Liquidating dividend cost method
If you do expect undistributed earnings to be paid out in the future, then you could make a case for applying the DRD to the undistributed earnings in the current period.In some cases, the deferred tax liability related to undistributed earnings from an equity investment can grow quite large over time.Whether you apply the DRD to deferred taxes on undistributed earnings is a judgment call.Accountants will generally advise you not to, since applying the DRD to undistributed earnings implies an expectation that those earnings will ultimately be distributed.When we calculate cost basis for your Vanguard investments, we'll automatically use "average cost" for mutual funds and "first in, first out" for individual stocks.
PNC Financial faced this dilemma in evaluating monetization options for its sizeable investment in Black Rock.
Now, let's see how to actually model equity method investments.
The concepts above are implemented in the following comprehensive example, where we assume a simplified P&L and balance sheet to focus on key takeaways, which are highlighted in yellow.
Rather, the Company A is entitled to a portion of Company B's earnings in proportion to Company A's economic ownership of Company B's stock.
Company A records its proportionate share of the subsidiary's earnings as an increase to the account on its balance sheet.