Equity method, goodwill and losses At the start of x1, Pasquale Company pays A10 million to acquire a 25% stake in Norina SpA. Norina’s net assets at that date are A24 million. Pasquale exercises significant influence over Norina and accounts for its investment by the equity method. The company attributes the difference between the purchase price and its share of Norina’s net assets to goodwill and proposes to amortise the asset on a straight-line basis over ten years. (It does not show the goodwill separately.)

The Norina investment is a disastrous one for Pasquale. Norina pays no dividends. It incurs losses of A4 million in calendar year x1 and further losses of A1.2 million in x2. Pasquale carries out an impairment review at the end of x2, as a result of which it writes off the remaining goodwill. In x3 Norina generates a small profit of A1.6 million. Pasquale takes advantage of the recovery in the value of its investment by selling its stake in Norina for A4.4 million at the end of x3.

Required

(a) Show the effect of its investment in Norina on Pasquale’s accounts for each of the years x1−x3.

Use journal entries or the balance sheet equation.

(b) Suppose that Pasquale carried out an impairment review at the end of x1 and wrote off the whole of its investment in Norina then. How would your answer to

(a) differ?

Check figure:

(a) Investment in Norina, carrying amount at end-x2 A4.7m AppenedixLO1