I asked the online tutor a couple of long and convoluted questions yesterday, just to make sure I was undestanding the materials.
Here is my latest convoluted question:
Let me see if I am understanding the logic behind this correctly.
At the bottom of p 622 and top of p 623, the textbook reads as follows:
"If the plant and equipment has a remaining useful life of 10 years and Small uses straight-line depreciation, Giant needs to increase the depreciation expense for Small by $40,000 divided by 10 years, or $4,000 each year for the next 10 years."
When using the equity method, the proportionate share of Small's net income would be applied to the original investment amount. When Small records the depreciation, it would debit depreciation expense and credit accumulated depreciation. Depreciation expense is already a component of net income (or loss) for Small.
Therefore, Giant would not need to adjust depreciation expense when accounting for proportionate net income from Small, except that in this example, the market value of plant and equipment exceeded its book value at the date that Giant acquired shares. So the adjustment Giant is making to depreciation expense in this example is to allocate the amount that market exceeded book at the date Giant purchased the shares to the remaining years of useful life of the asset in question.
I think I understand; it's just a little convoluted in my mind, and I want to make sure I have a proper handle on this.
I was actually right! Could it be I am starting to grasp some of the information on investments, hmmm? If so, then it's about time!