interest coverage ratio by accounting investment in associates, why no change?

Maybe I am just brain jamed, but why is this true? dont you incorporate profit and expense from your associates when you do your accounting, like in acquisition and equity method? The calculation for interest coverage is EBIT/interest expense, neither of which is affected by the investment in associates. On another note, if you are looking at asset turnover rate after excluding your investment in associate, which is sales/asset, why would you only modify the number of asset but not touching the sales, i think i might be confused in general what item change what not in investment in associate? someone please explain thanks

EBIT is income from operations; investments in associates are not part of operations, so they’re not included in EBIT. They’d be shown lower on the income statement (just before tax expense).

but what about sales and asset, shouldnt we include adjustment in those both?

oh thats right they are investment income, so equity method condense to one item in income statement, what about balance sheet ? my understanding from what you said is sales is an item in incomestatement’s operation items, and asset is in balance sheet, where we have to count for the share of associates, is that right?


The only thing you get from the associate is dividends. You shouldn’t include their sales, etc. in computing your interest coverage ratio.

is the dividends calculated named as investment income?

what about asset on B/S item, because in a question in the book,(reading 22 practice question 7), the answer did make adjustment to total asset, i get confused

I have this in my note, equity method shows up as one line consolidation, B/S: investment in associate, I/S:investment income is that wrong?

It might be called investment income, or it might be called dividend income.

What about it?

No, that’s correct.

One line on the income statement: Income from Affiliate. One line on the balance sheet: Investment in Affiliate.

as mentioned, is the asset adjusted after taking in investment in investee? it shows adjustment in the question answer I mentioned but if the asset is included, what we still call it one line adjustment, and if we take in share of the investee’s asset in balance sheet, what about liabilities, stock and retained earnings?

Under the equity method, there’s one line on the balance sheet: Investment in Affiliate.

It increases by our proportional share of the affiliate’s net income (less excess depreciation) and it decreases by the dividends received from the affiliate.

That’s it. No assets, no liabilities, no stock, no retained earnings.

I just read the question more carefully, the asset adjustment is from

‘the company has a 204 ending asset balance (188 beginning) for investments in associates’, so this seems like it is just net balance, which is adj. accumulated net profit of investee - accumulated dividends declared by investee ) X share owned% , instead of incorporation of investee’s asset share. Am i correct?

what about for consolidation method, same rule, except 100% with minority interest share of net income?

bump, S2000magician? sorry i know i am confusing

The change in Investment in Associate is the parent’s share of net income of the subsidiary, less any excess depreciation taken by the parent, less any dividends received from the subsidiary.

I’m not sure what you mean by “same rule”.

Consolidation is completely different from the equity method.

In the equity method you have one line (one account) on the balance sheet and one line on the income statement.

In consolidation, you include 100% of the subsidiary’s revenues and expenses in your income statement and 100% of the subsidiary’s assets and liabilities in your balance sheet. You have one extra line in the income statement for Minority Interest in Affiliate’s Net Income, and one extra line in the balance sheet (in the shareholders’ equity section) for Minority Interest in Affiliate.


I also got the Interest Coverage Ratio under acquisition method question wrong.

I understand that the Net Income under acquistion is calculated as (parent income + sub income - equity earning - non-controlling interest)

How about the EBIT under acquistion method?

I tried to use the same formula for EBIT (parent EBIT + SUB EBIT -equity earning -non-controlling interest), which gave me wrong answer.

The solution seems = parent EBIT+Sub EBIT - something

(since my practise question happen to have equity earning = non-controlling interest, so I am not sure which amount should I deduct)

Please help. Thanks!


Parent EBIT + Sub EBIT - (Transactions between Parent and sub)

Hi Flashback,

Thanks for your reply.

Could you explain what do you mean by “transactions between parent and sub”?

The question I was looking at doesn’t have any intercompany transactions.


Transactions between Parent and subsidiary are eliminated in consolidation.


What you mean under “something”? What says in this example?