Concept explainers
What types of investments in common stock normally accounted for using (a) the equitymethod and (b) carried at fair value?
Introduction:
Companies acquire ownership interests in other companies for variety of reasons. Some companies invest in other companies simply to earn a favourable return by taking advantage of the future earnings potential of their investees. Other reasons for acquiring interests in other entities include gaining voting control, entering new product markets by purchasing companies already established in those areas.
The types of investments in common stock accounted for equity method and fair value method.
Explanation of Solution
The method which is used to account the investments in common stocks is dependent upon the level of influence which an investor exercies over an investee. The investment will normally be reported on the investor balance sheet using the cost method, equity method or fair value option.
The equity method is needed for external reporting when the investor exercises significant influence over the financial and operating policies of the investee and the consolidation is inapproriate.
Corporate joint venture uses equity method for reporting of common stock.
The equity method reports investment of 20% or more in another company’s voting stock. The companies which holdsthe investments of the common stock of other companies have this option for investments which are not needed to be consolidated.
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Chapter 2 Solutions
ADVANCED FINANCIAL ACCOUNTING-ACCESS
- 3. Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of stockholders' equity? a. held-to-maturity debt securitiesb. marketable securitiesc. available-for-sale securitiesd. trading securitiesarrow_forwardDefine the term Return on common equity?arrow_forwardFor fi nancial assets classifi ed as trading securities, how are unrealized gains and losses refl ected in shareholders’ equity? C . Th ey are a component of accumulated other comprehensive income.arrow_forward
- Which of the following items is considered to be a current asset? Common Stocks. Inventory. Bonds. Preferred Stocks. Retained Earnings.arrow_forwardExplain the difference(s) between investments in equity securities classified as current assets versus those classified as long-term (noncurrent) assets.arrow_forwardFor investments in equity securities, which will result in recording income based on the income of the investee? Select one: a. Held-to-maturity classification b. Trading classification O C. Available-for-sale classification O d. Equity method of accountingarrow_forward
- For fi nancial assets classifi ed as trading securities, how are unrealized gains and losses refl ected in shareholders’ equity? B . Th ey fl ow through income into retained earnings.arrow_forwardWhere on the financial statements is an unrealized holding gain or loss on trading investments reported?arrow_forwardWhich one of the following is a type of equity? security that has a fixed dividend and a priority status over other equity securities?arrow_forward
- What is the difference between a Stock Account and in equity and Paid-in-Capital account? Are they DR or CR balances? What statement(s) do they appear on?arrow_forwardCommon Stock investments using the fair value method are: A. reported at fair value on the balance sheet. B. reported at cost on the balance sheet. C. reported with property, plant and equipment on the balance sheet. D. not reported on the balance sheet.arrow_forwardFor which of the following securities will unrealized holding gains or losses be recorded as other comprehensive income? Enter 1, 2, 3, or 4 that represents the correct answer. Debt investments, trading. Debt investments, held-to-maturity. Equity investments, trading. Equity investments, available-for-sale.arrow_forward
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