[smcilw1]

I have a quick question I’m hoping someone can help me with.

When accounting under the equity method, if a entity purchases an investment in the middle of the year do they report the income of the investment for the entire year or only for the portion in which they’ve owned it? For example, if an entity owns 30% which they purchased July 1st, and the investment reported income of $100,000. Would they report income of $30,000 (100,000 x 30%) or $15,000 ( 6/12 x 100,000 x 30%) ?? Thanks!!

FAR - 87 (7/14/11)
AUD - 94 (8/31/11)
REG - 92 (10/19/11)
BEC - 88 (11/30/11)

[jimboace88]

I had a MCQ similar to this in one of the earlier/middle Becker lectures. I'm pretty sure the answer to this question is that you report the income only for the portion of the year you held the investment for. The theory behind this is that you can't go back and retroactively apply a percentage to an earlier time period in which you didn't own that percentage.

I'm not sure which review course you're using, but they might have mentioned if an entity is accounting for an investment under the cost method and then later on acquires significant influence and has to use the equity method, you go back and restate the investment under the equity method ONLY FOR the percentage owned when you were accounting for it under the cost method.

I hope I didn't confuse you more than I helped–I know my explanation is kind of wordy. To make a long story short, the answer, of which I am fairly certain (although other people on this board are probably more capable than I am), is that you would report the income for the half of the year that you owned the 30% interest.

FAR 07/27/11 - 87
AUD 10/01/11 - 85
BEC 11/15/11 - 87
REG 01/03/12 - 92

[tbergy]

It is only for the period you actually owned the equity investment.

Think of it this way, if there was a stock with the price of $20 on January 1st, $40 on July 1st, and $45 on December 31st, and you purchased the stock on July 1st, you would only have a gain on that investment of $5 for the year ended December 31st. You don't get any of that $20 gain in months before you actually made the investment.

Hope that helps. I conquer FAR tomorrow. Wish me luck!

[smcilw1]

This is from a Wiley simulation:

100,000 shares of Stock C. Stock C was acquired on March 1, 2010, for $15 per share, which is 30% of the outstanding stock of C Corporation. On December 31, 2010, the market price of the stock was $16.25 per share. C Corp. had income of $560,000 during 2010 and paid dividends of $80,000 on December 30, 2010.

When it asked for the income from Stock C, I answered $140,000 ($560,000 (10/12) x 30%) However, Wiley tells me the answer is $168,000 ($560,000 x 30%).

I'm still confused. =/

FAR - 87 (7/14/11)
AUD - 94 (8/31/11)
REG - 92 (10/19/11)
BEC - 88 (11/30/11)

[jimboace88]

Although it's unlikely, textbooks and review courses are not always free from error. In my advanced accounting course in college the textbook frequently had the wrong answers because facts were changed when new editions came out by the answers were left the same.

I would check to see if there are any updates pointing out a correction of this–unless someone else knows a reason why it's correct?

FAR 07/27/11 - 87
AUD 10/01/11 - 85
BEC 11/15/11 - 87
REG 01/03/12 - 92

[RedRage00]

I'm using Wiley for FAR and I've noticed a lot of mistakes with them. Sometimes I can read the problem and the DATE doesn't make sense for what they are asking. They usually meant to put 2011 instead of 2010 or vice versa. I can usually figure it out, but you would think Wiley would have their stuff together. Yaeger pointed out and corrected several problems in the book for me during their lectures, but they didn't catch all of them and I didn't expect them to either.

I had a Lease SIM and I got it wrong because they told me one date, and the answer was for another date. I had it correct under the date asked so I understood the concept behind it. It's just frustrating to deal with.

Texas CPA
Licensed, March 2012

[jimboace88]

Yeah, unfortunately the people who write these textbooks and problems usually aren't the people who edit them when new editions come out. Those jobs go to interns/grad students who don't always have the experience or required level of expertise to know when something is wrong. It was a common problem in my Advanced Accounting book last semester, as I said–I think it might have been a Wiley book, actually.

FAR 07/27/11 - 87
AUD 10/01/11 - 85
BEC 11/15/11 - 87
REG 01/03/12 - 92

[jacquelynsimon]

Week Two of still not feeling the motivation to study for the FAR CPA Exam. I am just not a fan of Cost & Equity Method. I know #RogerCPAReview is trying their best to help, he looks really excited when I watch the lectures.

[jacquelynsimon]

Week Three of not wanting to study for the FAR portion of the CPA Exam. There are so many fun things to do like house cleaning and Physics, okay maybe not physics… but not Marketable Securities either. I need inspiration.

[Rocky123]

Unfortunately, you just have to suck it up and do it. Concepts become easier over time.

The tallest oak in the forest was once just a little nut that held its ground.

AUD-PASS
BEC-PASS
REG-PASS
FAR-PASS

Rocky123, CPA

[Author]

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