What are the journal entries for the equity method of accounting for investments?

The equity method treats the investment as a single line item on the balance sheet but adjusts it for the investor's share of the investee's income, dividends, and amortization of excess purchase price. Here is the complete journal entry framework:

Comprehensive Example:

On January 1, Ashford Holdings acquires 30% of Beacon Analytics for $9,000,000. Beacon's book value of net assets is $24,000,000 (Ashford's share: $7,200,000). The $1,800,000 excess is attributed to:

• Undervalued equipment (FV exceeds BV by $3,000,000; Ashford's share: $900,000; remaining life: 10 years)
• Goodwill: $900,000 (residual)

During Year 1, Beacon reports net income of $4,000,000 and pays dividends of $1,200,000.

Entry 1 — Initial Purchase:

Entry 2 — Recognize Share of Income:

Ashford's share = 30% x $4,000,000 = $1,200,000

Entry 3 — Receive Dividends:

Ashford's share = 30% x $1,200,000 = $360,000

Note: Dividends reduce the investment account — they are a return of capital, not income.

Entry 4 — Amortize Excess Purchase Price:

Equipment excess amortization = $900,000 / 10 = $90,000

Goodwill under equity method is not amortized (IFRS and GAAP) but is tested for impairment as part of the total investment.

Year-End Investment Balance:

$9,000,000 + $1,200,000 - $360,000 - $90,000 = $9,750,000

Reported Equity Income:

$1,200,000 - $90,000 = $1,110,000

Key exam points:

• Equity method income goes on the income statement as a single line (not consolidated revenue/expenses)
• Dividends do NOT appear on the income statement; they reduce the investment account
• Excess purchase price allocated to identifiable assets is amortized; goodwill is not
• Under IFRS, equity method investments are assessed for impairment using IAS 36 indicators

For more equity method practice, explore our CFA Level II question bank.