Question

Differentiate between
(a) The equity method,
(b) The initial value method and
(c) The partial equity methods
with core assumptions and with supported illustrations (Make you own assumption to support your illustrations)

Step 1 = Explain the concept of each method
Step 2 = Support the concept and assumption stated in step 1 with appropriate example
Step 3 - Make a brief conclusion
Please help me and answer this seprately + support example for each method necessary

At least 300 words

Answer 1

STEP 1- CONCEPT

EQUITY METHOD-The full equity method is also called the complete equity method or simply the equity method. The acquiring company or investor uses the equity method when it purchases a significant minority equity stake -- generally a minimum of 20 to 25 percent -- in another firm, the investee. The equity method is an accounting methodology used to account for holdings of less than 50 percent in which the investor exerts pronounced influence. This influence involves strategic, financial and operational decisions of the investee.

INITIAL VALUE METHOD- Under the initial value method, when accounting for an investment in a subsidiary,The investment account remains at initial value.The investment account is adjusted to fair value at year-end.Dividends received are ignored.Dividends received by the subsidiary decrease the investment account.Income reported by the subsidiary increases the investment account.

PARTIAL EQUITY METHOD-The partial equity method is an accounting methodology that companies investing in another entity use to account for their investment when their stake is not considered significant. The investing company may even have a seat on the investee’s board. However, that seat does not enable the investing company to exert much influence over the way the investee plans and runs its business.

STEP 2- EXAMPLES

EQUITY METHOD- If Company A invests $120,00 in Company B and earns $50,000 from that investment in a year, but Company B pays out dividends of 30 percent of invested stock, or $40,000 for Company A, Company A totals its investment as such: $120k + $50k - $40k = $130k. The complete equity method subtracts dividends from the total because dividends constitute money paid out to investors, or a partial buy back of total equity. In long-term equity investments, complete equity considers depreciable assets, or those that lose value over time, and also deduct this from total value.

INITIAL VALUE METHOD- If a company Comcast acquired AT&T Broadband, its December 31 year-end income statement included AT&T Broadband revenues and expenses only subsequent to the acquisition date. Comcast reported $8.1 billion in revenues that year. However, in a pro forma schedule, Comcast noted that had it included AT&T Broadband's revenues from January 1, total revenue for the year would have been $16.8 billion. However, because the $8.7 billion additional revenue ($16.8 billion − $8.1 billion) was not earned by Comcast owners, Comcast excluded this preacquisition revenue from its consolidated total.

PARTIAL EQUITY METHOD- If a company invests $100,000 in another company and receives 10 percent, or $10,000 in dividends in a year, cost equity method lists the value of the investment at $90,000, completely ignoring any increased stock value. The partial equity method bears similarity to the complete equity method. However, this method ignores depreciable assets but considers disparities between the market value and book value of a company, taking into account whether the public undervalues or overvalues the equity of an investment.

STEP 3- CONCLUSION

There are proponents for the use of each of these accounting methods, and different accounting standards organizations are split as to which is the more appropriate practice. Companies generally use the method that fits best with their overall operations and existing accounting practices.