4. assume that company a has invested 30 million in company b, and is accounting

Question

4. assume that company a has invested 30 million in company b, and is accounting for this investment using the equity method company a believes that it shares of the net book value of company b's assets equals 28 million and that the remaining 2 million of the purchase price relates to the excess of the fair value of certain patents over their book value. which of the following is a correct statement regarding how company a will treat this 2 million related to patents?

a. each year, over the life of the patents, company a will debit equity in investee income and credit its investment in company b for amortization of the 2 million. if the patents are impaired, the company will record an imairment loss.

b. company a will make no entry related to the 2 million in the future, unless the value of the patents are impaired.

c. company a will make no entry at all in the future related to the 2 million, whether or not the patents are impaired.

5. company a has an investment in company b, which it accounts for using the equity method. in 2016, company a sold some of its stock in company b, and properly begins accounting for its investment using the fair value method. which of the following statements are correct regarding how company a will account for this change?

a. company a must retroactively restate any prior year financial statements it presents, as if it had used the fair value method in those prior years

b. company a does not retroactively restate prior year financial statements.

6. which of the following is a correct statement regarding the FASB's rules for the "fair value option" for accounting for certain finanancial assets and liabilities?

a. companies that choose to use this option must use it for every investment they make

b. changes in the fair value of the investment are included in earnings for the sale

c. companies that use this method would not consider dividends from the investee as part of income.

d. the fair value option is not allowed for investments in the stock of other companies.

Explanation / Answer

The correct answer is (a) each year , over the life of the patents, company A will debit equity in investee income and credit its investment in company B for amortization of the 2 million. if the patents are impaired, the company will record an impairment loss.

Under the equity Method any excess over the book value paid for purchase is amortized. Company A will amortize the amount above book value (in our case company A has invested 30 million in company B however net book value of company B's assets equals 28 million and that the remaining 2 million of the purchase price relates to the excess of the fair value of certain patents over their book value) of the patent .In case the patent gets impaired, the company will record an impairment loss in such a case.

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