Revenue & Net income calculation in Equity and Consolidation methods

CFA Level II FRA
#1

If company P acquired 50% of company C, how are Revenue & NI calculation done under Equity method and Consolidation method on the acquisition date? (say on the acquisition/investment date, P itself has Rev $500, and NI $100, and C has Rev $300 and NI $50)

My way would be:

Equity method: 500+50%*300 =650 (REV) and 100+50*50% = 125 (NI);

Consolidation method: 500+300 = 800 (REV) and 100+50=150 (NI)

I know I am wrong at some of these calculations, for example, Schweser says “NI is the same under these methods”. I’m mainly using the textbook, would love to see some evidence/quote from the textbook if anyone can help me point out - I didn’t find any.

Thanks!

#2

Equity method: Rev = 500, NI = 125

Consolidation, Rev = 800, Exp = 400 + 250 = 650, Minority Int = 25, NI = 800-650-25=125

#3

Thanks CMLSML, your answers really helped to clarify!

#4

This stuff is tricky - best to make note cards and have columns for each method and review it regularly.

#5

Hello,

Just wanted to add that equity method doesn’t merge anything… that is, we don’t ‘consolidate’ the revenues, liabilities, expenses etc. its just 1 line.

#6

Thanks bbcman, you are right.

Now, the way I memorize how equity method works is that it does not do much on the IS (except for the inclusion of porportional share of investee’s NI), but mostly on BS, i.e. the investment account (increases by the amount of the porportional NI from the investee, decreases by the amount of dividends received).