This is question 14 of the afternoon session of the 2012 mock exam. Perhaps you have the exam so that I don’t have to post the entire question. The answer given is as follows:
Dagmar would be using the equity method to account for its investment in Elbe because of its classification as an associated company. Therefore, Dagmar will include its proportionate share of Elbe’s net earnings, less the amortization of the excess purchase price from the initial acquisition. Dagmar owns 30% (1.8 ÷ 6.0 million shares) of Elbe.
I have two questions:
Everywhere I check the calculation for the earnings recognized in the equity method you take the portion of the earnings and subtract the portion of the dividends. Add this total to the acquirer’s income statement
I have never seen the amortization of the excess purchase price being accounted for in the calculation.
All of the examples, except for this one, are pretty simple in my opinion. I’m affraid that I don’t see how the answer is the way that it is. What am I missing?