As of December 31, Year 6:
At December 31, Year 6, the carrying value of the investment in Francisco is $110
(computed as 10 shares x $11 per share). The $11 per share figure is the fair value at
Jan. 1, Year 7.
As of December 31, Year 7 (the equity method applies):
Step one—the equity method is applied retroactively to the prior years of ownership
(that is, Year 6).
Original cost (10 shares x $10) ........................................................... $ 100
Add: Percentage share of Year 6 earnings (1% x $2,000) ................ 20
Less: Dividends received in Year 6 .................................................... (10)
Net carrying value at Jan. 1, Year 7 ................................................... $ 110
Step two—the equity method is applied throughout Year 7.
Net carrying value, Jan. 1, Year 7 ....................................................... $ 110
Add: Original cost of additional shares (290 shares x $11) ............ 3,190
Add: Percentage share of Year 7 earnings (30% x $2,200) ............. 660
Less: Dividends received in Year 7 .................................................... (360)
Net carrying value at Dec. 31, Year 7 ................................................. $3,60