Equity Method

Question 1

How do we calculate goodwill under the Equity Method

Question 2

Net Identifiable Assets

Answer 2

Acquired companies Assets - Liabilities

Question 3

Equite Method Journal Entries

Question 4

Goodwill

Answer 4

BV of Assets - FMV of assets

Question 5

Why is the parent’s Investment in Subsidiary account eliminated in consolidation?

Answer 5

In consolidation, the parent and sub are treated as one single company.

The Investment in Sub on the parent’s books just represents ownership of the sub’s net assets.

But in the consolidated FS, you already include the sub’s actual assets and liabilities directly.

To avoid double counting, eliminate the parent’s Investment account against the sub’s equity.

At acquisition, replace it with:

The sub’s assets and liabilities at fair value,

Any goodwill created, and

Noncontrolling interest (NCI) if less than 100% ownership.

👉 Rule of thumb: Parent’s investment is always eliminated in consolidation — it never appears in the consolidated balance sheet.

Question 6

Why eliminate the parent’s Investment in Sub in consolidation?

Answer 6

Because the sub’s assets/liabilities are reported directly.
Entry:

Dr Sub’s equity (CS, RE)
Dr FV adjustments
Dr Goodwill
Cr Investment in Sub
Cr NCI

Question 7

How handle intercompany inventory still on hand?

Answer 7

Remove unrealized profit in ending inventory.
Entry:

Dr COGS
Cr Inventory

Question 8

How handle intercompany equipment sales?

Answer 8

Remove gain & fix depreciation.
Entry (year of sale):

Dr Gain on sale
Cr Accumulated depreciation
Cr Depreciation expense (excess)

Entry (future years):

Dr Accumulated depreciation
Cr Depreciation expense

Question 9

Who’s equity shows in consolidation?

Answer 9

Only the parent’s equity (plus NCI if <100%).

Question 10

How handle intercompany dividends?

Answer 10

Parent’s share is eliminated; only NCI share reduces NCI.
Entry:

Dr Dividend income (parent)
Dr NCI
Cr Dividends declared (sub)

Question 11

How handle intercompany receivables/payables?

Answer 11

Cancel them out — they’re internal.
Entry:

Dr A/P (or advances)
Cr A/R (or advances)

Question 12

What happens to unrealized intercompany profit in beginning inventory (next year)?

Answer 12

Reverse the prior year’s elimination.
Entry (at beginning of year):

Dr Inventory
Cr COGS

Question 13

What happens to the parent’s Investment in Sub and the sub’s equity in consolidation?

Answer 13

Both are eliminated. Sub’s assets & liabilities are reported directly, and equity is replaced by parent’s equity + NCI.

Question 14

How is goodwill (or bargain purchase gain) measured?

Answer 14

FVofsub(100%)−FVnetassets=Goodwill

If FV net assets > FV of sub → bargain purchase gain (recognized in income).

Question 15

Whose retained earnings appear in consolidation?

Answer 15

Only the parent’s RE. Sub’s RE is eliminated.

Question 16

How are intercompany sales eliminated?

Answer 16

Remove inside sale & purchase; defer unrealized profit in ending inventory.
Entry:

Dr Sales
Cr COGS
Dr COGS
Cr Inventory

Question 17

How are intercompany equipment sales handled?

Answer 17

Eliminate gain and adjust excess depreciation.
Entry (year of sale):

Dr Gain on sale
Cr Dep Exp (excess)
Cr Accumulated Dep

Subsequent years → only adjust Dep Exp & A/D.

Question 18

How are dividends handled?

Answer 18

Parent’s share is eliminated; only NCI’s share reduces NCI.