Kaplan Exam 2, PM Q13: I am not listing the numbers here, this is a strictly conceptual question for my learning purposes:
Info: Hope Manufacturing has recently stated its intention to acquire a 20% stake in Levitt Industries for $185 million cash. Both companies are U.S. companies that follow U.S. GAAP.
Explanation: The accounting for an ownership interest of between 20% and 50% in an associate is handled using the equity method. Under the equity method, the initial investment is recorded at cost and reported on the balance sheet as a noncurrent asset. Because the acquisition in this case is fully funded by cash, there will be no change to total assets for Hope.
My Q : I was under an impression that for purchases of 20-50% with influence but no control (regardless of whether its stock or cash) you wold use the Equity Method?
Equity method should be used, yes. On applying equity method, the Inv in Levitt account on Hope’s B/S increases by $185, however, cash on Hope’s B/S decreases by the same amount, leaving total assets unchanged.
I don’t understand your question tbh. It doesn’t say anywhere that because it is funded by cash, the acquisition is recorded using the equity method.
As you correctly stated, no matter how the acquisition if financed, you will always account for it using the equity method, as long as you have significant influence but no control or shared control (Joint Venture).
This is just just an excerpt and does not contain all the info as I stated. The question does say it was financed by cash. And yes, I agree we use the Equity Method and Assets stay unchanged.