EQ Method calc

CFA Level II FRA
#1

If we are trying to calculate Company’s A’s contribtuion to company’s B’s net earnings (company A is the investment) using the equity method, why do we subtract out the amortization of the excess purchase price from the intial aquisition? Makes intuitive sense to me that we get x% of the company’s net income (since we own x% of said company), but why then subtract that amortization?

Thanks!

#2

you first allocate ant excess paid to capital equipment and the like. next year, etc., you amortize that excess for the reason you depreciate.

#3

If you allocate some of the excess price to depreciable/amortizable assets, then you depreciate/amortize that excess price.

If you allocate it to nondepreciable assets (e.g., land), or to goodwill, you don’t depreciate it.