Purchase price - (RE + equity) Equals the differential.
Differential gets adjust to zero by one of the following:
FV differences (increase or decrease underlying assets)
Goodwill (goes to BS and gets amortized over years)
Bargain (goes to RE)
Cost or Market Method
Investor acquires < 20% of investee's voting stock (insignificant influence)
- Investment account (Trading or Available for Sale)
- Any income (dividends is placed in "Other income")
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Equity Method
Investor acquires 20% – 50% of investee's voting stock (significant influence)
- Investment account stays
- Income share increases Investment acct balance
- Dividends decrease Investment acct balance
- Interco profit eliminated proportiionally
- Equity method applied
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Consolidation Method
Investor acquires > 50% of investee's voting stock (legal control).
- Investment account gets zero'd out.
- Common Stock eliminated
- RE eliminated
- Interco's elimininated
- Noncontrolling balance exists in Equity section of Parent
- Noncontrolling share of income shown below Total Income
- Books are consolidated
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