Question 1

Case #1. You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

Case #2. How would a change be made from the equity method to the fair value method?

Case #3. The IASB issued accounting guidance to clarify accounting methods and procedures with respect to debt and equity investments. An important part of the statement concerns the distinction between held-for-collection debt investments, trading debt and equity investments, and non- trading equity investments.

Required:

(a) Why does a company maintain investment portfolios for these different types of investments?

(b) What factors should be considered in determining whether investments should be classified as held-for-collection, trading, or non-trading? How do these factors affect the accounting treatment for unrealized losses?

Case #4. Wolf Pack Transport Co. has a 25 percent equity investment in Maggie Valley Depot (MVD), Inc., which owns and operates a warehousing facility used for the collection and redistribution of various consumer goods. Wolf Pack paid $1,685,000 for its 25 percent interest in MVD several years ago, including a $300,000 allocation for goodwill as the only excess cost over book value acquired. Wolf Pack Transport has since appropriately applied the equity method to account for the investment. In its most recent balance sheet, because of recognized profits in excess of dividends since the acquisition, Wolf Pack reported a $2,350,000 amount for its Investment in Maggie Valley Depot, Inc., account. However, competition in the transit warehousing industry has increased in the past 12 months. In the same area as the MVD facility, a competitor company opened two additional warehouses that are much more conveniently located near a major interstate highway. MVDs revenues declined 30 percent as customers shifted their business to the competitors facilities and the prices for warehouse services declined. The market value of Wolf Packs stock ownership in MVD fell to $1,700,000 from a high last year of $2,500,000. MVDs management is currently debating ways to respond to these events but has yet to formulate a firm plan.

Required

1. What guidance does the FASB ASC provide for equity method investment losses in value?

2. Should Wolf Pack recognize the decline in the value of its holdings in MVD in its current year financial statements?

3. Should Wolf Pack test for impairment of the value it had initially assigned to goodwill?

Case #5. Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

Case #6. How is the goodwill impairment process simplified for private companies?