For WizardKim-DPR2

Wk4 Discussion 2nd Response:

Instructions: Respond to the video discussion post below. 3 substantial paragraphs, and 3 peer reviewed authoritative sources, not including the textbook, cited properly in APA format.

When the parent has complete ownership, equity method earnings from the subsidiary, combined with the parent’s other income sources, create a total income figure reflective of the entire combined business entity. Consequently, the equity method often is referred to as a single-line consolidation. (Hoyle, 2017) 

 An equity method investor presents its equity method investments on the balance sheet as a single amount. That amount generally includes for each investment: [323-10-45-1]  (KPMG, 2020)

— the investor’s cost to acquire the investment, which comprises its memo purchase price allocation;  

— adjustments made for dividends received or other investee capital activity; 

 — adjustments made to recognize the investor’s share of investee activity, such as its earnings and OCI; and  

— adjustments made to recognize investor-level activity, such as intra-entity profit or loss eliminations, amortization/accretion of basis differences and other-than-temporary impairments.  

 The investor also presents its equity in earnings of its investees in the income statement as a single amount. That amount generally includes for each investee: [323-10-45-1] (KPMG, 2020)

 — adjustments made to recognize the investor’s share of investee earnings or losses; 

 — adjustments made for some investee capital activity, such as disproportional changes made to the investor’s claim on the investee’s net assets; and 

— adjustments made to recognize investor-level activity, such as intra-entity profit or loss eliminations, amortization/accretion of basis differences and OTTI  

An investor applying the equity method may need to make adjustments to eliminate the effects of certain intercompany transactions. 

Properly applying the equity method ensures that the parent’s income and, hence, its retained earnings are correctly stated prior to consolidation. (Hoyle, 2017)

In the income consolidation process, the excess of amortization expenses is recognized for the current period relating to the adjustments of assets of the subsidiary to acquisition-date fair values. In addition, the income of the subsidiary recognized by the parent during the year is eliminated. This occurs when, after deducting the excess amortization from accrual income by the subsidiary, the initial operation recorded by the parent, in which the subsidiary’s income is recognized, is reversed. Thus, the impact of intra-entity subsidiary income carried by the parent is eliminated. 

Subsidiary Net Income – Equity in Subsidiary Earnings + Excess in Amortizations Expenses = 0 

Meanwhile, in the Retained Earnings consolidation process, the retained earnings of the subsidiary are removed as of the beginning of the current year, as well as the dividends declared during the year by the subsidiary must be eliminated. These dividends, when using the equity method, were originally recorded by the parent as a decrease in investments in the subsidiary company, so to eliminate their impact the investment account must be increased. 

Subsidiary Retained Earnings (end of the year) - Subsidiary Retained Earnings (beginning of the year) - Subsidiary Net Income + Subsidiary Dividends Declared = 0 

Consequently, when the parent employs the equity method, its net income, and retained earnings mirror consolidated totals. 

References: 

 Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2017). Advanced accounting 13e.  McGraw-Hill Education. 

KPMG. (2020, April). Equity Method of Accounting. Handbook. https://frv.kpmg.us/reference-library/2020/handbook-equity-method-of-accounting.html