M351_Notes-Day_20_Equity_method_2

M351_Notes-Day_20_Equity_method_2 - M351 Notes Class 20...

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M351 Notes, Class 20, Equity Method, Impairments, Category Transfers, pp. 850-862 A. Accounting using the equity method: When a company purchases shares of another company’s common stock, the investment is recorded at cost. For example, assume an investor company purchased 30% of the common stock of ABC Company (the investee) for $600,000 cash: Investment in ABC. .............................................. 600,000 Cash. ............................................................... 600,000 When the investee company earns net income , the investor company records its share by increasing the investment account and by increasing a revenue account. For example, assume the investee, ABC Company, earns $70,000 of net income. The investor company makes the following entry: Investment in ABC Company (30% x $70,000). .. 21,000 Revenue from investment. ............................. 21,000 When the investee company has a net loss , the investor company records its share by decreasing the investment account and by decreasing a loss
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M351_Notes-Day_20_Equity_method_2 - M351 Notes Class 20...

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