Asset Balance
Question: Assume, at the end of Year One, after the above journal entries have been made, Big sells all of its
shares in Little Company for $950,000 in cash. When the equity method is applied to an investment, what is the
appropriate recording of an eventual sale?
Answer: An investment reported using the equity method quickly moves away from historical cost as income
is earned and dividends received. After just one year, the asset balance reported above by Big has risen from
$900,000 to $968,000 (income of $80,000 was added and $12,000 in dividends were subtracted). If these shares
are then sold for $950,000, a loss of $18,000 is recognized.
Sale of Investment Reported Using the Equity Method
If these shares had been sold for more than their $968,000 carrying value, a gain on the sale is recorded.
