Business Combinations: Income Statement

Now let’s look at the income statements. Figure 7.5 contains the separate income statements of Company P and Company S for the year ended December 31, 2023.

Figure 7.5: Company P and S Income Statements

Under the equity method, Company P will report its 80% share of Company S’s net income in a one line account in the income statement. Under the acquisition method, the revenue and expenses of Company P and Company S are combined. It is also necessary to create a minority interest in the income statement for the portion of Company S’s net income that is not owned by Company P.

Figure 7.6 compares the income statement effects of the acquisition method and equity method.

Figure 7.6: Income Statement Comparison of Acquisition and Equity Methods

Similar to the consolidated balance sheet, Company P reports 100% of Company S’s revenues and expenses even though Company P only owns 80%. Thus, a minority interest is created by multiplying the subsidiary’s net income by the percentage of the subsidiary not owned. In our example, the minority interest is $800 ($4,000 S net income × 20%).

The minority interest is subtracted in arriving at consolidated net income.

Notice the acquisition method results in higher revenues and expenses as compared to the equity method, but net income is the same.

This will be covered later in this topic review.