Section 2: 30–40%2E3

Equity Method Investments

Exam insight

Equity method questions almost always involve excess cost amortization or intercompany profit elimination. The one to burn in: dividends received reduce the investment account, they aren't income. It's easy to slip and debit cash and credit dividend income instead of the investment account. Also know the suspension rule, you stop recognizing losses once the investment hits zero.

What AICPA wants you to know

1Apply the 20-50% presumption for significant influence and know the exceptions
2Compute the equity method investment account balance over time
3Record investee income/loss and dividends under the equity method
4Apply amortization of excess purchase price (including goodwill)
5Account for losses that exceed the investment balance (suspension of equity method)

Patterns in this topic

The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.

The Equity Method EngineEquity income is your share of net income minus excess amortization; dividends only shrink the investment.

Exam tip

Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.