Hilton6E Sm02

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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 investment as a held-for-significant-influence investment.

Problem 3 (30 min.)
This problem involves the preparation of journal entries over a two-year period for an investment under two assumptions: (a) that it is a significant influence investment and (b) that it is accounted for using the cost method.

Problem 4 (40 min)
This problem requires journal entries, the calculation of the balance in the investment account and the preparation of the investor’s income statement under both the equity method and cost method. The investee reports a loss from discontinued operations for the year.

Problem 5 (40 min)
This problem compares the investment account balance, the income per year, and the cumulative income for a three-year period for a 20% investment if it was classified as FVTPL, investment in associate and fair-value-through-OCI.

Problem 6 (30 min)
This problem requires the preparation of slides for a presentation to describe GAAP for publicly accountable enterprises for financial instruments as they relate to FVTPL, fair-value-through-OCI, held-for-significant-influence and held-for-control investments.

Problem 7 (30 min)
This problem requires the preparation of slides for a presentation to describe GAAP for private enterprises for financial instruments as they relate to FVTPL, fair-value-through-OCI, held-for-significant-influence and held-for-control investments.

WEB-BASED PROBLEMS
Problem 1
The student answers a series of questions based on the most recent financial statements of Vodafone, a British company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

Problem 2
The student answers a series of questions based on the most recent financial statements of Siemens, a German company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

REVIEW QUESTIONS
1. A business combination is an...
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