| Paragraph 19 (i) |
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| An
investor's share of losses of an investee
may equal or exceed the carrying amount of an investment accounted for
by the equity method. . . The investor should ordinarily discontinue applying the equity method when the investment is reduced to zero and should not provide for additional losses. . . . If the investee subsequently reports net income, the investor should resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period that the equity method was suspended. |
Illustration:
On January 1, 20X0, Cat Corporation paid $100,000 for 15,000 shares of Dog Corporation's common stock, representing a 30% investment in Dog. Dog declared and paid a dividend of $1 a share to its common stockholders during 20X0. Dog incurred net losse over the subsequent 6 years as follows:
At what amount should Cat's investment in Dog appear on Cat's balance sheet as of December 31, 20X4, and December 31, 20X5? |
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| Paragraph 19 (i) | |||||||||||||||||||||||||||||
| If the investor's investment in voting stock
of an investee company falls below the level necessary to be able to
exercise
significant influence, the investor should discontinue the use of the
equity
method. This reduction may occur for several reasons, such as sale of a portion of an investment by the investor, sale of additional stock by an investor, or by other transactions. Any earnings or losses that relate to the stock retained by the investor and that were previously accrued should remain as part of the carrying amount of the investment. |
Illustration:
On January 1, 20X0, Dey Corporation paid $150,000 for 15,000 shares of Bass Corporation's common stock, representing a 25% investment in Bass. Bass declared and paid a dividend of $1 a share to its common stockholders during 20X0. Bass's net income was $130,000 for the year ended December 31, 20X0. On January 1, 20X1, Bass issued 60,000 additional shares of stock to the public; Dey did not purchase any of these additional shares. As a result, Dey could no longer exercise significant influence over Bass. Bass's Net income and dividend payments are provided below. At what amount should Dey's investment in Bass appear on Dey's balance sheet as of December 31, 20X1?
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Paragraph 19 (i) |
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| An
investment that was previously accounted
for on other than the equity method may become qualified for use of the
equity method by an increase in the level of ownership. The investment, results of operations (current and prior periods presented) and retained earnings of the investor should be adjusted retroactively. . . . |
Illustration:
On January 1, 20X0, Rey Corporation paid $150,000 for 15,000 shares of Rio Corporation's common stock, representing a 15% investment in Rio. Rio declared and paid a dividend of $1 a share to its common stockholders during 20X0. Rio's net income was $130,000 for the year ended December 31, 20X0. On December 31, 20X0, Rey purchased an additional 10,000 shares of RIO Corporation's common stock for $110,000. At what amount should Rey's investment in Rio appear on Rey's balance sheet as of December 31, 20X0? |
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