Acc 4100, Chapter 1: The Equity Method of Accounting for Investments

To record acquisition

Dr. investment in company xxx
Cr. Cash xxx

Fair value

Control (through variable interests) (Primary beneficiary status (no ownership required), Accounting method: consolidated financial statements  Cost method: used for equity investments where the ________ is not readily determinable  ________ method: used for all equity investments in which the investor does NOT have the ability to significantly influence the investee  Equity Method is used for investments where the company is deemed to have "significant influence "(20 %- 50 %) over their investment.

To record net income

Dr. investment in company xxx
Cr. Equity in investee income xxx

defer

xxx xxx

To record dividends

Dr. dividends receivable (or cash) xxx
Cr. Investment in company xxx

To record excess depreciation

(Amount undervalued * %)/useful life

Dr. equity in investee income xxx
Cr. Investment in company xxx

To record a loss

Flip the entry!

Dr. equity in investee xxx
Cr. Investment in company xxx

Suppose the carrying value of an equity investment is $1,300,000 and it is determined that the fair value of the equity has permanently declined to $1,000,000. The reduction in fair value is reported as

Dr. impairment loss on equity method 300,000
Cr. Investment in company 300,000

To record OCI

Dr. investment in small company xxx
Cr. Equity in investee income xxx
Cr. OCI from equity method investment xxx

To record sale of shares

Dr. cash xxx
Cr. Gain on sale of investment xxx
Cr. Investment in small xxx

To determine amount of unrealized profit to defer

($ sold * %) * % unsold * % ownership

To record deferral of the unrealized profit

Dr. equity in investee income xxx
Cr. Investment in small xxx

How do we record goodwill under the equity method?

We do not record goodwill under the equity method. Ignore it!