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Lecture 7

BU387 Lecture 7: Equity Method-slides
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Department
Business
Course
BU387
Professor
John Czubak
Semester
Winter

Description
Strategic Investments  Classifications and accounting methods Holding Method a < 20%: passive interest Fair Value b 20% - 50%: significant interest Equity Method c > 50%: controlling interest Consolidation  Other factors to consider: -representation on the board of directors -participation in policy-making process -material intercompany transactions/provision of technical information, etc. 1 Equity Method  Initial recognition: at acquisition cost  During holding period, investment account balance: - increased by the share of the investee’s net income - decreased by the share of the investee’s dividends  End of fiscal year: - No fair value adjustment  Disposal - recognize gain or loss on sale (“Other expenses and losses” section on I/S) Proceeds – carrying amount = gain or loss Economic substance rather than the legal form - Investment account reflects the investor’s equity in the underlying net assets of the investee 2 Equity Method - Example On Jan.1, 2017, ABC buys 40% of the voting shares of XYZ for $100,000 cash. In 2017, XYZ has earnings of $30,000 and pays dividends of $10,000. If the investment is accounted for by the equity method, ABC will make the following entries on Dec. 31, 2017: To record ABC’s share of XYZ’s net income: To record receipt of dividends from XYZ: • Following the two entries for 2017, the investment account in XYZ will reflect the following: 3 Equity Method - Example On Jan.1, 2017, ABC buys 40% of the voting shares of XYZ for $100,000 cash. In 2017, XYZ has earnings of $30,000 and pays dividends of $10,000. If the investment is accounted for by the equity method, ABC will make the following entries on Dec. 31, 2017: To record ABC’s share of XYZ’s net income: Investment in XYZ 12,000 Investment income ($30,000 ´ 40%) 12,000 To record receipt of dividends from XYZ:
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