Describing the Equity Method Use Case

Objectives

After completing this lesson, you will be able to:

  • Describe the equity method use case
  • Identify the accounting entries for the equity method

Equity Method Use Case

In December of 2024, the US00 (United States) consolidation unit purchased a 35% stake in the CA00 (Canadian) consolidation unit for 130,000 EUROS (group currency). Since the ownership percentage is less than 50%, the Canadian subsidiary is consolidated with the equity method.

In general, the equity method is an accounting technique used to assess the profits earned by their investments in other companies. This method can only be used when the investing company holds significant influence over the company being invested in, but does not have full control over it, as with a majority voting interest. This usually occurs when a company owns 20% to 50% of another company's stock.

When using the equity method, the investing company records its share of the investee's profits as a boost to its own net income, and this investment is recorded on the balance sheet as a non-current asset.

The financial statements of an investee unit consolidated using the equity method are not included in the consolidated financial statements.

Identify the Accounting Entries for the Equity Method

As a new intermediate consolidation consultant at ABC Corporation, Robert must learn how to identify the accounting entries for the equity method. In this video, we will cover the necessary accounting entries for both the first and subsequent consolidations, focusing on the values before and after the investment/equity elimination task.

Select the play button below to learn how to identify the accounting entries for the equity method.

Robert’s Summary:

The video discusses the configuration of a reclassification method to automate accounting entries using the equity method. It provides examples of the accounting entries before and after the manual booking of goodwill.

The video also explains the preparation for consolidation group change and the elimination of investment and equity. It further discusses the accounting entries for subsequent consolidation, including the debiting of investment at equity and the crediting of current year retained earnings.

The goal is to automate these entries for the equity method.

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