Question

The Crump Companies, Inc. has ownership interests in several public companies. At the beginning of 2021, the company's ownership interest in the common stock of Silken Properties increased to the point that it became appropriate to begin using the equity method of accounting for the investment. The balance in the investment in equity securities account was $31 million at the time of the change. Accountants working with company records determined that the balance in an investment in equity affiliate account would have been $48 million if the equity method had been used previously.

Required:

1. Will Crump apply the new method retrospectively or apply the new method prospectively?

2. Suppose Crump is changing from the equity method rather than to the equity method.

Answer 1

1. Will Crump apply the new method retrospectively or apply the new method prospectively?

Retrospectively:

Crump will first need to adjust its current balance to reflect the change to equity method. Since the company holds different stocks, we must use the general investment in securities account for $48 million - $31 million = $17 million.

Dr Investment in securities 17,000,000

Cr Retained earnings 17,000,000

Then the previous balances must be adjusted but just for comparative purposes and disclose the reasons why the change took place in the footnotes.

2. Suppose Crump is changing from the equity method rather than to the equity method.

Prospectively:

It doesn't need to adjust anything (the carrying value remains the same), just disclose the change in the footnotes. The company just switches to the accounting method.