How to use the equity method investment calculator
- Enter the carrying value of the investment at the start of the period.
- Enter your ownership percentage of the investee.
- Enter the investee's net income for the period (a loss as a negative number) and the total dividends it paid to all owners.
- Optionally add an amortization charge for any basis difference, then read the carrying value at the end and the roll-forward table.
Formula
Share of income = investee net income x ownership
Share of dividends = dividends paid x ownership
Ending carrying value = start + share of income - share of dividends - amortization
Dividends reduce the carrying value because they return part of the investment. They are not counted again as income.
A 30% stake that started the year at $600,000
The investee earned $400,000 and paid $100,000 in dividends. Your share of income is 30% x $400,000 = $120,000 and your share of dividends is $30,000. The carrying value at the end is $600,000 + $120,000 - $30,000 = $690,000.
If the investee instead lost $120,000, your share of the loss is $36,000 and the carrying value at the end is $600,000 - $36,000 - $30,000 = $534,000. The loss appears in parentheses in the table.
Where this method is used
The equity method is a way to record an investment in a company you can influence but do not control. Instead of recording dividends as income, you record your share of the investee's income as it is earned, and you treat dividends as a return of the investment. The carrying value therefore follows the investee's results. Which method applies to a given holding depends on your accounting framework and on the facts, such as influence over decisions, not on the percentage alone.
Basis differences and losses
If you paid more than your share of the investee's book value, part of the excess may be written off over time. That charge is the amortization field. This tool takes the charge you give it and does not work it out from the purchase price. Losses reduce the carrying value, and frameworks have rules for what happens when losses use it up, which this tool does not apply.
To see how a stake changes when new shares are issued, use the Equity Dilution Calculator. The Cost of Equity Calculator and the Dividend Discount Model Calculator look at the investment from the valuation side, and the Journal Entry Generator can record the year's entries.
Assumptions and limits
- The ownership percentage stays the same all year. A purchase or sale during the year needs separate periods.
- Intercompany profits, other comprehensive income and impairment are not modeled.
- Amounts are rounded to the cent at each step.
- The figures shown are examples. Whether and how to use the equity method is a matter for your accounting framework and adviser.
Frequently asked questions
Why do dividends lower the carrying value?
The investee's income already raised the carrying value as it was earned. A dividend moves some of that value back to you as cash, so the investment is worth less on the books.
How is a loss shown?
A loss makes your share of income negative, and it is shown in parentheses. It reduces the carrying value.
Do I enter my share or the total?
Enter the investee's totals for the period. The tool multiplies them by your ownership percentage.
What if the carrying value goes below zero?
The tool shows the arithmetic result, including a negative one. Your framework has rules for that case that are not applied here.