This is in the Schweser Notes: Under equity method, proportionate share of investee’s income is included int he parent’s income. The parent’s reported income is not affected by changes in the market value of the investee unless the value decline is considered permanent or realized losses are incurred upon sales of the investment. Scenario: Supposed Parent company § purchase 25% (2500 shares @ $1.00 per share) for $2500 of company S on Jan 1st. Company S make $0.20 per share and paid $0.10 dividend (50% payout ratio), and the stock price goes from $1.00 per share to $1.50 market value at year end. No further shares are purchased or sold. In this case, at year end, P should report an additional of 2500x$0.20 = $500, is that correct? In another word, we ignore the dividend and market value of the share price in the parent’s income statement? Thanks.
monki Wrote: ------------------------------------------------------- > > In this case, at year end, P should report an > additional of 2500x$0.20 = $500, is that correct? > In another word, we ignore the dividend and market > value of the share price in the parent’s income > statement? > > Thanks. Correct. IS(500) BS Investment in S(2500+250) Cash(250)