Video: Equity method investments - Practice Questions

In this lesson, follow along with Nick Palazzolo, CPA, as he works through a set of practice questions focusing on equity method investments. Nick dives into the nuances of determining significant influence over investee companies, using illustrative examples of board representation and managerial exchanges to clarify the concept. He then shifts gears to crunch numbers on an actual equity method scenario, reinforcing how to record the effects of net income and dividends on the investment account. Whether it's deciphering multiple choice questions or calculating the final investment balance, this lesson demystifies the equity method step by step, ensuring all the key points are well understood and nothing is overlooked.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Welcome back everyone to another multiple choice question review video. In this chapter today we have equity method investments. Let's jump in. Which of the following factors would not be an indicator of an investor's ability to exercise significant influence over the operating and financial policies of an investee? Let's think about why this is important. Always important to bring this to your mind. Why are we doing what we're doing? I mean there are some things on this test. Sure I don't have a straight answer for you as to why. Most things I do. In this case it's important because if you have significant influence over an investee then you're going to use the equity method. Pretty important for a chapter called the equity method. Do you have significant influence if there is interchange of managerial personnel between investor and investee? Gosh that's a mouthful. Well think about it. If you can interchange those running a company between both companies, yeah I'd say that's pretty much significant influence right? Like if I buy two shares of Apple stock I can't start switching up the management at Apple. That's just not how it works. But if you're able to do that it probably means that you have significant influence. Meaning that's not the answer to our question here. Next investor representation on the investee board of directors. If I run Microsoft and Microsoft is able to assign members to the board of directors of Stripe, the payment processor, then yeah that's significant influence right? That's pretty much a good amount of control. Like I can really control that if I put members on the board of directors. So that's going to be an indicator and thus not our answer. What about investor recommendation for the investee to hire a

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