Question

on january

ew/cennecthatuma htpsANS D.d Connect Cle ACC 40S ced Accounting - Hoyle, Schaefer, Doupnik, 13e, The Equity Method of Accounting for Investments Page 31 Determine the amounts that would appear on Halstead's 2018 income statement relating to its ownership and partial sale of its investment in Sedgwick's common stock. LO 1-1 2. 1-2 , 1-3 2, 1-4 0, 1-5d e 22. Echo, Inc.,. purchased 10 percent of ProForm Corporation on Jamuary 1, 2017, for $345,000 and accounted for the investment using the fair-value method. Echo acquires an additional 15 percent of ProForm on January 1, 2018, for $580,000. The equity method of accounting is now appropriate for this investment. No intra-entity sales have occurred. a. How does Echo initially determine the income to be reported in 2017 in connection with its ownership of ProForm? b. What factors should have influenced Echo in its decision to apply the equity method in 2018? c. What factors could have prevented Echo from adopting the equity method after this second purchase? d. What is the objective of the equity method of accounting? e. What criticisms have been leveled at the equity method? Page 32 f. In comparative statements for 2017 and 2018, how would Echo determine the income to be reported in 2017 in connection with its ownership of ProForm? Why is this accounting appropriate? g. How is the allocation of Echo's acquisition made? h. If ProForm declares a cash dividend, what impact does it have on Echo's financial records under the equity method? Why is this accounting appropriate? i. On financial statements for 2018, what amounts are included in Echo's Investment in ProForm account? What amounts are included in Echo's Equity in Income of ProForm account? LO 1-3 9, 1-6 e Next Highlight 2 Previous Highlight ( Previous Section Next Section >

Answer 1

a) When Echo Inc.., purchased 10% proform corporation on January 1, 2017 it records its investment under "Investment in Associates" , a long term asset account Investment in Associates. $3,45,000 Cash. $3,45,000 b) The equity method is only used when the invest can influence the operating or financial decision of the invested. If there is no significant influence over the invest the invest instead uses the cost method to account its investment. c) Unless a scoop except applies to an investigation applies the equity method to a corporate like investment that gives it the ability to exercise significant influence over the operation and financial police of the invested. This applies regardless of whether or not the significant influence in temporary. d) The objective of the equity method is to reflect the special relationship between investor and investee The equity method is used when the investor holds a relatively large share of the invest, but not controlling interest. The large ownership percentage indicates that the investor has the ability to influence the decision making prices of the investee use of the fair value method wouldn't reflect the relationship between the two parties. e) One of the drawbacks of employed equity method is that its not so easy to comprehend and use. Using this method consumes longer amount of time for gathering, comparing and reviewing figures of the principal company plus its subsidiaries. Its important to get accurate fiscal DAT various companies to be able to arrive figures. Even if data obtained from one subsidiary is inaccurate it could it could adversely affect the worth of principal company. Another drawback of following equity method is that rather than conveying dividends as income it shows them as dedication Dividends cause reduction of the amount of investments. These are not account as income it should also be mentioned here that on following eating method dividends from subsidiary don't ever get transferred to parents company. f) When Echo Inc.., purchased to record investments and additional investment under Investment in associated a long term asset account. Investment in associates $925000 Cash. $9,25,000 g) allocation of acquisition made it records acquisition under the head investment in associates, a long term account. h) TB invest records its procrastinating share of dividends declared and received by the investee as a decrease(credit) to the long term investment account. The invest records its proportionate share of the invested net income as on increasel debit) to the long term investment account and an increase credit) to the revenue from investment account. A gain or loss on disposal of an available for sale investment is classified as other revenue and expenses on the income statement. An adjustment must be made at the end of the accounting period for trading investment to bring the investment account to market (fair value). Unrealized holding gain or losses on available for sale of investments are not included in net income. Instead they are included in other comprehensive income who is added to gains or subtracted from losses net income to determine comprehensive income