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Accounting for Equity Investments- Assessment 1
Overview –
Complete three exercises in consolidating the financial statements of a subsidiary and parent company. Consolidated financial statements of a subsidiary and parent company are becoming more typical in today’s business world.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:-
Competency 1: Consolidate financial statement information. Prepare all necessary journal entries for an equity investment. Prepare a consolidated balance sheet for an equity investment. Determine consolidated asset balances for an equity investment. Analyze equity investment accounting methods. Determine retained earnings balances for an equity investment.
Context–
By now, you are probably asking yourself how there can be additional accounting topics that have not been covered in the courses that preceded this one. Those previous courses answered most of the questions facing an individual seeking a career in the accounting field; however, there still remain many unanswered questions.
Financial reporting for business combinations has experienced many changes over the past several years. In December 2007, the Federal Accounting Standards Board (FASB) issued several statements that significantly affected financial reporting for business combinations.
The procedures used to consolidate financial information generated by the separate companies in a business combination are affected by both the passage of time and the method applied by the parent in accounting for the subsidiary; thus, no single consolidation process that is applicable to all business combinations can be identified. Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition.
In all combinations, within its own internal records the acquiring company will use a specific method to account for the investment in the acquired company. For combinations being consolidated after the acquisition date, certain procedures are required.
Question to Consider
To deepen your understanding, you are encouraged to consider the questions below concerning the equity method of accounting for investments and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
- What methods are available to account for investments by one company in another?
- How are costs matched against revenues from these investments?
- What does the Financial Accounting Standards Board (FASB) have to say about accounting for investments?
- Why use the equity method versus the fair-value method to account for said investments?
- Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has many critics. –
- What problems could opponents of the equity method identify?
- Which managerial incentives could influence a firm’s percentage ownership interest in another firm?
Resources –
The following resources are required to complete the assessment.
– Accounting for Equity Investments Excel Workbook.
Resources
– Carmichael, D. R., & Graham, L. (2012). Accountants’ handbook, volume 1: Financial accounting and general topics (12th ed.). Hoboken, NJ: John Wiley & Sons.
- – Chapter 8, “Accounting for Business Combinations.”
- Chapter 9, “Consolidation, Translation, and the Equity Method.”
Flood, J. M. (2014). Wiley GAAP 2014: Interpretation and application of generally accepted accounting principles (12th ed.). Hoboken, NJ: John Wiley & Sons.
- Chapter 2, “ASC 205 Presentation of Financial Statements.”
- Chapter 20, “ASC 323 Investments—Equity Method and Joint Ventures.
- “Chapter 45, “ASC 805 Business Combinations.”
- Chapter 47, “ASC 810 Consolidations.”
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of advanced accounting (6th ed.). New York, NY: McGraw-Hill Education.
- Chapter 1, “The Equity Method of Accounting for Investments.”
- Chapter 2, “Consolidation of Financial Information.”
- Chapter 3, “Consolidations – Subsequent to the Date of Acquisition.”
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of advanced accounting (6th ed.). New York, NY: McGraw-Hill Education.
- Chapter 1, “The Equity Method of Accounting for Investments.”
- Chapter 2, “Consolidation of Financial Information.”
- Chapter 3, “Consolidations – Subsequent to the Date of Acquisition.”Complete Exercises 1, 2, and 3 in the Accounting for Equity Investments Excel Workbook, linked in the Required Resources for this assessment.
All financial information and applicable instructions are provided in each exercise worksheet.
Exercise 1: Journal Entries Prepare all necessary journal entries for an equity investment.
Exercise 2: Consolidated Balance Sheet Prepare a consolidated balance sheet for an equity investment.
Exercise 3: Consolidated Balances Determine consolidated asset balances for an equity investment. Analyze equity investment accounting methods. Determine retained earnings balances for an equity investment.
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