# Equity method of consolidation question (Reading 37)

Reading 37, Page 190, Question 5. THe jist of the question is as follows Company A owns 10% of Company B; the intial investment was 10MM yen. Company B owns 20% of Company A; the initial investment was 10MM yen. Both companies value thie minority interest at historical cost. The annual net income of Company A was 10 MM yen. The annual net income of Company B was 30 MM yen. Assume that the two companies do not pay dividends. The current stock market values are 200 MM yen for Company A and 450 MM yen for Company B. A. Restate the earning of the two companies, using the equity method of consolidation. My solution was Company A - Net Income 10 MM Yen + Income from Affilate = 0.1*30 MM= 3MM - Minority Interest = 0.2*10MM =- 2MM Consolidated NI = 11MM Company B - Net Income is 30 MM + Income from affiliate =0.2*10MM = 2MM - Minority Interest = 0.1*30MM = -3MM Consolidated NI = 29 MM The correct answer seems to be \$13MM (Comapny A), 32 MM (Company B). This does not account for the minority interest. What am I missing? Thanks in advance.

Minority interest was at historical cost - so it is not re-valuated at the current book value. Minority interest would arise if the current equity (on the books) value was used to value the companies. also in your calculation above - the minority interest if evaluated should be based on 200M for Company A and 450 Million for Company B. Because those are the book values of equity. For Minority interest it is not net income that is used.

Not sure, but I think you only deduct minority interest when you have a controlling interest.

also dreary is right in that the equity method does not account for minority interest. that is only a part of consolidation method.

CPK, deary, thanks for your feedbackâ€¦