| Course | ACC 405 Advanced Accounting |
|---|---|
| Module | Module 3 |
| Paper type | undergraduate equity method investment assignment |
| Length | About 1,040 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 405 Module 3
Thirty Percent of a Sparkling Water Startup: Applying the Equity Method With Excess Cost and Intra-Entity Profit
[Student Name]
Southern New Hampshire University
ACC 405: Advanced Accounting
Module Three Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Thirty Percent of a Sparkling Water Startup: Applying the Equity Method With Excess Cost and Intra-Entity Profit
Introduction
On January 1 the New Hampshire maple products company bought 30 percent of the voting stock of a two-year-old startup that makes sparkling water sweetened with maple syrup, paying $900,000. The investment gives it one of five board seats and a supply agreement to provide the startup's syrup. This assignment explains why the equity method applies, allocates the excess of cost over book value, computes the year's equity income including intra-entity adjustments and rolls the investment account forward to December 31.
Significant Influence
The equity method applies when an investor can exercise significant influence over the investee's operating and financial policies, which is presumed at 20 to 50 percent of voting stock unless evidence shows otherwise (Accounting Principles Board, 1971). Here the evidence supports the presumption. The investor holds a board seat, supplies the startup's key ingredient and shares technical staff to help with flavor development. It does not control the startup: the founders hold 55 percent and a venture fund 15 percent, and they can outvote it on any matter. The investment is therefore neither consolidated nor carried at fair value through income; it is reported under the equity method.
Excess of Cost Over Book Value
The startup's book equity on January 1 was $2,400,000, so the investor's 30 percent share was $720,000. The $180,000 paid above that is assigned to the assets that explain it.
Table 1. Allocation of Excess Cost
| Item | Amount | Treatment |
|---|---|---|
| Price paid | $900,000 | |
| 30% of book equity of $2,400,000 | 720,000 | |
| Excess of cost over book value | $180,000 | |
| Assigned to proprietary recipes and formulation know-how | 100,000 | Amortized over 5 years, $20,000 a year |
| Remainder, goodwill | $80,000 | Not amortized; tested as part of the investment |
The recipes and formulation work are not on the startup's balance sheet because they were developed internally, but they are worth more than zero, and the investor paid for them. The remaining $80,000 reflects the startup's brand and growth prospects that cannot be attached to a specific asset. Unlike goodwill in a consolidation, equity method goodwill is not tested separately; the whole investment is reviewed for impairment if its value declines below carrying amount in a way that is not temporary (Hoyle et al., 2021).
Equity Income and Intra-Entity Profit
The startup reported net income of $500,000 and paid dividends of $100,000. During the year the investor sold it $200,000 of maple syrup at a 25 percent gross margin, and at year end 40 percent of that syrup was still in the startup's tanks, not yet turned into sparkling water and sold.
Table 2. Equity Income for the Year
| Item | Amount |
|---|---|
| 30% of the startup's net income of $500,000 | $150,000 |
| Less amortization of the excess assigned to recipes | (20,000) |
| Less 30% of unrealized profit in the startup's ending syrup ($200,000 x 25% x 40% = $20,000) | (6,000) |
| Equity in investee income | $124,000 |
The intra-entity adjustment exists because the investor recorded $50,000 of gross profit when it sold the syrup, but $20,000 of that profit sits in syrup the startup has not yet sold to outsiders. For the two companies taken together, that profit will only be earned once the drinks reach store shelves. Because the investor owns only 30 percent of the startup, it defers 30 percent of the unrealized profit, $6,000, and will recognize it next year when the syrup is used and the drinks are sold (Fischer et al., 2016).
Upstream Versus Downstream
The syrup sale ran downstream, from investor to investee, which is why the investor defers its own share of profit it recorded. If the startup had sold goods to the investor instead, an upstream sale, the unrealized profit would sit in the startup's income, and the investor would remove 30 percent of it from its equity in the startup's earnings. Under the equity method the arithmetic is the same either way: only the investor's ownership share is deferred, because the other 70 percent of the startup belongs to outsiders whose share of profit was earned in an arm's-length sense. The distinction matters much more under consolidation, where upstream profits must be shared with the noncontrolling interest, as Module Five shows. Here the practical effect is a $6,000 timing difference that reverses next year when the syrup becomes sparkling water and leaves the startup's tanks.
Entries and Investment Roll-Forward
The investor records three entries during the year. At purchase it debits Investment in Startup for $900,000 and credits Cash. At year end it debits Investment in Startup and credits Equity in Investee Income for $124,000. When dividends are declared, it debits Dividends Receivable and credits Investment in Startup for $30,000, its 30 percent share.
Table 3. Investment Account Roll-Forward
| Item | Amount |
|---|---|
| Cost, January 1 | $900,000 |
| Equity in investee income | 124,000 |
| Dividends received | (30,000) |
| Balance, December 31 | $994,000 |
The dividends reduce the investment rather than counting as income because the investor already recognized its share of the earnings that paid for them. Counting both would recognize the same income twice.
What the Equity Method Shows and Hides
The equity method puts the investor's share of the startup's results on one line of the income statement and one line of the balance sheet. That compression is useful, since the investor does not control the startup's assets, but it also hides information. A reader of the investor's statements sees $124,000 of income but not the startup's revenue growth, its cash burn or its debt. Under consolidation those would appear in full. The notes should therefore disclose summarized financial information about the startup and the investor's supply relationship, so that users can judge the risk behind the single line. The investor should also note that the startup's cash dividends of $30,000 were far less than its share of income, a typical pattern for a young company reinvesting its earnings, and a reason the investment account will grow faster than cash received from it.
Conclusion
The investor's 30 percent stake and board seat give significant influence, so the equity method applies. The $180,000 excess over book value is split between $100,000 of recipes, amortized over five years, and $80,000 of goodwill. Equity income for the year is $124,000 after amortization and a $6,000 deferral of unrealized profit on syrup, dividends reduce the investment by $30,000, and the year-end balance is $994,000.
References
Accounting Principles Board. (1971). The equity method of accounting for investments in common stock (APB Opinion No. 18). American Institute of Certified Public Accountants.
Fischer, P. M., Tayler, W. J., & Cheng, R. H. (2016). Advanced accounting (12th ed.). Cengage Learning.
Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2021). Advanced accounting (14th ed.). McGraw Hill.
What the ACC 405 Module 3 instructions ask for
The Module Three assignment in ACC 405 usually asks you to account for an investment of roughly 20 to 50 percent in another company's voting stock. Expect to explain why significant influence exists, compute any excess of cost over the investor's share of book value and assign it to specific assets or goodwill, record the investor's share of income and dividends, amortize the excess where required and defer unrealized profit on intra-entity sales. Many versions ask for a schedule that rolls the investment account forward and for the income statement and balance sheet effects. Explain each adjustment in words, since the equity method compresses a great deal of information into one line.
How this ACC 405 Module 3 equity method assignment example is built
The sample follows a $900,000 purchase of 30 percent of a sparkling water startup with book equity of $2,400,000. The investor's share of book value is $720,000, so $180,000 of excess is assigned to proprietary recipes, $100,000 amortized over five years, and to goodwill, $80,000, not amortized. The startup earns $500,000 and pays $100,000 of dividends. Equity income is 30 percent of $500,000, or $150,000, less $20,000 of amortization. The investor also sold the startup $200,000 of syrup at a 25 percent margin, and 40 percent remains unused, so $6,000 of profit is deferred. Equity income is $124,000, dividends reduce the investment by $30,000, and the year-end balance is $994,000.
Where the ACC 405 Module 3 rubric puts the points
Rubrics for the ACC 405 equity method assignment typically score the significant influence determination, the excess cost allocation, equity income, amortization, the treatment of dividends, intra-entity profit and the investment roll-forward. Top papers allocate the excess to identifiable assets before goodwill, amortize only the portion with a finite life, treat dividends as a reduction of the investment rather than income and defer only the investor's share of unrealized intra-entity profit. Graders reward an explanation of why the method fits the relationship and a clear note on which adjustments reverse next year. Common deductions include recording dividends as revenue, amortizing goodwill and deferring 100 percent of intra-entity profit. A roll-forward that reconciles is often worth its own points.
ACC 405 Module 3 help: the mistakes that cost points
Equity method problems most often go wrong when dividends are recorded as income, which double counts the investee's earnings, and when the entire intra-entity profit is deferred rather than the investor's ownership share. Students also amortize the goodwill portion of the excess or skip the allocation entirely. If your problem includes a change from the fair value method, an investee with preferred stock or a partial sale of the investment, those variations follow from the same principles and we can work them from your facts. Roll the investment account forward line by line at the end; if it does not reconcile, one of the adjustments is missing.
Get ACC 405 Module 3 written to your instructions
Send the ACC 405 Module 3 problem and instructions. The paper will test for significant influence, allocate any excess cost, compute equity income with amortization and intra-entity adjustments, record the entries and roll forward the investment account. Delivery is usually two days out, with no fee on your first request. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 405 Module 3 questions, answered
Where can I find a free ACC 405 Module 3 equity method sample?
This page includes a full ACC 405 Module 3 assignment applying the equity method to a 30 percent stake with excess cost and intra-entity profit.
When is the equity method used?
When an investor has significant influence over an investee's operating and financial policies, generally presumed at 20 to 50 percent of the voting stock.
How are dividends treated under the equity method?
As a reduction of the investment account, because the investor already recognized its share of the income that funded them.
How is the excess of cost over book value handled?
It is assigned to specific assets whose fair value exceeds book value and amortized over their lives, with any remainder treated as goodwill, which is not amortized.
Why is intra-entity profit deferred under the equity method?
Because profit on goods sold to the investee is not realized until the investee sells them to outsiders. The investor defers its ownership share of that unrealized profit.