Equity Method: Investment in Associates (20% - 50%) & Joint Venture

Equity Method

the investor’s share of asset and liability of the investee is a single line item on the balance sheet; revenue and expense is a single line item on income statment

How is dividends treated

It is treated as return of capital and reduces the carrying amount of the investment. It is not reported in the investor’s profit and loss

Equity Method Balance Sheet Formula

Equity method income statement

% of investee’s reported income - amortization of excess purchase price + % of realized profit - % of unrealized profit

What happens to the investor’s total equity when equity method is used

no change is equity

Equity method’s impact on ratios

Equity method results in 1)lowest asset & liability 2)lower leverage ratio 3) higher earning 4)higher profit margin

impairment loss formula

recoverable amount - covering amount