McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 2-1...

2-2-11

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Reporting Intercorporate Investments in Common Stock

Baker / Lembke / KingBaker / Lembke / King

2Electronic Presentation by

Douglas Cloud Pepperdine University

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0% 20% 50% 100%

Level of Common Stock OwnershipLevel of Common Stock Ownership

Influence not significant

Significantinfluence

Control

Cost Method

EquityMethod

Consolidation

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The Cost MethodThe Cost Method

Investor Company purchases 20 percent of Investee Company’s common stock for $100,000 at the beginning of 20X1. Influence is determined to be not significant.

Investor Company purchases 20 percent of Investee Company’s common stock for $100,000 at the beginning of 20X1. Influence is determined to be not significant.

Investment in XYZ Company Stock 100,000Cash 100,000

Record purchase of XYZ Companystock.

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The Cost MethodThe Cost Method

During the year, XYZ has net income of $50,000 and pays dividends of $20,000.

During the year, XYZ has net income of $50,000 and pays dividends of $20,000.

20% of $20,000

Cash 4,000Dividend Income 4,000

Record dividend income from XYZ Company.

Note that ABC records only its share of the distributed earnings of XYZ.

Note that ABC records only its share of the distributed earnings of XYZ.

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On January 2, 20X1, Investor Company purchases 10 percent of Investee Company’s

common stock. Investee Company’s net income is $100,000 and dividends paid total $70,000.

On January 2, 20X1, Investor Company purchases 10 percent of Investee Company’s

common stock. Investee Company’s net income is $100,000 and dividends paid total $70,000.

Liquidating Dividends IllustratedLiquidating Dividends Illustrated


Record receipt of 20X1 dividend from Investee Company.

10% of $70,000

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On January 2, 20X2, Investee Company’s net income is $100,000 and dividends paid total $120,000. Thus,

Investee had cumulative net income of $200,000 and paid cumulative dividends of $190,000.

On January 2, 20X2, Investee Company’s net income is $100,000 and dividends paid total $120,000. Thus,

Investee had cumulative net income of $200,000 and paid cumulative dividends of $190,000.




10% of $120,000

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For 20X3, Investee’s net income is $100,000 and $120,000 in dividends are declared and paid. Cumulative net income is now $300,000 and

cumulative dividends paid total $310,000.

For 20X3, Investee’s net income is $100,000 and $120,000 in dividends are declared and paid. Cumulative net income is now $300,000 and

cumulative dividends paid total $310,000.


Cash 12,000Investment in Investee Company Stock 1,000Dividend Income 11,000


($310,000 - $300,000) x 10%10% x ($120,000 - $10,000)

10% of $120,000

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Equity MethodEquity Method

APB Opinion No. 18 requires that the equity method be used for reporting investments, other than

temporary, in common stock...

APB Opinion No. 18 requires that the equity method be used for reporting investments, other than

temporary, in common stock...

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Corporate joint ventures. Companies in which the

investor’s voting stock interest gives the investor the “ability to exercise significant influence over operating and financial policies” of that company.


...of thefollowing:

...of thefollowing:

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What is significant influence?

What is significant influence?

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APB 18 states, “An investment (direct or indirect) of 20% or more of the voting stock of an investee should lead to the

presumption that in the absence of evidence to the contrary an investor has the

ability to exercise significant influence over an investee.”

APB 18 states, “An investment (direct or indirect) of 20% or more of the voting stock of an investee should lead to the

presumption that in the absence of evidence to the contrary an investor has the

ability to exercise significant influence over an investee.”

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Equity Method--Recognition of IncomeEquity Method--Recognition of Income

ABC Company acquires significant influence over XYZCompany by purchasing 20 percent of the common

stock of XYZ at the beginning of the year.

ABC Company acquires significant influence over XYZCompany by purchasing 20 percent of the common

stock of XYZ at the beginning of the year.

XYZ reports net income of $60,000.XYZ reports net income of $60,000.

Investment in XYZ Common Stock 12,000Income from Investee 12,000

Record income from investment in XYZ Co.

20% x $60,000

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Equity Method--Recognition of DividendsEquity Method--Recognition of Dividends

XYZ declares and pays a $20,000 dividend.XYZ declares and pays a $20,000 dividend.

Cash 4,000Investment in XYZ Company Stock 4,000

Record receipt of dividend from XYZ.

20% x $20,000

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Equity Method--Carrying AmountEquity Method--Carrying Amount

Investment in XYZ Common Stock

Original cost 100,000Equity accrual ($60,000 x .20) 12,000Ending balance 108,000

Dividends ($20,000 x .20) 4,000

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Equity Method--Interim AcquisitionsEquity Method--Interim Acquisitions

Investment in XYZ Common Stock

Original cost 109,000Equity accrual ($60,000 x 1/4 x .20) 3,000Ending balance 108,000

Dividends ($20,000 x .20) 4,000

ABC Company acquires 20 percent of XYZ’scommon stock on October 1 for $109,000. XYZ earns

income of $60,000 and pays dividends of $20,000.

ABC Company acquires 20 percent of XYZ’scommon stock on October 1 for $109,000. XYZ earns

income of $60,000 and pays dividends of $20,000.

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Equity Method--Cost Exceeds Book ValueEquity Method--Cost Exceeds Book Value

Ajax Corporation purchases 40 percent of the commonstock of Barclay Company on January 1, 20X1, for$200,000. Barclay has net assets with a book value

of $400,000 and a fair value of $465,000.

Ajax Corporation purchases 40 percent of the commonstock of Barclay Company on January 1, 20X1, for$200,000. Barclay has net assets with a book value

of $400,000 and a fair value of $465,000.

Cost of investment to Ajax $200,000

Book value of Ajax’s share of Barclay’s net assets (.40 x $400,000) (160,000)

Differential $ 40,000

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Cost of Investment$200,000

Fair value of net identifiable assets (40% x $465,000)

$186,000

Total differential$40,000

Excess of cost over fair value of net identifiable assets

$14,000

Excess of fair value over book value of net identifiable assets

$26,000

Book value of net identifiable assets (40% x $400,000)

$160,000


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Barclay reports net income of $80,000 in 20X1.Barclay reports net income of $80,000 in 20X1.

Investment in Barclay Stock 32,000Income from Investee 32,000

Record equity-method income.

40% x $80,000

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Barclay declares and pays a dividend of $20,000 in 20X1.Barclay declares and pays a dividend of $20,000 in 20X1.

40% x $20,000

Barclay reports net income of $80,000 in 20X1.Barclay reports net income of $80,000 in 20X1.

Investment in Barclay Stock 32,000Income from Investee 32,000

Record equity-method income.

Cash 8,000Investment in Barclay Stock 8,000

Record dividend from Barclay.

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The $40,000 excess paid by Ajax is assigned to Land, $6,000, Equipment, $20,000, and Goodwill, $14,000. Equipment is

amortized, but land and goodwill are not.

The $40,000 excess paid by Ajax is assigned to Land, $6,000, Equipment, $20,000, and Goodwill, $14,000. Equipment is

amortized, but land and goodwill are not.

Equipment ($20,000 ÷ 5 years) $4,000

Income from Investee 4,000Investment in Barclay Stock 4,000

Amortize differential.

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Equity Method--Disposal of AssetsEquity Method--Disposal of Assets

If Barclay had purchased the land in 20X0 for $75,000 and sells the land in 20X2 for $125,000. Barclay recognizes a gain

on the sale of $50,000, and Ajax’s share is $20,000 (40%).

If Barclay had purchased the land in 20X0 for $75,000 and sells the land in 20X2 for $125,000. Barclay recognizes a gain

on the sale of $50,000, and Ajax’s share is $20,000 (40%).

Ajax’s share of Barclay's reported gain $20,000

Portion of Ajax’s differential related to land (6,000)

Gain to be recognized by Ajax $14,000

Income from Investee 6,000Investment in Barclay Stock 6,000

Remove differential related to Barclay’sland sold.

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Equity Method--Purchase Additional SharesEquity Method--Purchase Additional Shares

ABC Company purchases 20 percent of XYZ’s common stock on January 2, 20X1, and another 10 percent on

July 1, 20X1, and the stock purchases are at book value.

ABC Company purchases 20 percent of XYZ’s common stock on January 2, 20X1, and another 10 percent on

July 1, 20X1, and the stock purchases are at book value.

Income, January 2 to June 30: $20,000 x .20 $ 4,000

Income, July 1 to December 31: $30,000 x .30 9,000

Income from Investment, 20X1 $13,000

Investment in XYZ Stock 13,000Income from Investee 13,000

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Equity Method--Purchase Additional SharesEquity Method--Purchase Additional Shares

XYZ declares and pays a $10,000 dividend on January 15 and again on July 15.

XYZ declares and pays a $10,000 dividend on January 15 and again on July 15.

January 15 dividend: $10,000 x .20 $2,000

July 15 dividend: $10,000 x .30 3,000

Reduction in Investment, 20X1 $5,000

Cash 2,000Investment in XYZ Stock 2,000

January 15, 20X1

Cash 3,000Investment in XYZ Stock 3,000

July 15, 20X1

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Equity Method--Change to Equity MethodEquity Method--Change to Equity Method

Aron Corporation purchases 15 percent of Zenon Company’s common stock on January 2, 20X1 and

another 10 percent on January 2, 20X4. Aron switches to the equity method on January 2, 20X4.

Aron Corporation purchases 15 percent of Zenon Company’s common stock on January 2, 20X1 and

another 10 percent on January 2, 20X4. Aron switches to the equity method on January 2, 20X4.

Originally under Restated under Year Net Income Dividends Cost Equity

Zenon Investment Income Reported by Aron

20X1 $15,000 $10,000 $1,500 $2,250

20X2 18,000 10,000 1,500 2,700

20X3 22,000 10,000 1,500 3,300

$55,000 $30,000 $4,500 $8,250

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The investment account and retained earnings of Aaron are restated as if the equity method had been applied

from the date of the original acquisition.

The investment account and retained earnings of Aaron are restated as if the equity method had been applied

from the date of the original acquisition.

Investment in Zenon Common Stock 3,750Retained Earnings 3,750

Restate investment account from cost toequity method.

$8,250 - $4,500

Equity Method--Change to Equity MethodEquity Method--Change to Equity Method

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Cost and Equity Methods ComparedCost and Equity Methods Compared

Recorded amount of investment at date of acquisition.

Cost MethodCost Method

Original cost

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Recorded amount of investment at date of acquisition.


Original cost

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Usual carrying amount of investment subsequent to acquisition

Original cost


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Original cost increased (decreased) by investor’s share of investee's income (loss) and decreased by investor’s share of investee’s dividends and by amortization or write-off of the differential.


Usual carrying amount of investment subsequent to acquisition

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Not amortized or written-off


Differential

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Differential

Amortized or written down if related to limited-life assets of investee or assets disposed of.


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Income recognized by investor

Investor’s share of investee’s dividends declared from earnings since acquisition


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Investor’s share of investee’s earnings since acquisition, whether distributed or not, reduced by

any amortization or write-off of the differential.


Income recognized by investor

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Investee dividends from earnings since acquisition by investor

Income


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Investee dividends from earnings since acquisition by investor

Reduction of investment


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Investee dividends in excess of earnings since acquisition by investor



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Investee dividends in excess of earnings since acquisition by investor




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APB 18--What is Significant Influence?APB 18--What is Significant Influence?

An investor owning less than 20 percent can still have significant influence. APB 18 stated a number of factors that could

indicate such influence.

An investor owning less than 20 percent can still have significant influence. APB 18 stated a number of factors that could

indicate such influence.

1. Representation on board of directors.2. Participation in policy-making.3. Material intercompany transactions.4. Interchange of managerial personnel.5. Technological dependency.6. Size of investment in relation to

concentration of other shareholdings.

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FASB InterpretationFASB Interpretation No. 35 No. 35 Evidence that an investor is unable to exercise significant influence over an investee:1. Opposition by the investee.

2. The investor and investee sign an agreement in which the investor surrenders significant rights as a shareholder.

3. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor.

4. The investor, desiring more information than is available to the investee’s other shareholders, tries to obtain that information, and fails.

5. The investor tries and fails to obtain representation on the investee’s board of directors.

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PSAK 13 InvestasiPSAK 13 Investasi

Investasi : investasi lancar dan inestasi jangka panjang

Harga perolehan ditentukan dengan nilai wajar aktiva yang diserahkan

Investasi jangka panjang dicatat sebesar harga perolehan, jika ada penurunan yang bersifat tidak sementara dicatat mengurangi investasi

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PSAK 15 PSAK 15 : Investasi pada perusahaan asosiasi: Investasi pada perusahaan asosiasi

Pengaruh signifikan 20%Dicatat dengan menggunakan metode ekuitas jika ada

pengaruh signifikanWalaupun lebih dari 20% tetap metode cost jika :

pembatasan yang ketat sehingga mengurangi kemampuan mengalihkan dana pada investor

Pengungkapandaftar dan penjelasan dari perusahaan asosiasi (nama, tempat, kedudukan, jumlah kepemilikan)metode yang digunakan untuk mempertanggungjawabkan investasi tersebut

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KUIS KUIS PT. Kenanga membeli 30% kepemilikan PT. Anggrek pada 1 April 2003 dengan menerbitkan saham sebanyak 1000.000 dengan nilai par 100 dan harga pasar 320. Saat pembelian ekuitas PT. Anggrek terdiri dari common stock 500.000.000, additional paid in capital 100.000.000 dan retained earning 300.000.000. Berikut asset yang memiliki perbedaan nilai buku dan nilai wajar

nilai buku nilai wajarTanah 100.000.000 200.000.000Bangunan (10) 200.000.000 240.000.000Peralatan (4) 130.000.000 100.000.000Hutang jk panjang (5) 100.000.000 120.000.000

Selama tahun 2003 laba PT. Anggrek 120.000.000, deviden 10 juta (Februari) dan 40 juta (September).

Buat jurnal selama tahun 2003 dan hitung nilai investasi 31/12/03

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Chapter TwoChapter TwoChapter Two

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