Question & Answer: 1. Recognize investors varying levels of influence or control, based on the level of stock ownership. pls take you…..

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.

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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.

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