[stephw4763]

I am studying for the FAR section with Becker and I am confused about something that I do not think the book explained very well. It is in the section with the equity method.

Big Corporation acquires a 40% interest in Small for $300,000. Equity (net assets) have a BV of $550,000 and a FV of $600,000. THe difference between the BV and FV relates to equipment being depreciated over a remaining useful life of ten years.

Journal entry to record deprecation on undervalued equipment (20,000 / 10 yrs):

Equity in investee income 20,000

Investment in Small Co. 20,000

I do not understand that journal entry at all. Why is it decreasing the investment in Small Co? Any help at all to explain this would be helpful. Thanks

B- 82
A- 84
R- 67, 72, 78
F- 83

[Mahina]

I think of it this way. You pay more for the company because it's worth a little more than it says. Due to the fact that the worth doesn't stay since it is depreciating, your investment is worth a little less each time. So you lower the investment to show this.

BEC - 85
FAR - 85
REG - 82
AUD - 68, 88

[Jeremy]

That's the right way to think about it but I would like to add one caveat, this only applies if the differences arises from the difference in the NBV and FMV of the assets (and theoretically the liabilities). Any other difference is goodwill, which does not get depreciated.

B- 8/13/2012- 92
A- 7/19/2012- 83
R- 5/30/2012-82
F- 7/3/2012- 90

[stephw4763]

Great– thank you all so much!

B- 82
A- 84
R- 67, 72, 78
F- 83

[Author]

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