Consolidated net income using the equity method for an acquisition combination is computed as follows:
NOT Parent company’s revenues from its own operations plus subsidiary retained earnings.
To compute consolidated net income using the equity method for an acquisition combination, the parent company should follow these steps:
1. Determine the percentage of ownership in the subsidiary: The parent company should determine the percentage of ownership in the subsidiary to be accounted for under the equity method.
2. Compute the subsidiary’s net income: The subsidiary’s net income should be computed using the appropriate accounting principles. The parent company should then apply its ownership percentage to the subsidiary’s net income to determine its share of the net income from the subsidiary.
3. Consolidate the subsidiary’s net income into the parent company’s financial statements: Next, the parent company should add its share of the subsidiary’s net income to its own net income to determine consolidated net income.
4. Adjust for intercompany transactions: Finally, the parent company must eliminate any intercompany transactions between the parent and subsidiary to obtain a consolidated net income figure that reflects the economic activity of the consolidated group as a whole.
In summary, consolidated net income using the equity method for an acquisition combination is calculated by adding the parent’s share of the subsidiary’s net income to the parent’s own net income, and making adjustments for any intercompany transactions.
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