Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?
What will be an ideal response?
If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity. If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.
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