Just did a mock exam with the following questions and I’m not seeing the answer (even after reading the answer key):
Had Fisher Global reported its investment in the joint venture under the acquisition method rather than under the equity method, it is most likely that:
A) reported revenue would have been the same. B) reported expenses would have been higher. C) Fisher’s net income would not have been affected.
Answer:
Your answer: B was incorrect. The correct answer was C) Fisher’s net income would not have been affected.
Under the acquisition method, the investee firm’s revenue and expenses would be reported on Fisher’s income statement, increasing both expenses and revenues. Under the equity method, Fisher’s revenue and expenses are reported without adjustment, and the proportion of income from the purchased firm is reported separately, so that net income is the same under either method.
So - I thought that under the acquisition method the revenue and expenses on Fisher’s income statement consolidate the investee firm’s revenue and expenses. Increasing both and (provided the subsidiary is profitable) increasing net income. The total net income adds to retained earnings and then the minority interest is backed out as a liability on the balance sheet.
Can anybody weigh-in? Am I missing something here? Looks like the answer key indicates revenue and expenses would have been higher but the answer “reported expenses would have been higher” is wrong. Any ideas?