Example 2: This example looks at how to handle an excess of investment cost over the book value of net assets acquired when using the equity method. Assume B (the investee) has the following book values and fair values. Book Value(BV) Difference Assets Liabilities 100 20 Equity 80 Fair Value(FV) 140 20 120 A (the investor) pays 30 for a 20% interest in B. Calculate goodwill. Price paid Minus: Book value of net assets acquired Excess of price paid over BV Allocation of Excess to specific assets or Liabilities whose FV>BV Remainder Goodwill Shortcut method: Price paid Minus Fair value of net assets acquired (based on ownership %) Equals Goodwill Assume that the excess paid over book value is attributable to investee fixed assets having a remaining useful life of 4 years. What journal entry is prepared by the investor after the first year. Dr. Important points to note: Cr. 1. When comparing price paid to the book value of net assets acquired, remember to apply the percentage ownership to the BV acquired. 2. While it may seem easier to use the "shortcut method" to solve for goodwill, it is recommended that at this stage you follow the 2 step approach first shown. 3. Amortization of fair value adjustment under the equity method are always debited to the equity earnings account, not a separate amortization account. 2