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Equity Method - YouTube
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we are going to talk about the equity
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method this method is used when a
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company or an investor owns between
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twenty and fifty percent of the common
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stock of a corporation so to record the
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acquisition of a stock investment you're
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the journal entry as as follows let's
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look at the facts here though first
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Miller corporation acquires or purchases
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thirty percent of the common stock of
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Beck company for 120,000 on january
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first 2014 so we're going to debit stock
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investments and I want to make this
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clear you do not debit common stock
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because we're not issuing our common
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stock and if we were issuing our common
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stock we would be crediting common stock
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so there's never an instance where you
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would debit common stock account so even
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though we bought common stock or if we
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had bought preferred stock it wouldn't
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make any difference you would debit
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stock investments and so will debit it
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for a hundred and twenty thousand and
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then we will credit cash for 120,000 so
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we're going to record the revenue and
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dividends of beck company so let's say
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for 2014 Beck reports net income of a
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hundred thousand and it declares and
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pays a forty thousand dollar cash
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dividend so the way the equity method
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works because we owned between twenty
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and fifty percent it's presumed that we
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have significant in
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once as to how the company is run and
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influence on to how much net income they
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make and how many dividends they declare
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so because of that we are going to show
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our share of that net income as if we
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had earned it ourselves so the journal
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entry to show our share of the net
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income will be a debit to stock
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investments and this is the same account
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that we used up here when we originally
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bought it so basically we're increasing
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the amount of our equity by we're going
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to record our thirty percent equity so
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the calculation for that is you would
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take thirty percent times the hundred
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thousand net income and so we're showing
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that 30,000 of that is it's as if we had
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received it and turned right around and
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giving it back in and said you know I
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want to reinvest it in the company and
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then we're going to credit revenue from
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stock investments so
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we're going to show our thirty thousand
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dollars of that hundred thousand now
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they paid a forty thousand dollar cash
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dividend so to record that we're going
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to debit cash for our share of that
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40,000 so we own thirty percent times
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forty thousand what would have come to
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us would be twelve thousand so we're
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going to debit 12,000 to cash and we're
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going to credit stock investments so
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what we're doing here is we are
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adjusting our investment account for our
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share then of the net income and
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reducing it for our share of the
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dividends so if we were going to do a
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t-account here for our stock investment
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account the original debit was a 120,000
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then our share of the net income was
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30,000 so our investment went up by that
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amount but we actually received 12,000
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of it in cash so that reduces our
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investment so our ending balance is
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going to be 138 and that is the balance
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in this investment account if I were to
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sell these investments right now that
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would be considered the cost that I
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would compare to the selling price to
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see if I had a gain or a loss so to
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summarize in sort of a generic t account
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under the equity method your original
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purchase price is going to be debited
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then your share of the net income is
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going to be debited so I'm just going to
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put share of net income and the
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dividends that you receive are going to
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be credited so you will debit or credit
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dividends
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I mean you're going to debit stock
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investment for the amount of dividends
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received and that is what your stock
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investment account is going to look like
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