Hi, When you use the Equity Method to report an investment in another company I understand the Asset Side of the Balance sheet ( Initial cost + Equity Income - Dividend), but what will be reported on the Equity/Liability side of the Balance Sheet to equal it out? Thanks for the help!
If the company used cash to purchase the investment it will not change anything on the right side of the balance sheet. The equity or liabilities only change if the company raises capital to make the investment.
This is true for the initial purchase, but not subsequently (which, I believe, is the substance of the original question).
Your liabilities won’t change (unless, as Chad mentions, you borrow money to finance the purchase). Your equity (Retained Earnings, to be specific) will change (increase, we hope) each year by your proportional share of the subsidiary’s net income. Your Cash will increase each year by your proportional share of dividends paid by the subsidiary.
Thank you both very much for the answers.
So to be specific. If we have an investment in company X - 20% for 200K. “X” has a income of 900K and pays 350K in dividend. What do we then report?
My understanding: Asset Side:
Investment in X is reported as: 310K Original Investment (200K) + (20% * 900K) - ( 20% * 350K)
From your answer S2000magician. We also repoprt: +70K under cash. Meaning the asset side has increased by 380K.
How do I get the other side of the balance sheet to equal the increase of 380K on the Asset Side? I.e. where do I report an increase of 380K in either Equity or Liabilities ( I understand from your answers that It should be reported under Equity, but how? ) Thank you again for the help.
You’re quite welcome.
We increase our investment in Company X by 20% of $900,000 = $180,000.
We decrease our investment in Company X by 20% of $350,000 = $70.000.
The net increase in the investment in Company X is $180,000 − $70,000 = $110,000.
Cash increases by $70,000: dividends received.
Retained earnings increases by $180,000 (vs. our own net income).
Everything’s hunky-dory, and our balance sheet . . . well . . . balances.
Thank you very much. It makes sense to me now.
if we had the same information and we used the Acquisition method, I presume we would consolidate (add our own and company X together) our own Assets and Liabilities with company X, keep Equity unchanged apart from adding a line with minority interest to our own Balance Sheet. Is that correct or are there any other items to be aware of?