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F. Often an investor's ability to significantly influence an investee is not achieved in a single stock transaction, but occurs sequentially. For example, the
F. Often an investor's ability to significantly influence an investee is not achieved in a single stock transaction, but occurs sequentially. For example, the investor could acquire 10% of the stock initially and would apply fair value accounting, but then later acquires another, say 12%, and now is required to apply the equity method. FASB ASC 323 addresses this issue and states that this change should be handled prospectively- that is, the cost of any new shares acquired are simply added to the current investment carrying amount, and the investor begins applying the equity method Example: Large Company acquires 10% of Small Company on 1/1/20 for $600,000. Large Company does not exert significant influence over Small Company and applies fair value accounting. In 2020, Small Company has $80,000 of net income and pays $25,000 in cash dividends. In 2021, Small Company has $100,000 of net income and pays $30,000 in cash dividends. Fair value of Large Company's investment in Small Company is $650,000 at the end of 2020 and $700,000 at the end of 2021. The journal entries to record the above events are as follows:
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