Question

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Choose at least two concepts from the following: equity method, fair value method, partnership, corporation, bankruptcy chapter 7, bankruptcy chapter 11, subsidiary, parent company, consolidation of financial statements, trust, estates, liquidation, partnerships termination, estates tax, acquisition, variable interest entity, EPS, income tax, reorganization.

Required

Explain how you may use them in your present or future accounting position. Make sure you provide details to include how each concept will help you support the financial goals of the company you currently work for or will work for in the future.

Answer 1

Equity Method: Equity method is method of valuation of investments made by entity and the returns earned thereon. It is applied during consolidation of financial statements by parent company where the investor (parent company) holds significant influence on the investee (associate company). The term significant influence is not defined any where but giving due weightage to other factors, holding of 20% of more of the total capital of the investee by investor is an indicator of existence of significant influence. Under this method, the investor should consider its proportion of share of investee's equity and also proportionate share of profit or loss from overall profit or loss of investe is added or reduced respectively to the investor's share of investee's equity and the value of investment as on date of consolidation is obtained.

Fair Value Method: Fair Value method of investment is usually adopted when the investor neither have control, nor significant influence on the investee. In fair value method, investments are valued initially at cost of acquisition. Later the value can be adjusted to the prevelant fair value ('fair value' is the value at which two unrelated, knowledgeable and willing parties agree to exchange a particular asset. Usually prevelant market price will be the best measure of fair value) periodically and the respective of profit or loss out of such adjustment should be recognized. The application of this method is particularly difficult if the market value or fair value of the investment under consideration is not readily available. For example, unlisted share do not have ready made information about the market value of the share.