This question asks you to calculate the investment account for a firm. It takes the amount paid, adds proportion of net income, subtracts proportion of dividends paid but then it subtracts out the amortized goodwill on non-land PPE. I thought that goodwill could NOT be amortized? Can someone provide an explanation?
That’s not goodwill. You are depreciating the excess over book value that you paid for the sub’s Plant and Equipment.
U can’t amortize goodwill if you dont have info about previous goodwill. However if you have goodwill in equity method : Price - (Bv)% - (FV-BV PPE)% then you deduct the impairment of the goodwill from the net income which in turn affects the investment in associate account.
Think of it this way, your purchase price exceeds the value of equity (which is A - L, ie net assets). Therefore, although your original investment is indeed the price you paid, you need to allocate the excess paid to the identifiable assets whose fair value exceeds their book value. In this case, it was both land and PPE. The remaining excess that can’t be allocated is your goodwill, which cannot be amortized. Any excess that was allocated to PPE can be amortized. Excess related to inventory will be expensed. Excess allocated to land cannot be amortized.
thanks guys - I guess Schweser decided to skip this entire section