Advanced Accy-3 methods -2

Several advanced accounting texts (1) present the full equity method in their consolidated statement working paper pedagogies. In these texts, many of the entries made by the parent company to adjust its accounts for unrealized profits on intercompany transactions would be different or would require modification if the parent issued "parent only" statements, or if the subsidiary was not consolidated.

The above paragraph is not a criticism of these textbooks, as their objectives are directed toward the preparation of consolidated financial statements. All of the equity-method approaches listed above, in addition to the cost method, are appropriate pedagogies. (2) In all of these texts, the consolidated statement working papers and resulting consolidated statements are correct in all respects, regardless of the method used by the parent company to account for its subsidiary investment. However, there appears to be a void in the literature with respect to accounting for intercompany transactions when a parent/investor uses the equity method to account for its …

Advanced Accy-3 methods

Advanced accounting textbooks present consolidation techniques and procedures from the standpoint of the parent's use of both the cost and equity methods. With respect to the equity method, one or more of the following three approaches are generally presented:

1. The "simple" equity method: Under this method, the parent's investment account reflects the price paid plus the parent's share of the subsidiary's net income less dividends.

2. The "partial" equity method: This method is the same as the "simple" equity method, except that the parent also adjusts its investment and subsidiary income accounts each period for any excess of cost over book value (or vice versa) as the undervalued (overvalued) assets and/or liabilities are used by the subsidiary in its earnings process.

3. The "full" or "complete" equity method. The parent extends the "partial" equity method and adjusts its accounts for intercompany transactions such as intercompany inventory profits that are unrealized at a financial statement date.