The Equity Method of Accounting for Investments 高级财务管理教学PPT课件.ppt

Equity Method – Applied(Continued…) Step 2: The investor recognizes its proportionate (pro rata) share of the investee’s net income (or net loss) for the period. Journal entry:(被投资方net income 增加比例） Debit – Investment in Investee Credit – Equity in Investee Income This will appear as a separate line-item on the investor’s income statement. 1-* Equity Method – Applied(Continued…) Step 3: The investor reduces the investment account by the amount of cash dividends received from the investee. Journal entry: Debit – Cash Credit – Investment in Investee 1-* Equity Method Example Little Company reported net income of $200,000 during 2019 and paid cash dividends of $50,000. These figures indicate that Little’s net assets have increased by $150,000 during the year. Big owns 20% of Little and records the following entries using the equity method. Investment in Little Company. . 40,000 Equity in Investee Income .. . . . . . . . . . 40,000 To accrue earnings of a 20 percent owned investee. 1-* Cash . . . . . . . . . . . . .. . . . . . 10,000 Investment in Little Company . .. . . . 10,000 To record receipt of cash dividend from investee. Excess of Cost Over Book Value of Acquired Investment When Cost Book Value of an investment acquired, the difference must be identified. 1-* LO 4 Assets may be undervalued because: Fair values (FV) of some assets and liabilities on investee’s books are different than book values (BV). Investor is willing to pay extra expecting future benefits to accrue from the investment. Additional amount paid in excess of book value not allocated to undervalued assets is attributed to an intangible future value and referred to as Goodwill. 1-* Let your Yes be Yes, No, No. Excess of Cost Over BV Acquired When Cost BV acquired, the difference must be identified. 1-* Excess of Cost Over BV Acquired(Continued…) The amortization of the difference associated with the undervalued assets is