Equity Method Investments
Learn the Equity Method Investments rule, work one CPA Exam example, avoid the common trap, and continue with free FAR questions.
The decision that earns the point
The Equity Method Investments decision
Under the equity method, an investor generally begins with investment cost, increases the investment for its share of investee income, decreases it for its share of losses and dividends received, and separately accounts for basis differences, impairment, and other required adjustments.
Exam use
FAR can test method selection, acquisition differentials, income recognition, dividends, intercompany profit, and ending carrying amount.
Your scratch-paper plan
Solve it in three moves
- 1
Select the method
Use the ownership, influence, and other stated facts to decide whether the equity method applies.
- 2
Build the basis bridge
Separate book-value share from acquisition-date basis differences and identify later amortization effects.
- 3
Roll the investment
Start with cost, add adjusted investee income, subtract dividends and losses, and include required eliminations or impairment.
Worked problem
Work the facts before choosing the answer
Investor buys 30% of Investee for $300,000. Investee reports $100,000 income and pays $20,000 dividends; no basis differences are stated.
Show the work
Recognize $30,000 equity-method income and reduce the investment by the $6,000 share of dividends.
Answer
Ending investment carrying amount is $324,000: $300,000 plus $30,000 less $6,000.
Do it now
Test the same decision with a fresh question
Start with free FAR practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
The trap and the repair
Common trap
Recording dividends as investment income double-counts investee performance under the equity method. Ignoring basis differences can also overstate equity-method income.
Repair
Treat dividends as a return of investment and maintain a carrying-amount schedule from acquisition through the reporting date.
Your exam workflow
- Step 1Read the requirementIdentify what the task asks you to decide about equity method investments.
- Step 2Sort the factsUse the ownership, influence, and other stated facts to decide whether the equity method applies.
- Step 3Apply the ruleSeparate book-value share from acquisition-date basis differences and identify later amortization effects.
- Step 4Check the outputStart with cost, add adjusted investee income, subtract dividends and losses, and include required eliminations or impairment.
Keep the next step narrow
Quick questions
What is the shortest useful answer for equity method investments?
Under the equity method, an investor generally begins with investment cost, increases the investment for its share of investee income, decreases it for its share of losses and dividends received, and separately accounts for basis differences, impairment, and other required adjustments.
How can equity method investments appear on the CPA Exam?
FAR can test method selection, acquisition differentials, income recognition, dividends, intercompany profit, and ending carrying amount. The exact task can change, so identify the governing facts before applying the rule.
What is the most common mistake with equity method investments?
Recording dividends as investment income double-counts investee performance under the equity method. Ignoring basis differences can also overstate equity-method income. Treat dividends as a return of investment and maintain a carrying-amount schedule from acquisition through the reporting date.
Where should I practice equity method investments?
Use /free-practice/far for section-aligned practice, then review /learn/far-consolidated-financial-statements when the miss comes from an adjacent rule rather than this topic itself.