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Category: Business and Industry
Date Submitted: 02/20/2016 08:08 AM
SAMPLE ACCOUNTING ISSUES MEMO
Memorandum
To: Investor, Inc. Accounting Files
From: Student name
Date: xx/xx/xxxx
Re: Accounting for investment in ABC Corp
Facts
Investor, Inc. (“Investor”) recently purchased 15% of the outstanding common stock of ABC
Corp, a nonpublic company, for $3 million. Along with this purchase, Investor was also given
the ability to appoint five new members (out of ten total members) to ABC Corp's Board of
Directors. Additionally, Investor will be leading a restructuring (such as a refinance) of ABC
Corp's current outstanding debt, as a condition of its equity investment.
Issues
1. Should Investor account for its investment under the cost method, or under the equity method?
2. How should Investor initially record its investment?
Analysis – Issue 1: Should Investor account for its investment under the cost method, or
under the equity method?
Investor has evaluated the appropriate accounting treatment for its investment in 15% of ABC
Corp's stock. Because this is a noncontrolling (less than 50%) ownership interest, two
alternatives were considered: 1) Account for the investment under the "cost method", or 2)
Account for the investment under the "equity method".
Use of the cost method is addressed in ASC 325-20-05-2 and 05-3 ("Investments - Other, Cost
Method Investments"), as follows:
05-2. Investments are sometimes held in stock of entities other than subsidiaries, namely corporate joint
ventures and other noncontrolled entities. These investments are accounted for by one of three
methods—the cost method (addressed in this Subtopic), the fair value method (addressed in Topic 320),
and the equity method (addressed in Topic 323).
05-3. While practice varies to some extent, the cost method is generally followed for most investments in
noncontrolled corporations, in some corporate joint ventures, and to a lesser extent in unconsolidated
subsidiaries, particularly foreign.
The guidance above indicates that the cost...