MGT120H5 Chapter Notes - Chapter 7: Controlling Interest, Equity Method, Book Value
CHAPTER 7-INVESTMENT AND TIME VALUE OF MONEY
SUMMARY:
• Non-strategic investments are initially recorded at cost and
subsequently reported on the balance sheet at fair value. Any
changes in value are recorded through net income (profit or loss,
short-term and long-term investments) or under “other
comprehensive income” (only long-term investments). The cost
method is used for investments where the market price is not
available.
• If the company (investor) owns between 20% and 50% of the
voting shares of the investee and exercises significant influence
over the investee, the equity method is used to account for the
investment. This means that the investor recognizes their share of
the investee’s net income as their own. The investor’s share of
dividends is treated as a return of investment. If the company
(investor) owns more than 50% of the investee’s shares and
exercises control over the investee, the financial statements of the
investee are consolidated (combined) with those of the investor.
The result is as if the parent and subsidiary are one company.
Goodwill and Non-controlling interest are two accounts that only a
consolidated entity would have. Goodwill results when a company
pays more for the subsidiary company than the fair value of the
subsidiary’s net assets. Non-controlling interest occurs when a
company buys less than 100% of the company they control.
• When a company buys a long-term investment in bonds, they are
recorded at the price paid. When there is a premium or discount,
the bonds are amortized to account for interest revenue and the
bond’s carrying amount. These bonds are reported on the balance
sheet at its amortized cost.
• Buying and selling long-term investments in shares and bonds are
reported under investing activities.
• Time value of money refers to the fact that money earns interest
over time, and it plays a key role in measuring the value of certain
long-term investments as well as long-term debt. Interest is the
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MGT120H5 Full Course Notes
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Document Summary
Summary: non-strategic investments are initially recorded at cost and subsequently reported on the balance sheet at fair value. Any changes in value are recorded through net income (profit or loss, short-term and long-term investments) or under other comprehensive income (only long-term investments). This means that the investor recognizes their share of the investee"s net income as their own. The investor"s share of dividends is treated as a return of investment. If the company (investor) owns more than 50% of the investee"s shares and exercises control over the investee, the financial statements of the investee are consolidated (combined) with those of the investor. The result is as if the parent and subsidiary are one company. Goodwill and non-controlling interest are two accounts that only a consolidated entity would have. Goodwill results when a company pays more for the subsidiary company than the fair value of the subsidiary"s net assets.
