Pg 166. Question 12. Asks if Zimt’s net income in 2010 will most likely be:
I chose ----> Highest if Zimt is deemed to have control of Oxbow.
With control, I would add each individuals NI to get the consolidated Income which would be higher then answer B, which I thought would have lower NI cause it’s significant influence(Equity Method).
But the answer is ---- Independent of the accounting method. The one question that I cant get in the section. Dont get it.
Net income is the same regardless if you use the equity method or the acquisition method
Under the equity method, you claim only your pro-rata share of the subs net income. Under the acquisition method, you claim all of the subs revenues and all of the subs expenses. However, you reduce this number by the minority interest. After that is done, the net income would be the same as under the equity method.
Net Income should be the same under all methods.
I’m assuming but not sure. Can somebody confirm. That only passive investments(AFS and Held til maturity) are affected by the method of accounting (Equity or Consolidation).
Since this is Held for Trading(Active) — Accounting method doesnt matter.
So if this example was AFS or Held til maturity, My answer of having Control would be correct.
Am I correct?
Ok…thanks guys.
^ following up…when you consolidate Oxbow into Zimt’s financial statements under the acquisition method, you’ll show all of Oxbow’s revenues and expenses, but at the bottom of the income statement you reduce Net Income by a “minority interest” that represents the percent of Oxbow that Zimt does not own.
Therefore, while Revenues and Expenses are different under Equity and Acquisition methods, Net Income will remain the same b/c you deduct it by a minority interest.
EDIT: Would You Look edited his past post and added what I said here (as I was writing my post)
Would you look.
Fantastic. That helped a ton. It connected the topics for me quite well.
Tommy.
Then i’ll give you the credit. Perfect summary and helped immensely.
haha no his explanation was just as good as mine! I didn’t mean to say he copied what I said; he was editing his first post as I was writing mine. Sorry to Would You Look if that came off the wrong way! Our timing was just very similar.