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The equity method of accounting requires the investor’s proportionate share of the investee’s reported net income to be adjusted for acquisition differentials. Thus, the difference at the date of acquisition of the investee’s stock between the fair value and carrying amount of inventory is such an adjustment when the inventory is sold. A similar adjustment for land is required when the land is sold. Assuming that the FIFO inventory was sold during the year and the land was not, Park’s proportionate share of Tun’s reported net income is decreased by the inventory differential allocated at the date of acquisition.
How is the Excess of FV to Carrying amount a decrease in net income? Isn’t selling an item with a higher FV than before a gain?
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