BU487 Lecture Notes - Lecture 2: Equity Method
Document Summary
Significant influence investments are accounted for using the equity method. Investor records its proportionate share of invotee investee income as its income and reduces the investment gains and losses by its share of dividend. Example: big buys 25 % of the voting shares of small for on jan 1 at y/e. Small reports net income of 40 and declares dividend of 20. The invest gains and losses will be show as follows: The purchase discrepancy (pd) is the difference between the cost of the investmet acquired and the book value of the investors share. The investor must attribute this pd to depreciable assets on a prorated basis and then amortized the difference. Any unallocated pd is reffered to as good will which is not recognized on the. B/s but is included as part of the investment account balance. Update investment account with investor"s share of investes change in re.
