Reporting Intercorporate Interests: Douglas Cloud

4-1
Baker / Lembke / King
Reporting
Intercorporate
Interests 2
Electronic Presentation
by Douglas Cloud
Pepperdine University
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
2-2
Reporting Intercorporate Interest
• This chapter presents the accounting and

reporting procedures for investments in
common stock and for selected other types
of interests in other entities.
2-3
• Some companies invest in other companies

simply to earn a favorable return by taking
advantage of potentially profitable situations.
• As indicated in the next slide, there are

various other reasons that companies
invest in other companies.
2-4
• Reasons Companies Invest in Other

Companies:
• Gain control over other companies
• Enter new market or product areas
through companies established in those
areas
• Ensure a supply of raw materials or
other production inputs
[continued on next slide]
2-5
• Ensure a customer for production output

• Gain economies associated with greater
size
• Diversity
• Gain new technology
• Lessen competition
• Limit risk
2-6
• Examples of intercorporate investments include:

• Carrefour’s acquisition of a sizable portion
of PT Alfa Retailindo ’s stock to gain a
larger market share in retail industry.
• Phillip Morris’ purchase of the stock of PT
HM Sampoerna to enter cigarette indusry in
Indonesia.
2-7
Investments in Common Stock
• The method used to account for investments

in common stock depends on the level of
influence or control that the investor is able to
exercise over the investee.
2-8
Level of Common Stock Ownership
0% 20% 50% 100%
Influence not Significant Control

significant influence
Cost Equity Consolidation

Method Method
2-9
• The level of influence is the primary factor

determining whether the investor and
investee will present consolidated financial
statements or the investor will report the
investment in common stock in its balance
sheet using either the cost method (adjusted
to market value, if appropriate) or the equity
method.
2-10
• Consolidation involves the combining for

financial reporting the individual assets,
liabilities, revenues, and expenses of two or
more related companies as if they were part
of a single company.
2-11
• This process includes the elimination of all

intercompany ownership and activities (such
as intercompany sales and purchases, and
intercompany loans).
2-12
• Consolidation is normally appropriate where

one company, referred to as the parent,
controls another company, referred to as the
subsidiary.
2-13
• An unconsolidated subsidiary should be

reported as an investment on the parent’s
balance sheet. Unconsolidated subsidiaries
are relatively rare.
• The specific requirements for consolidation

are discussed in Chapter 3.
2-14
• The equity method is used for external

reporting when the investor exercises
significant influence over the operating and
financial policies of the investee and
consolidation is not appropriate.
2-15
• The equity method may not be used in place

of consolidation when consolidation is
appropriate, and therefore its primary use is
in reporting nonsubsidiary investments.
• The equity method is used most often when
one company holds between 20 and 50
percent of another company’s common stock.
2-16

• The cost method is used for reporting
investments in equity securities when both
consolidation and equity-method reporting
are inappropriate under PSAK No. 15.
• If cost-method equity securities have readily

determinable fair values, they must be
adjusted to market value at year-end.
2-17
Accounting During the Year

Versus Reporting at Year End
• Under normal circumstances, companies

using the cost or equity method for financial
reporting purposes “at year end” also use that
method for accounting for the investment on
their books “during the year.”
2-18
Accounting During the Year

Versus Reporting at Year End
• As discussed next, this is not the case with

respect to companies required to consolidate
their investments in subsidiaries for financial
reporting purposes.
2-19
Accounting During the Year Versus

Reporting at Year End--Continued
• When consolidated financial statements are

prepared for financial reporting purposes “at
year end,” the parent still must account for
the investment in the subsidiary ”during the
year” (on its books)
2-20
Accounting During the Year Versus

Reporting at Year End--Continued
• Using the cost or equity method even though

the intercorporate investment and related
income must be eliminated in preparing the
consolidated statements “at year end.”
2-21
Cost Method—Influence Not Significant

(0 to 20 percent)
• Intercorporate investments accounted for by

the cost method are carried by the investor at
historical cost.
2-22

(0 to 20 percent)
• Income is recorded by the investor when

dividends are declared by the investee.
• The cost method is used when the investor
lacks the ability either to control or to exercise
significant influence over the investee.
2-23
Cost Method—influence Not Significant

(0 to 20 percent)
• At the time of purchase, the investor records

its investment in common stock at the total
cost incurred in making the purchase.
2-24
Cost Method—influence Not Significant

(0 to 20 percent)
• After the time of purchase, the carrying

amount of the investment (i.e., the original
cost) remains unchanged under the cost
method until the time of sale (or unless there
is a liquidating dividend—more on this later).
2-25

(0 to 20 percent)
• Once the investee declares a dividend, the

investor has a legal claim against the
investee for a proportionate share of the
dividend and realization of the income is
considered certain enough to be recognized.
2-26

(0 to 20 percent)
• Recognition of investment income before a

dividend declaration is considered
inappropriate because the investee’s income
is not available to the owners until a dividend
is declared—dividends do not accrue!!!
2-27
Cost Method—Example
• PT ABC purchases 20 percent of PT XYZ

Company’s common stock for Rp100,000,000
the beginning of the year but does not gain
significant influence over PT XYZ.
Investment in PT XYZ
Company Stock Rp100,000,000
Cash Rp100,000,000
2-28
Cost Method—Example
• During the year, PT XYZ has net income of

Rp50,000,000 and pays dividends of Rp20,000,000.
Cash (Rp 20,000,000 X .20) Rp 4,000,000

Dividend Income Rp 4,000,000
NOTE: Liquidating dividends are discussed next.

2-29
Cost Method—Liquidating Dividends
• All dividends declared by the investee--in excess

of its earnings since acquisition by the investor--
are viewed by the investor as liquidating
dividends.
• In the previous example, if PT XYZ had no

earnings, all dividends would have been viewed
by PT ABC as liquidating dividends.
[Continued on next slide.]
2-30
Cost Method—Liquidating Dividends
• In turn, “Investment in PT XYZ Stock” would be

credited in lieu of “Dividend Income.”
Cash (Rp 20,000,000 X .20) Rp 4,000,000

Investment in PT XYZ
Common Stock Rp 4,000,000
2-31
Liquidating Dividends Illustrated

On
On January
January 2,
2, 20X1,
20X1, PTPT Investor
Investor purchases
purchases 10
10
percent
percent of
of PT
PT Investee’s
Investee’s common
common stock.
stock. PT
PT
Investee’s
Investee’snet
net income
income isis Rp100,000,000
Rp100,000,000 and
and
dividends
dividends paid
paid total
total Rp
Rp 70,000,000.
70,000,000.
Cash 7,000,000
Dividend Income 7,000,000
Record receipt of 20X1 dividend from PT Investee.
10% of $70,000
2-32
On
On January
January 2,
2, 20X2,
20X2, PT
PT Investee’s
Investee’s net
net income
income isis
Rp100,000,000
Rp100,000,000 and
and dividends
dividends paid
paid total
total
Rp120,000,000.
Rp120,000,000. Thus,
Thus, PT
PT Investee
Investee had
had cumulative
cumulative net net
income
income of
of Rp200,000,000
Rp200,000,000 andand paid
paid cumulative
cumulative
dividends
dividends of
of Rp190,000,000.
Rp190,000,000.
Cash 12,000,000
Dividend Income
12,000,000
10% of
Rp120,000,000
2-33

For
For 20X3,
20X3, PT
PT Investee’s
Investee’s net
net income
income isis
Rp100,000,000
Rp100,000,000 andand Rp120,000,000
Rp120,000,000 in in dividends
dividends are
are
declared
declared and
and paid.
paid. Cumulative
Cumulative net
net income
income isis now
now
Rp300,000,000
Rp300,000,000 andand cumulative
cumulative dividends
dividends paid
paid total
total
Rp310,000,000.
Rp310,000,000.
Cash 12,000
Investment in PT Investee Stock 1,000
Dividend Income 11,000
10% of
10% x(Rp310,000
Rp120,000,000
(Rp120,000,000
,000- -
Rp300,000,000)
Rp10,000,000)x 10%
2-34
The Equity Method—Significant

Influence (20 to 50 percent)
• PSAK 15 provides the professional guidance

regarding the equity method. The equity
method of accounting for intercorporate
investments in common stock is intended to
reflect the investor’s changing equity or
interest in the investee.
2-35

• PSAK 15 establishes a 20 percent rule

because assessing the degree of influence
may be difficult in some cases.
2-36
Equity Method—Significant Influence
• Because of the ability to exercise significant

influence over the policies of the investee,
realization of income from the investment is
considered to be sufficiently assured to
warrant recognition by the investor as the
income is earned by the investee.
2-37
Equity Method—Significant Influence
• This differs from the case in which the

investor does not have the ability to
significantly influence the investee and the
investment must be reported using the cost
method; in that case, income form the
investment is recognized only upon
declaration of a dividend by the investee.
2-38

• Unless proven otherwise, an investor holding

20 percent or more of the voting stock is
presumed to have the ability to influence the
investee.
2-39

• The equity method is a rather curious one in

that the balance in the investment account
generally does not reflect either cost or
market value, nor does the balance
necessarily represent a pro rata share of the
investee’s book value.
2-40

• Under the equity method, the investor
records its investment at the original cost.
• This amount is adjusted periodically for

changes in the investee’s stockholders’
equity occasioned by the investee’s profits (or
losses) and dividend declarations.
2-41

• Reported by • Effect On Investor:
Investee:
– Record income (loss)
from investment and
– Net Income
increase (decrease)
(Loss)
investment account.
– Record asset (cash or

– Dividend receivable) and decrease
Declaration investment account.
2-42
The Equity Method—Equity Accrual
Assume PT ABC acquires significant

influence over PT XYZ by purchasing 20
percent of the common stock of the PT XYZ
at the beginning of the year. PT XYZ reports
income for the year of Rp60,000,000. PT
ABC records its Rp12,000,000 share of PT
XYZ’s income with the following entry:
2-43
The Equity Method—Equity Accrual
Investment in PT XYZ Stock

(Rp60,000,000 X .2) Rp12,000,000
Income from Investee Rp12,000,000
2-44
Equity Method—Recognition of
Dividends
• Dividends from an investment are not
recognized as income under the equity
method because the investor’s share of
the investee’s income is recognized as
it is earned by the investee.
2-45
Dividends
• Instead, such dividends are viewed as
distributions of previously recognized
income that already has been capitalized
in the carrying amount of the investment.
2-46
Dividends
In effect, all dividends from the investee are

treated as liquidating dividends under the
equity method. Thus, if PT ABC owns 20
percent of PT XYZ’s common stock and PT
XYZ declares and pays a Rp20,000,000
dividend, the following entry is recorded on
the books of PT ABC to record its share of
the dividend:
2-47
Dividends
Cash (Rp20,000 ,000X .20) Rp4,000,000

Investment in PT XYZ Stock Rp4,000,000
2-48
Equity Method—
Acquisition at Interim Date
• When an investment is purchased, the
investor begins accruing income from the
investee under the equity method at the date
of acquisition.
• No income earned by the investee before the

date of acquisition of the investment may be
accrued by the investor.
2-49
Equity Method—Acquisition at Interim

Date (Continued)
• When the purchase occurs between balance

sheet dates, the amount of income earned by
the investee from the date of the acquisition
to the end of the fiscal period may need to be
estimated by the investor in recording the
equity accrual.
2-50

Date (Continued)
• For example, if the acquisition (20 percent

interest) was transacted on October 1 and
the investee earned Rp60,000,000 for the
entire year, the investor would have an equity
accrual of Rp3,000,000 (i.e., Rp60,000,000 X
.20 X 3/12 = Rp3,000,000).
2-51

Date (Continued)
WARNING: Watch out for “liquidating
dividends” when acquisitions
are transacted at interim dates.

2-52
Investment Cost Versus

Underlying Book Value
• When one corporation buys the common
stock of another, the purchase price normally
is based on the market price of the shares
acquired rather than the book values of the
investee’s assets and liabilities.
2-53

• As a result, there often is a difference
between the cost of the investment to the
investor and the book value of the investor’s
proportionate share of the underlying net
assets of the investee.
• This difference is referred to as a differential.
2-54

• The differential represents the amount paid

by the investor in excess of the book value of
the investment and is included in the
investment amount.
2-55

• Hence, the amortization or reduction of the
differential involves the reduction of the
investment account.
• At the same time, the investor’s net income
must be reduced by an equal amount to
recognize that a portion of the amount paid
for the investment has expired.
2-56

• There are several reasons the cost of an

investment might exceed the book value
of the underlying net assets and give rise
to a positive differential.
2-57

• One reason is that the investee’s assets

may be worth more than their book value.
• Another reason could be the existence of
unrecorded goodwill associated with the
excess earning power of the investee.
2-58

• Purchase differentials related to a limited life

asset (e.g., equipment) should be amortized
over the life of the related asset.
2-59

• If the purchase differential has a debit

balance, the equity method entry to amortize
the purchase differential will be the opposite
of the “equity accrual” entry, that is, with
respect to the accounts debited or credited.
• Examples are provided on next slide.
2-60

• Any portion of the differential that is related to
land is not amortized since land has an
unlimited life.
• Any portion of the differential that represents
goodwill (referred to as equity method
goodwill) is neither amortized nor written
down for impairment.
2-61

• However, an impairment loss on the
investment itself should be recognized if it
suffers a decline in the value that is other
than temporary.
2-62
Equity Method--Cost Exceeds Book

Value
PT
PTAndika
Andika purchases
purchases 40 40 percent
percent of
of the
the common
common
stock
stock of
of PT
PT Barata
Barata onon January
January 1, 1, 20X1,
20X1, for
for
Rp200,000,000.
Rp200,000,000. PTPT Barata
Barata hashas net
net assets
assets with
with aa book
book value
value
of
of Rp400,000,000
Rp400,000,000 and
and aa fair
fair value
value ofof Rp465,000,000.
Rp465,000,000.
Cost of investment to PT Andika Rp200,000,000

Book value of PT Andika ’s share of
PT Barata’s net assets
(.40 x Rp400,000,000) (160,000,000)
Differential Rp 40,000,000
2-63
Equity Method--Cost Exceeds Book Value
Cost of Investment
Rp200,000,000 Excess of cost over
fair value of net
identifiable assets
Rp14,000,000
Fair value of net
identifiable assets
Total differential
(40% x
Rp40,000,000
Rp465,000,000) Excess of fair value
Rp186,000,000 over book value of
net identifiable
Book value of net assets
identifiable assets Rp26,000,000
(40% x
Rp400,000,000)
Rp160,000,000
2-64
PT
PTBarata
Barata reports
reports net
net income
income of
of Rp80,000,00
Rp80,000,00 in
in 20X1.
20X1.
Investment in PT Barata Stock 32,000,000
Income from Investee 32,000,000
Record equity-method income.
40% x
Rp80,000,000
2-65
PT
PT Barata
Barata reports
reports net
net income
incomeof
of Rp80,000,000
Rp80,000,000 in
in 20X1.
20X1.
Record equity-method income.
PT
PT Barata
Barata declares
declares and
and pays
pays aadividend
dividend of
of
Rp20,000000
Rp20,000000 inin 20X1.
20X1.
Cash 8,000,000
Record dividend from PT Barata.
40% x
Rp20,000,000
2-66
The
TheRp40,000,000
Rp40,000,000excess
excesspaid
paidbyby PT
PTAndika
Andikaisisassigned
assignedto
to
Land,
Land,Rp6,000,000,
Rp6,000,000,Equipment,
Equipment,Rp20,000,000,
Rp20,000,000,andandGoodwill,
Goodwill,
Rp14,000,000.
Rp14,000,000. Equipment
Equipmentand
andgoodwill
goodwill are
areamortized,
amortized,but
but
land
landisisnot.
not.
Equipment (Rp20,000,000 ÷ 5 years) Rp4,000,000

Amortize differential.
2-67
Equity Method--Disposal of Assets

IfIfPT Baratahad
PTBarata hadpurchased
purchasedthe
theland
landin
in20X0
20X0for
for Rp5,000,000
Rp5,000,000and and
sells
sellsthe
theland
landin
in20X2
20X2for
forRp125,000,000.
Rp125,000,000.PT Baratarecognizes
PTBarata recognizesaa
gain
gainononthe
thesale
saleof
ofRp50,000,000,
Rp50,000,000,andand PT
PTAndika’s
Andika’sshare
shareisis
Rp20,000,000
Rp20,000,000(40%).
(40%).
PT Andika’s share of PT Barata 's reported gain Rp20,000,000
Portion of PT Andika’s differential related to land (6,000,000)
Gain to be recognized by PT Andika Rp14,000,000

Remove differential related to PT Barata’s land sold.
2-68
Equity Method--Purchase Additional Shares
PT
PT ABC
ABC purchases
purchases 20 20 percent
percent of
of PT
PT XYZ’s
XYZ’s common
common
stock
stock on
on January
January 2,
2, 20X1,
20X1, and
and another
another 10
10 percent
percent on
on
July
July 1,
1, 20X1,
20X1, and
and the
the stock
stock purchases
purchases are
are at
at book
book value.
value.
Income, January 2 to June 30: Rp25,000,000 x .20 Rp 5,000,000

Income, July 1 to December 31: Rp35,000,000 x .30 10,500,000
Income from Investment, 20X1 Rp15,500,000
Investment in PT XYZ Stock 15,500,000

Income from Investee 15,500 ,000
2-69
Equity Method--Purchase Additional Shares
PT
PT XYZ
XYZ declares
declares and
and pays
pays aa Rp10,000,000
Rp10,000,000
dividend
dividend on
on January
January 15
15 and
and again
again on
on July
July 15.
15.
January 15 dividend: Rp10,000,000 x .20 Rp 2,000,000

July 15 dividend: Rp 10,000,000 x .30 3,000,000
Reduction in Investment, 20X1 Rp 5,000,000
January 15, 20X1
Cash 2,000,000
July 15, 20X1
Cash 3,000,000
2-70
Equity Method--Change to Equity Method

PT
PT Aroma
Aroma purchases
purchases 15
15 percent
percent of
of PT
PT Zuraida’s
Zuraida’s
common
common stock
stock on
on January
January 2,
2, 20X1
20X1 and
and another
another 10
10
percent
percent on
on January
January 2,
2, 20X4.
20X4. PT
PT Aroma
Aroma switches
switches to
to the
the
equity
equity method
method onon January
January 2,
2, 20X4.
20X4.
PT Zuraida Investment Income Reported by PT Aroma
Originally under Restated under
Year Net Income Dividends Cost Equity
20X1 Rp15,000,000 Rp 10,000,000 Rp 1,500,000 Rp 2,250,000

20X2 18,000,000 10,000,000 1,500,000 2,700,000
20X3 22,000,000 10,000,000 1,500,000 3,300,000
Rp 55,000,000 Rp 30,000,000 Rp 4,500,000 Rp 8,250,000
2-71
Equity Method--Change to Equity Method
The
The investment
investment account
account and and retained
retained earnings
earnings ofof PT
PT
Aroma
Aroma are
are restated
restated as
as ifif the
the equity
equity method
method had
had been
been
applied
applied from
from the
the date
date of of the
the original
original acquisition.
acquisition.
Investment in PT Zuraida Common Stock3,750,000
Retained Earnings 3,750,000
Restate investment account from cost to
equity method.
Rp8,250,000 -
Rp 4,500,000
2-72
Disposal of Differential-Related
Assets
• If the investee disposes of any asset to which

the differential relates, that portion of the
differential must be removed from the
investment account on the investor’s books.
2-73
Disposal of Differential-Related
Assets
• When this is done, the investor’s share of the

investee’s gain or loss on disposal of the
asset must be adjusted to reflect the fact that
the investor paid more for its proportionate
share of that asset than did the investee.
2-74
Impairment of Investment Value
• As with many assets, accounting standards

require that equity-method investments be
written down if their value is impaired.
2-75
Impairment of Investment Value
• If the market value of the investment declines

materially below its equity-method carrying
amount, and the decline in value is
considered other than temporary, the carrying
amount of the investment should be written
down to the market value and a loss
recognized.
2-76
Impairment of Investment Value-con’t
• The new lower value serves as a starting

point for continued application of the equity
method.
• Subsequent recoveries in the value of the

investment may not be recognized.
2-77
Changes in Number of Shares Held
• A change in the number of common shares

held by an investor resulting from a stock
dividend, split, or reverse split is treated in
the same way as under the cost method.
2-78
Changes in Number of Shares Held
• No formal accounting recognition is required

on the books of the investor.
• On the other hand, purchases and sales of
shares do require formal recognition.
2-79
Purchases of Additional Shares
• A purchase of additional shares of common

stock already held by an investor and
accounted for using the equity method simply
involves adding the cost of the new shares to
the investment account and applying the
equity method in the normal manner from the
date of acquisition forward.
2-80
Purchases of Additional Shares-

Con’t
• The new and old investments in the same

stock are combined for financial reporting
purposes.
• Income accruing to the new shares can be
recognized by the investor only from the date
of acquisition forward.
2-81
Determination of Significant Influence
• The general rule established in PSAK 15 is

that the equity method is appropriate where
the investor, by virtue of its common stock
interest in an investee, is able to exercise
significant influence over the operating and
financial policies of the investee.
2-82
Determination of Significant Influence
• In the absence of other evidence, common

stock ownership of 20 percent or more is
viewed as indicating that the investor is able
to exercise significant influence over the
investee.
2-83
Unrealized Intercompany Profits
• Intercompany sales do not result in the

realization of income until the intercompany
profit is confirmed in some way, usually
through a transaction with an unrelated party.
2-84
• Thus, unrealized intercompany profits must

be eliminated from both consolidated
financial statement amounts as well as equity
method amounts.
• The term for the application of the equity
method that includes the adjustment for
unrealized intercompany profits is “fully
adjusted equity method.”
2-85
• Unrealized intercompany profits overstate

earnings. Thus the equity method entry to
remove the unrealized profit will be the
opposite of the “equity accrual” entry, that
is, with respect to the accounts debited or
credited.
Examples are provided on the next slide.

2-86
• To record equity method income of

Rp24,000,000.
Investment in PT Investee Rp24,000,000
Income from PT Investee
Rp24,000,000
2-87
• To remove unrealized intercompany profit of

Rp2,000,000 (assumed).
Income from PT Investee Rp 2,000,000
Investment in PT Investee Rp 2,000,000
2-88
Chapter Three to Chapter Ten
• Three different approaches are followed by

companies (in practice) in accounting for their
consolidated subsidiary during the year:
• The fully adjusted equity method

(a.k.a., the equity method).
• The basic equity method.
• The cost method.
2-89
• The cost method and the fully adjusted

equity method (a.k.a., the equity method)
were previously discussed in this chapter.
• The basic equity method is used in Chapters

3 to 10 and is discussed in the next slide.
2-90
• In essence, the basic equity method is a

modified version of the equity method
discussed in this chapter.
• Specifically, the basic equity method avoids
“unrealized profit transactions” that will be
eliminated during the consolidation process.
2-91
• While the basic equity method is “Not GAAP,”

use of the basic equity method may help
provide some “clerical savings” for the parent
company—as well as students and teachers.
2-92
You Will Survive Chapter 2 !!!
• There are two sets of accounting

records (i.e., books) to analyze.
• You should always ask yourself –

does the information relate to the
investor or the investee or both ?
2-93
• If consolidation is required, the investor may

be referred to as the “parent company” and
the investee may be referred to as the
“subsidiary” company.
• The cost method and the equity method are
both accounting methods and reporting
methods, that is, they are used during the
year as well as at year-end, respectively.
2-94
• Unless consolidation is required, the investor

would usually use the same method for
accounting and reporting purposes.
2-95
• If consolidation is required, all balances

related to either the cost method or the equity
method are eliminated when preparing the
consolidated financial statements—thus
either method may be used during the year.
2-96
• There is only one “trick” to the cost

method—liquidating dividends.
• Remember—dividends do not accrue.
• Remember—only use post-acquisition
earnings.
2-97
• Think of the equity method in terms of three

levels (and start with the bottom
level):
• Top level--Unrealized profits

• Middle level—Differential
• Base or bottom level--Book value
2
End of Chapter
Reporting Intercorporate Interests
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Reporting Intercorporate Interests: Douglas Cloud

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4-1

Baker / Lembke / King

Reporting Intercorporate Interest

• This chapter presents the accounting and

Reporting Intercorporate Interest

• Some companies invest in other companies

• As indicated in the next slide, there are

Reporting Intercorporate Interest

• Reasons Companies Invest in Other

Reporting Intercorporate Interest

• Ensure a customer for production output

Reporting Intercorporate Interest

• Examples of intercorporate investments include:

Investments in Common Stock

• The method used to account for investments

Level of Common Stock Ownership

0% 20% 50% 100%

Influence not Significant Control

Cost Equity Consolidation

Investments in Common Stock

• The level of influence is the primary factor

Investments in Common Stock

• Consolidation involves the combining for

Investments in Common Stock

• This process includes the elimination of all

Investments in Common Stock

• Consolidation is normally appropriate where

Investments in Common Stock

• An unconsolidated subsidiary should be

• The specific requirements for consolidation

Investments in Common Stock

• The equity method is used for external

Investments in Common Stock

• The equity method may not be used in place

Investments in Common Stock

• If cost-method equity securities have readily

Accounting During the Year

• Under normal circumstances, companies

Accounting During the Year

• As discussed next, this is not the case with

Accounting During the Year Versus

• When consolidated financial statements are

Accounting During the Year Versus

• Using the cost or equity method even though

Cost Method—Influence Not Significant

• Intercorporate investments accounted for by

Cost Method—Influence Not Significant

• Income is recorded by the investor when

Cost Method—influence Not Significant

• At the time of purchase, the investor records

Cost Method—influence Not Significant

• After the time of purchase, the carrying

Cost Method—Influence Not Significant

• Once the investee declares a dividend, the

Cost Method—Influence Not Significant

• Recognition of investment income before a

• PT ABC purchases 20 percent of PT XYZ

• During the year, PT XYZ has net income of

Cash (Rp 20,000,000 X .20) Rp 4,000,000

NOTE: Liquidating dividends are discussed next.

Cost Method—Liquidating Dividends

• All dividends declared by the investee--in excess

• In the previous example, if PT XYZ had no