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24.3 Equity Method Income, Dividends, and Impairment
Uniform CPA Examination Exam
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1 Chapter 1: CPA Exam Structure and Licensure Rules
1.1 CPA Evolution Model 1.2 Eligibility, Credit Window, and Scheduling Rules 1.3 Scoring, Pass Rates, and Blueprints
2 Chapter 2: CPA Scoring, Interface, and Exam Strategy
Score Scale and Testlets MCQ/TBS Weighting by Section Sample Test Interface Tools Exam-Day Time Management
3 Chapter 3: AUD Ethics, Independence, and Engagement Acceptance
3.1 Professional Responsibilities and Independence 3.2 Engagement Acceptance and Continuance 3.3 Audit Documentation and Quality Management 3.4 Audit Risk Foundations
4 Chapter 4: AUD Risk Assessment, Controls, and Evidence
4.1 Assertions and Risk Assessment 4.2 Internal Control Design and Operating Effectiveness 4.3 Substantive Procedures and Audit Evidence 4.4 Sampling, Analytics, and Estimates
5 Chapter 21: AUD Sampling, Analytics, and Accounting Estimates
21.1 Audit Sampling Risk and Sample Design 21.2 Substantive Analytical Procedures 21.3 Estimates, Fair Value, and Specialists 21.4 Data Analytics, Exceptions, and Follow-Up
6 Chapter 22: AUD Integrated Audits, IT Controls, and SOC Reliance
22.1 ICFR Integrated Audit Framework 22.2 IT General Controls and Application Controls 22.3 Service Organizations, SOC Reports, and CUECs 22.4 Control Deficiencies and Material Weaknesses
7 Chapter 5: AUD Reporting, Attestation, and Review Engagements
5.1 Audit Opinions and Modifications 5.2 Emphasis, Other Matter, and Going Concern 5.3 Review, Compilation, and Preparation Engagements 5.4 Attestation and Government Auditing Signals
8 Chapter 36: AUD Workbook - From Risk to Report
36.1 Risk-Assertion-Procedure Drill 36.2 Evidence Reliability Drill 36.3 Control Deficiency Classification Drill 36.4 Report Modification Decision Drill
9 Chapter 6: FAR Financial Statements and Reporting Framework
6.1 Conceptual Framework and Standard Setting 6.2 Financial Statement Presentation 6.3 Cash Flow Statement and Disclosures 6.4 Not-for-Profit Reporting Basics
10 Chapter 7: FAR Balance Sheet Accounts and Rollforwards
7.1 Cash, Receivables, and Reconciliations 7.2 Inventory and Cost Flow Errors 7.3 Property, Equipment, and Intangibles 7.4 Debt, Equity, and Contingencies
11 Chapter 8: FAR Selected Transactions and Measurement Models
8.1 Revenue Recognition: Five-Step Model 8.2 Leases, Income Taxes, and Impairment 8.3 Business Combinations and Consolidations 8.4 Accounting Changes, Errors, and Subsequent Events
12 Chapter 32: FAR Revenue, Leases, and Income Taxes Deep Dive
32.1 Revenue Contract Modifications and Variable Consideration 32.2 Lease Classification and Lessee Accounting 32.3 Deferred Tax Assets, Liabilities, and Valuation Allowances 32.4 Simulation Workflows for Revenue, Lease, and Tax Exhibits
13 Chapter 31: FAR Financial Instruments, Fair Value, and Derivatives
31.1 Financial Asset Classification and Measurement 31.2 Fair Value Hierarchy and Disclosures 31.3 Derivatives, Hedge Accounting, and Embedded Features 31.4 Foreign Currency and Comprehensive Income Signals
14 Chapter 24: FAR Consolidations, Equity Method, and Intercompany Workpapers
24.1 Consolidation Decision and Noncontrolling Interest 24.2 Acquisition-Date Measurement and Goodwill 24.3 Equity Method Income, Dividends, and Impairment 24.4 Intercompany Inventory, Debt, and Fixed Asset Eliminations
15 Chapter 9: FAR Governmental Accounting and Fund Reporting
9.1 Governmental Fund Types and Basis 9.2 Government-Wide Statements and Reconciliations 9.3 Budgetary Accounting and Encumbrances 9.4 Governmental and NFP Comparison Traps
16 Chapter 23: FAR Not-for-Profit and Special Reporting Topics
23.1 Not-for-Profit Net Assets and Restrictions 23.2 Contributions, Conditional Gifts, and Agency Transactions 23.3 Functional Expenses and Statement Presentation 23.4 Interim, Segment, and EPS Reporting Traps
17 Chapter 37: FAR Workbook - Journal Entries, Rollforwards, and Reconciliations
Adjusting Entry Workflow Account Rollforward Workflow Reconciliation and Error Correction Drill Statement Presentation Workpaper Drill
18 Chapter 10: REG Tax Procedure, Ethics, and Business Law
10.1 Tax Practice Ethics and Preparer Responsibilities 10.2 IRS Procedure, Statutes, and Penalties 10.3 Contracts, Agency, and Business Entities 10.4 Secured Transactions, Bankruptcy, and Priority
19 Chapter 11: REG Individual Federal Tax Workflows
11.1 Gross Income, Exclusions, and Adjustments 11.2 Filing Status, Dependents, and Deductions 11.3 Credits, Payments, and AMT Concepts 11.4 Retirement, Passive Activity, and Loss Limitations
20 Chapter 12: REG Property Transactions and Entity Taxation
12.1 Basis, Realized Gain, Recognized Gain, and Character 12.2 C Corporations and Shareholder Transactions 12.3 S Corporations, Partnerships, and Basis 12.4 Entity Tax Simulations and K-1 Workflows
21 Chapter 25: REG Entity Choice, Basis, and Owner Tax Consequences
25.1 C Corporation, S Corporation, and Partnership Comparison 25.2 Formation Contributions and Built-In Gain 25.3 Distributions, Redemptions, and Liquidations 25.4 Loss Limits: Basis, At-Risk, and Passive Rules
22 Chapter 26: REG Property Tax, Character, and Deferral Transactions
26.1 Capital, Ordinary, and Section 1231 Character 26.2 Depreciation Recapture and Unrecaptured Gain 26.3 Like-Kind Exchanges, Involuntary Conversions, and Installment Sales 26.4 Related-Party, Wash-Sale, and Imputed-Interest Traps
23 Chapter 33: REG Trusts, Estates, Gifts, and Exempt Organizations
33.1 Trust and Estate Income Tax Basics 33.2 Gift, Estate, and Beneficiary Planning Concepts 33.3 Tax-Exempt Organizations and Unrelated Business Income 33.4 Fiduciary K-1 and Distribution Simulation Workflows
24 Chapter 38: REG Workbook - Tax Return Schedules and Basis Workpapers
38.1 Individual Return Classification Drill 38.2 Property Basis and Character Workpaper 38.3 Pass-through K-1 and Owner Basis Workpaper 38.4 Business Law Issue Spotting Drill
25 Chapter 13: BAR Business Analysis, Economics, and Forecasting
13.1 Financial Statement Analysis and Ratios 13.2 Variance, Forecasting, and Budgeting 13.3 Cost Accounting and Performance Management 13.4 Economics, Finance, and Decision Models
26 Chapter 14: BAR Technical Accounting and Advanced Reporting
14.1 Revenue, Leases, and Complex Arrangements 14.2 Derivatives, Hedges, and Fair Value 14.3 Business Combinations and Consolidations 14.4 SEC Reporting and Public Company Context
27 Chapter 15: BAR State and Local Government Analysis
15.1 Governmental Fund Analysis 15.2 Government-Wide Conversion Workflows 15.3 Budgetary Reconciliation and CAFR/ACFR Reading 15.4 Government Simulation Strategy
28 Chapter 16: ISC Information Systems and Data Management
16.1 Systems Architecture and Data Flow 16.2 ERP, Accounting Systems, and Change Management 16.3 Data Governance, SQL, and Analytics 16.4 Availability, Backup, and Recovery Controls
29 Chapter 17: ISC Security, Privacy, and SOC Engagements
17.1 Security Threats and Control Selection 17.2 Privacy, Confidentiality, and Compliance Frameworks 17.3 SOC 1, SOC 2, SOC 3, and Cybersecurity Reports 17.4 Service Organization Exceptions and User Controls
30 Chapter 18: TCP Individual Tax Planning and Personal Financial Issues
18.1 Nonroutine Individual Income and Estimated Tax 18.2 Passive, At-Risk, and Investment Planning 18.3 Retirement, Education, and Insurance Planning 18.4 Gift, Estate, and Beneficiary Concepts
31 Chapter 19: TCP Entity Compliance and Planning
19.1 C Corporation Tax Planning 19.2 S Corporation Basis and Distributions 19.3 Partnership Tax Planning and Allocations 19.4 Trusts, Tax-Exempt, and International Signals
32 Chapter 34: TCP International and Advanced Entity Tax Topics
34.1 International Tax Signals and Source of Income 34.2 CFC, Foreign Tax Credit, and Permanent Establishment Concepts 34.3 Consolidated Returns and Affiliated Corporations 34.4 Advanced Partnership and S Corp Planning Scenarios
33 Chapter 35: Choosing and Preparing for BAR, ISC, or TCP
35.1 Discipline Fit Matrix by Background 35.2 BAR, ISC, and TCP Blueprint and Skill Comparison 35.3 Discipline Study Plans and Practice Balance 35.4 Switching Disciplines, Retake, and Score Interpretation
34 Chapter 39: CPA TBS Research, Authoritative Literature, and Document Review
39.1 Document Review Simulation Method 39.2 Research and Authoritative Literature Workflow 39.3 Exhibit Overload and Relevant Data Selection 39.4 Written Explanation and Professional Judgment Drills
35 Chapter 20: CPA Simulations, Retakes, and Final Review
20.1 TBS Exhibit Triage and Workpaper Method 20.2 Section-Specific Final Review Plans 20.3 Score Release, Retake, and Credit Window Decisions 20.4 Four-Section Study Roadmaps
36 Chapter 40: Discipline Workbook Drills for BAR, ISC, and TCP
40.1 BAR Ratio, Variance, and Government Drill 40.2 ISC Control Evidence and SOC Drill 40.3 TCP Basis Planning and Entity Drill 40.4 Discipline Final Mock and Review Log
24.3 Equity Method Income, Dividends, and Impairment
Key Takeaways Explain This Topic AI
The equity method applies when an investor has significant influence over an investee but does not control it - presumed at 20% to 50% of voting stock but rebuttable by the facts.
The investment carrying amount increases for the investor's share of investee net income and decreases for both investee net losses and dividends received.
Dividends from an equity method investee are a return of investment that reduces the carrying amount, never dividend income.
Basis differences between cost and the share of investee book value are assigned to identifiable assets and liabilities, with extra depreciation/amortization reducing equity-method income; any residual is equity-method goodwill embedded in the balance.
An equity method impairment loss is recognized only when the decline in value is other than temporary, writing the investment down to fair value as the new basis.
Last updated: June 2026
Equity Method Income, Dividends, and Impairment
The equity method applies when an investor exercises significant influence over an investee but does not control it. FAR includes equity method investments in the investments group of balance sheet accounts. The 2026 blueprint tasks include identifying when the equity method applies and calculating the carrying amount with journal entries (the basic carrying-amount task excludes impairment). A production-quality study plan still covers impairment because it is a common judgment and links to broader investment measurement.
When the Equity Method Applies
Significant influence is presumed when an investor holds 20% to 50% of voting stock, but the presumption can be overcome in either direction. Evidence of influence: representation on the board, participation in policy decisions, material intercompany transactions, interchange of management, or technological dependency. Evidence against influence: an opposing majority owner, litigation between the parties, a standstill agreement, or legal/regulatory restrictions on the investor's rights.
- Investment situation Usual accounting model Key reason
- Control of investee Consolidation Investor controls the entity
- Significant influence, no control Equity method Participation in policy and operating decisions
- Passive equity, readily determinable fair value Fair value through net income No significant influence
Passive equity, no readily determinable fair value Measurement alternative (cost less impairment, plus/minus observable price changes) No influence and no quoted price
Carrying Amount Rollforward
The equity-method investment is a one-line substitute for the investor's share of investee net assets. Roll it forward:
Begin with cost of the investment.
Add the investor's share of investee net income.
Subtract the investor's share of investee net loss.
Subtract dividends received.
Adjust for amortization of basis differences and intercompany profit deferrals.
Reduce for impairment when required.
The income entry is debit Investment in Investee, credit Equity in Earnings of Investee . The dividend entry is debit Cash, credit Investment in Investee . Dividends are not income because the investor already recognized its share of investee earnings as the investee earned them; a dividend is the investee returning part of that already-recognized value.
Basis Differences
Cost often differs from the investor's share of the investee's book value. Assign the difference to identifiable assets and liabilities based on fair value differences; any residual is equity-method goodwill embedded in the investment balance.
Worked example. Investor buys 30% of Investee for $500,000 when 30% of book value is $440,000. The $60,000 excess is $40,000 attributable to undervalued equipment with a 10-year remaining life and $20,000 to goodwill. Each year, the investor reduces equity-method income by $4,000 ($40,000 / 10) of extra depreciation. The goodwill portion is not separately amortized or tested; it stays in the investment balance and is only addressed through overall impairment.
Intercompany Profit Effects
Transactions between investor and investee can create unrealized profit. If inventory sold between the companies remains unsold to outsiders at period-end, the investor defers its ownership share of the unrealized profit. This prevents recognizing income on profit not yet earned from the broader economic perspective; the deferral reverses when the goods reach an outside customer.
Impairment
An equity-method investment is reviewed for impairment when events suggest the carrying amount may not be recoverable. If the decline in fair value below carrying amount is other than temporary , the investor recognizes an impairment loss and writes the investment down to fair value, which becomes the new basis going forward. The write-down is not reversed if value later recovers.
Judgment factors: the severity and duration of the decline, the investee's financial condition and operating losses, liquidity problems, adverse legal or regulatory developments, and the investor's ability and intent to hold until recovery. A temporary market dip does not automatically create impairment.
Exam Traps
Do not record dividend income for equity-method dividends - reduce the investment instead.
Do not consolidate when significant influence exists without control.
Do not ignore fair value basis differences created at purchase.
Apply the investor's ownership share to the depreciation/amortization difference, not 100% of the investee's amount.
Do not recognize impairment unless the decline is other than temporary.
Losses Exceeding the Investment and the Fair Value Option
When accumulated equity-method losses reduce the investment to zero , the investor generally stops recognizing further losses and does not record a negative investment, unless it has guaranteed investee obligations or committed to provide further financial support. Recognition resumes only after the investee returns to profitability and the investor's share of subsequent income exceeds the share of losses not previously recognized.
An investor may also elect the fair value option for an equity-method-eligible investment at initial recognition. If elected, the investor reports the investment at fair value with changes in net income and does not apply equity-method rollforward mechanics; the election is irrevocable for that instrument. Watch for fact patterns that mention this election - they change the entire accounting.
Change from Cost/Fair Value to Equity Method
If an investor's ownership rises to the significant-influence level (for example, from 10% to 25%), it adopts the equity method prospectively from the date of the increase. There is no retroactive restatement of prior periods; the carrying amount at the date of change plus the new purchase become the cost basis going forward.
Key Takeaways
Equity-method questions are rollforward questions. Start with cost, add income, subtract losses and dividends, adjust for basis differences and unrealized profits, then test for impairment. Stop recognizing losses at a zero carrying amount absent a guarantee, and switch to the equity method prospectively when influence is gained. If the fact pattern shifts from significant influence to control, stop using the equity method and move to consolidation analysis.