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1. Recognize investors varying levels of influence or control, based on the level of stock ownership. pls take your time to give answers to this question, i need detailed answers only.
Expert Answer
The purchase of the voting common stock of another company receives different accounting treatments depending on the level of the ownership and the amount of influence or control caused by the stock ownership. The ownership levels and accounting methods can be summarized as follows:-
| Level of ownership | Initial Recording | Recording of Income |
| Passive:- Generally under 20% ownership | At cost including broker’s fees | Dividends as declared (except stock dividend) |
| Influential :- Generally 20% to %50% ownership | At cost including broker’s fees | Ownership share of profit (or loss) is reported. Shown as financial Investment in the financial statements. |
| Controlling:- Generally over 50% ownership | At cost including direct acquisition cost. | Ownership share of profit (or loss) accomplished by merging the subsidiary income statement accounts with those of parent in the consolidation process. |
Fair value method/ Cost method:-
- At acquisition: A buys 2,000 shares of B for $100,000.
Investment in B 100000
Cash 100000
- A receives $4,000 in dividends from B.
Cash 4000
Dividend Income 4000
At year End
- Reduce dividend income recognized, if needed
Dividend income 1000
Investment in B 1000
If A determines that cumulative dividends exceed its cumulative share of income by $1,000.
- Adjust investment to fair value
Allowance to adjust available
-for-sale securities to fair value 21000
Other comprehensive income 21000
If fair value of increases to $120,000 and the Investment in B account balance is $99,000.
Equity Method:-
- At acquisition: A buys 2,000 shares of B for $100,000.
Investment in B 100000
Cash 100000
- A receives $4,000 in dividends from B.
Cash 4000
Investment in B 4000
At year End
- A determines that its share of B’s income is $5,000.
Cash 4000
Investment in B 4000
- The ending balance in the Investment in B is:
$100,000 cost – $4,000 dividends + $5,000 income = $101,000.
