of the investment is less than its carrying amount.
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Description
Learn about the cost method used for investments in equity securities when the fair value is not readily determinable and the investment does not provide significant influence or control. Explore how these investments are measured at cost.
