How do you build an amortization schedule for the excess purchase price under the equity method?

Let me build this out systematically so you can replicate it on exam day.

Step 1: Compute the Excess

Pelham paid $260M for 40% of Stonebridge.

Share of book equity = 40% x $500M = $200M

Total excess = $260M - $200M = $60M

Step 2: Allocate the Excess

Wait — that gives negative goodwill. Let me re-read the problem. The excess of $60M is Pelham's share. So the full fair value adjustments would be $40M/0.40 = $100M for patents and $30M/0.40 = $75M for customer relationships. But we only care about Pelham's 40% share:

• Patents: $40M over 8 years = $5.0M/year
• Customer relationships: $30M over 6 years = $5.0M/year
• Goodwill: $60M - $40M - $30M = negative $10M

Actually, let me restate the problem correctly. If the allocations already represent Pelham's share:

Goodwill = $60M - $40M - $30M = -$10M

A negative goodwill (bargain purchase) would be recognized as a gain. But more likely the question means total excess is $60M and allocations are as given, leaving $60M - $40M - $30M = -$10M, which signals the fair value of identifiable assets exceeds the purchase price. The bargain purchase gain of $10M is recognized immediately.

Corrected Amortization Schedule:

Step 3: Investment Account Balance (Year 1)

Assume Stonebridge earns $50M and pays $10M dividends:

Key point: Dividends reduce the investment account (they are a return OF capital, not income). Amortization also reduces the account. Only the share of investee net income and the one-time bargain gain increase it.

For more equity method vignettes, explore our CFA Level II practice questions.