Proportionate consolidation method and Equity method

Income Statement

Company	C	J	C (Proportionate consolidation)		C (Equity)
Revenue	3,115	421	3,115+50%*421 = 3,325.5	>	3,115
COGS	2,580	295	2,580+50%*295 = 2,727.5	>	2,580
SG&A	316	50	316+50%*50 = 341	>	316
EBIT	3,115-2,580-316 =219	421-295-50 =76	3,325.5-2,727.5-341 = 257
Interest expense	47	8	47+50%*8 =51	>	47
Equity in earnings of J	22		(*1)		22
Pretax income	194	68	(219-47)+50%*68 =206
Income tax	60	24	60+50%*24 =72
Net income	134	44	206-72 =134	=	134

C: company which owns 50% of a joint venture company
J: joint venture company

Balance Sheet

Company	C	J	C (Proportionate consolidation)		C (Equity)
Assets
Cash	118	13	118+50%*13 = 124.5
Accounts receivable	390	50	390+50%*50 = 415
Inventory	314	41	314+50%*41 = 334.5
Property	1,007	131	1,007+50%*131 =1,072.5
Investment	37.5		(*1)
Total Assets	1,866.5	235	(1,866.5-37.5)+50%*235 =1,946.5	>	1,866.5
Liabilities
Accounts Payable	274	35	274+50%*35 =291.5
Long-term debt	719	125	719+50%*125 =781.5
Total Liabilities	274+719 = 993	35+125 = 160	993+50%*160 =1,073	>	993
Equity
Equity	873.5	75	(873.5-37.5)+50%*75 =873.5	=	873.5
Total Equity	873.5	75	873.5	=	873.5
Total Liabilities and Equity	1,866.5	235	(1,866.5-37.5)+50%*235 =1,946.5	>	1,866.5

(*1) The investment in J is not included as an asset under proportionate consolidation.

Proportionate Consolidation Method


Current Ratio = Current Asset / Current Liability
= (Cash + Accounts Receivable + Inventory) / Accunts Payable
= (124.5 + 415 + 334.5) / 291.5 = 3.0

Interest Coverage Ratio = EBIT / Interest Expense

= (Revenue - COGS - SG&A) / Interest Expense

= (3,325.5 - 2,727.5 - 341) / 51 = 5.0

Long-term debt-to-equity Ratio = Long-term debt / Equity

= 781.5 / 873.5 = 0.89

Equity Method

Long-term debt-to-equity Ratio = Long-term debt / Equity

= 719 / 873.5 = 0.82