中级会计Chap07-3.pptVIP

7 - * 7 - * Equity method The investor has significant influence over the investee: 20% Equity ownership 50% The company will use “equity method” to record the investment. Equity method Four events under equity method: Purchase of investment Recording investment revenue Receiving cash dividends Making adjustments on net income Case study Illustration 7-6 United Intergroup purchased 30% of Arjent’s common stock for $1,500,000 cash. Book value of Arjent’s net assets=$2,100,000 Fair value of Arjent’s net assets=$3,600,000 30% of the company=$1,500,000 30% of Fair value of Arjent’s net assets =$3,600,000 *30%=$1,080,000 Goodwill=$1,500,000-$1,080,000=$420,000 Six events Purchase of investment Dr. Investment Cr. Cash Illustration 7-6 Dr. Investment 1,500,000 Cr. Cash 1,500,000 Six events Recording investment revenue Investment revenue =investee’s net income × n% n%: the investor’s percentage share Dr. Investment Cr. Investment revenue Case study Illustration 7-6 Arjent’s 2011 net income: $500,000 n%=30% Investment revenue =$500,000×30%=$150,000 Dr. Investment 150,000 Cr. Investment revenue 150,000 Six events Receiving dividends Dr. Cash Cr. Investment Case study Illustration 7-6 Arjent’s 2011 dividends: $250,000 Our company’s dividends =$250,000×30%=$75,000 Dr. Cash 75,000 Cr. Investment 75,000 Six events 4. Making adjustments on net income If the fair value is not equal to book value of the investee, the investor should adjust its share of the investee’s net income. Six events Adjustments for tangible assets Tangible assets: building, equipment, machine… When fair value of tangible asset ≠ book value of tangible asset, we must adjust our investment revenue for additional depreciation expense. Six events Adjustments for tangible assets If FV of the assetBV of the asset Additional depreciation expense =(FV-BV) × depreciation rate × n% n%: the investor’s percentage sha