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The Equity Method
The equity method of accounting for investments is used for strategic investments where the investor owns between 20% and 50% of the investee's shares.
Recording the Acquisition
- Debit asset account titled Stock Investments
- Includes all costs related to acquisition
- Example: Price of shares, brokerage fees, commissions
Recording Dividends
- Dividends are credited to Stock Investments asset account
Recording Investee Revenue
- Investor's portion of investee revenue added to Stock Investments asset account
- Recorded as Revenue from Stock Investments
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Example: Equity Method
Karlini Company had the following transactions pertaining to stock investments
Feb 13: Purchased 30,000 of the 80,000 outstanding common shares of Aquablu Inc.'s stock for $11 per share and paid 2% in brokerage fees.
Aug 23: Aquablu paid a $250,000 cash dividend to its common shareholders.
Dec 31: Aquablu reported annual income of $400,000.
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Example: Equity Method
On July 1st, Carleton Co. purchased 48% of Williams Company's 1,000,000 outstanding common shares for $800,000 plus $20,000 in brokerage fees. On August 5th, Williams Company pays a $0.45 per share cash dividend. On Sep 30, Williams Company reports quarterly earnings of $270,000.
What is the balance of Carleton Co.'s Stock Investments account on September 30th?
Practice: Equity Method
Ethan Company had the following transactions in the month of April:
- Apr 4: Purchased 30% of the 300,000 shares of common stock in Noah Corp for $35 per share plus 5% in brokerage fees.
- Dec 31: Noah Corp declared and paid a $800,000 cash dividend and reported earnings of $1,400,000.
Prepare the journal entries to record the transactions described above.
To record the acquisition on April 4th.
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Equity Method
On March 18th, 2020 Moran Inc. purchased 50% of Libby Co.'s 200,000 shares for $700,000 plus $15,000 in brokerage fees. On June 30th, Libby Co. declared and paid cash dividends of $150,000 to its common shareholders and reported income of $220,000.
What amount would be recorded on Moran Inc.'s balance sheet?