I am having a bit of hard time understanding why the excess price of the depreciable asset is being reduced from the investor’s investment value.
Can someone help me to get the logic behind this concept?
What, exactly, is the context?
I have no idea what you’re asking.
In the equity method when we calculate the investment value in the investor’s balance sheet.
You’re buying (a share of) capital assets worth, say, $10 million, that the target company has valued (on their balance sheet) at, say, $8 million.
If you buy those assets you’re allowed to depreciate them. But the target company will depreciate only $8 million worth of them. So it’s up to you to depreciate (your share of) the other $2 million worth.
ok got it now. Thank you very much
sorry, i have another question
Lets assume its the other way around where the company is worth $10 million on their balance sheet and their fair value is $8 million. In this case, given that the target is worth $10 million on their balance sheet, us, being the acquirer, we do not need to depreciate the $2 million in excess because the target company is handling that?
I was doing some of the problems in the book and noted that regardless of the situation, the difference between the book value and fair value is depreciated.