Calculating Book Value of Equity Method Investments

Brian Krogol
Was this helpful?
alright when it comes time to sell our equity method investment, it's important to know what the final value is in the investment account because we have to calculate our gain or or loss based on the difference between the selling price and the book value. So it's always helpful to use a T. Account. So when we think about our equity method investments, we're gonna have a T. Account that's gonna have our beginning balance which is usually what we purchased it for. Right, we purchase it for some amount and then we increase it whenever there's net income, right? Whenever we have net income of the investor, we're gonna have our I'll say percentage net income of the invest E. That's gonna increase our investment. Just like we saw in our examples and what's gonna decrease our investment? Well that's if we have I'll put it right here next to this 1% net loss of the investing that will decrease our investment account, our asset. And what else decreases it? Our percentage of the dividends, right? When we receive dividends from the investor, Well that's going to decrease our investment and it'll leave us with our ending balance in the account. Right? So notice doesn't this look very similar to another account we've dealt with when we deal with T. Accounts And the based formula, there's an account that we have a beginning balance. It increases by net income, it decreases by dividends and then it ends up with an ending balance, it looks like retained earnings, doesn't it? Except this is our investment in another company. So you can almost think of this as almost our retained earnings in this other company. Okay, So it's like our equity in this other company and that's why it's called the equity method. We're keeping track of the equity that we have of their earnings and of their dividends paid, reducing our equity in them, right? So it looks very similar as far as the T. Account goes. Um so notice we purchased the investment, we increase it by the net income or decrease it by the net loss and then we decrease it by the dividends to get to our ending balance. So in our example, if we plug in the numbers that we've had in our journal entries, well our purchase price was 1,250,000. Right? And that's what we saw in the first entry. We debited the asset, the equity method investment, we debited it for the million 250. Then we had the net income during year one, right? The year one. So this was the purchase, Let me do it in a different color. So this was the purchase right here. Then we have the year one income. And in year one they earned uh our percentage was 224,000 of their net income. Right are 40% of their total net income came to 224,000. And that increased our value there. And in year two there was a loss Which decreased our investment by 40,000. And then in years. Uh and then in year three, they paid some dividends right? We had the dividends that also decreased our investment by 100 and 68,000. Right? A 168,000 was the decrease. And that gets us to the ending balance in our investment. So what's gonna be the ending balance after all of these transactions? Let's go ahead and calculate it. We're gonna start with the one million, 250,000. We're gonna add 224,000. Subtract 40,000 and subtract 168,000. And that gets us to our final balance of one million, 266,000. So after all of these years of income and payment of dividends and the loss right. Our ending balance in the account is one million, 266,000. So what what you really want to be familiar with is those four entries that we dealt, with right the purchase of the investment. the percentage of the net income or the loss, and then the percentage of the dividends finally gets us to our ending balance that we're going to compare to our selling price. Okay, So now let's go ahead and let's look at the selling price of this investment. Actually, let's take a pause here with the now that we've figured out the book value, let's take a pause and we'll do the gain and the sale gain on the sale and the loss on the sale in the next video.