Hilton6E Sm02
Chapter 2
Investments in Equity Securities
DESCRIPTION OF CASES AND PROBLEMS
CASES
Case 1
A company increases its equity investment from 10% to 25%. Management wants to compare the equity method and fair-value method in order to understand the affect on the accounting and wants to know which method better reflects management’s performance.
Case 2
A company has acquired an investment in shares of another company and members of its accounting department have differing views about how to account for it.
Case 3
This case focuses on the accounting for a long-term investment when the investee is hostile and refuses to co-operate with the investor.
Case 4
In order to maintain his company’s earnings growth, the CEO would like to direct a 40% owned investee company to declare a dividend greater than its normal yearly dividend. If the cost method were used, this income manipulation would work if no part of the dividend were treated as a liquidating dividend. It will not work if the equity method has to be used to account for the investment.
Case 5
This case, adapted from the CICA, gives an illustration of a company that has raised money for its operations in several ways (i.e. other than raising common equity) and asks the student to analyze both the accounting issues and methods that should be used to account for various aspects of the business and methods that should be used to account for the various types of investments.
PROBLEMS
Problem 1 (20 min.)
This problem involves the calculation of the balance in the investment account for an investment carried under the equity method over a two-year period. Then, journal entries are required to reclassify and account for the investment as FVTPL for the third year.
Problem 2 (20 min.)
This problem involves the preparation of journal entries for a FVTPL investment for one year. In year 2, journal entries are required to reclassify and account for the
Investments in Equity Securities
DESCRIPTION OF CASES AND PROBLEMS
CASES
Case 1
A company increases its equity investment from 10% to 25%. Management wants to compare the equity method and fair-value method in order to understand the affect on the accounting and wants to know which method better reflects management’s performance.
Case 2
A company has acquired an investment in shares of another company and members of its accounting department have differing views about how to account for it.
Case 3
This case focuses on the accounting for a long-term investment when the investee is hostile and refuses to co-operate with the investor.
Case 4
In order to maintain his company’s earnings growth, the CEO would like to direct a 40% owned investee company to declare a dividend greater than its normal yearly dividend. If the cost method were used, this income manipulation would work if no part of the dividend were treated as a liquidating dividend. It will not work if the equity method has to be used to account for the investment.
Case 5
This case, adapted from the CICA, gives an illustration of a company that has raised money for its operations in several ways (i.e. other than raising common equity) and asks the student to analyze both the accounting issues and methods that should be used to account for various aspects of the business and methods that should be used to account for the various types of investments.
PROBLEMS
Problem 1 (20 min.)
This problem involves the calculation of the balance in the investment account for an investment carried under the equity method over a two-year period. Then, journal entries are required to reclassify and account for the investment as FVTPL for the third year.
Problem 2 (20 min.)
This problem involves the preparation of journal entries for a FVTPL investment for one year. In year 2, journal entries are required to reclassify and account for the