Hi,
I am a little confused with the equity method of intercorporate accounting.
When an investor allocates a % share of investee’s net income to his income statement and also to the one line in the Balance Sheet (assuming no dividends), how would the Assets and liabilites match up. Investment would show up as an asset whereas the profits after tax would come under shareholders equity. Where does the difference go?
Where is there a difference? If I understand the way you worded the scenario correctly, you are under the impression that there’s a difference because of tax…?
If that’s what your asking, then the answer is as follows:
The investee’s net income is after tax and the investor’s pro-rata share of the investee’s net income (after-tax) is reported below the line on the investor’s income statement. No additional tax is charged to the investor’s portion of investee’s net income. So, the same amount will be reported on the asset side of the balance sheet that will flow from the income statement to stockholder’s equity since the accounting equation has to be such that A = L +E, if A increases and L isn’t increasing, E has to increase…
If that’s not what you’re asking… then I didn’t understand your question.
Yes, that’s exactly what I wanted to know. I did not know it is reported below the net profits.
That’s what confused me.
Thanks.