Chapter 2, Problem 2.1Q

What types of investments in common stock normally accounted for using (a) the equitymethod and (b) carried at fair value?

To determine

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.