# FRA: Equity Method Upstream Sale, Example 5 p. 134

Jan 1, 2011

Wicker buys 25% stake in Foxworth for \$1 m, uses equity method BV of Foxworth’s net assets on that date = \$3.8 m An analysis of fair s and book values showed that all were equal except one asset, a building, that was undervalued by \$40K, with 20 years remaining life and uses SL depreciation

During 2011, Foxworth NI = \$20K, paid dividends of \$3,200, and sold inventory to Wicker. At the end of the year there was \$8,000 profit from the upstream sale in Foxworth’s net income. 1) Calculate the equity income to be reported as a line item on Wicker’s 2011 income statement

\$1 mil - 950,000 = 50,000 excess purchase price - 10,000 attributable to the building (25%x40,000) = \$40,000 goodwill

That all makes sense to me. What I don’t understand is, in solution 1, why are they not subtracting out the portion of dividends that Foxworth paid? My understanding of the equity method is that Wicker should not be entitled to 25%(3,200) = \$800. How come that’s left out of the solution? Solution 1 5,000 25%(20,000) Wicker’s share of Foxworth’s reported income - 500 10,000/20 amortization of exchess purchase price attributable to building - 2,000 unrealized prift from upstream sale (25% x 8,000) = 2,500 2011 equity income

EDIT: I see in solution 2 about the balance sheet that they’ve accounted for that \$3,200 but why doesn’t the line item on the income statement reflect that ?

Because the dividend doesn’t go into th P&L using the equity method. It’s balance sheet only (cash + and an offsetting reduction in the carrying amount of the investment).