What happens to the unamortised excess if the investee sells the underlying asset before amortisation is complete?

When the investee sells (or otherwise disposes of) the asset to which the excess was attributed, the remaining unamortised excess must be recognised immediately, either as a gain or loss flowing through the investor's equity income.

Continuing the example:

Lucia owns 20% of William. The original excess attributed to PP&E was $60K, being amortised over 10 years at $6K/year.

Year 1: amortisation $6K, remaining excess $54K

Year 2: amortisation $6K, remaining excess $48K

Year 3: amortisation $6K, remaining excess $42K

Year 4: amortisation $6K, remaining excess $36K

Year 5: amortisation $6K, remaining excess $30K

If William sells the PP&E for $X on year-5 end:

Step 1 — Compute William's gain/loss on sale (under William's books):

If William paid $200K originally, used 5 years of depreciation (life 15 years), then $\text{book value} = \$200\text{K} - 5 \times (\$200\text{K}/15) = \$200\text{K} - \$66.7\text{K} = \$133.3\text{K}$.

If William sells for $250K: $250K − $133.3K = $116.7K gain on William's income statement.

Step 2 — Adjust the investor's share:

Lucia's share of William's gain: $20\% \times \$116.7\text{K} = \$23.3\text{K}$.

BUT — Lucia originally paid more than book value for that PP&E ($60K extra attributed to the asset, of which $30K is still unamortised at year 5). When William sells the asset, Lucia's implicit basis in the asset was higher.

So Lucia's actual gain (from her perspective) is: $23.3K (share of William's gain) − $30K (unamortised excess) = −$6.7K loss.

Step 3 — Investment account adjustment:

The $30K unamortised excess is removed from Lucia's investment carrying value. From year 6 onwards, there's no more amortisation drag on this particular excess (the asset is gone).

Reporting:

In Lucia's "Equity in earnings of William" line for year 5:

• Share of William's ordinary NI (excluding PP&E sale gain): say $20K
• Less: regular amortisation of excess on this PP&E: $-\$6\text{K}$
• Plus: share of William's PP&E sale gain: $+\$23.3\text{K}$
• Less: write-off of unamortised excess: $-\$30\text{K}$
• Total equity income for year 5: $7.3K

This is materially lower than a normal year ($14K), reflecting the realisation event.

Why this matters:

If you only see the $20K share of NI and forget the $+\$23.3\text{K}$ and $-\$30\text{K}$ adjustments, you'll report year-5 equity income that's off by $13.3K. That's a common exam trap and a real-world reporting error.

Similar logic applies to:

• Inventory sales: if the excess was attributed to inventory, the write-off happens when the inventory is sold (which is typically within a year).
• Patent expirations: if the excess was attributed to a finite-life intangible and the intangible reaches end of useful life, any remaining excess is written off then.
• Impairment of the underlying asset: if William impairs the PP&E, Lucia must write off her share of the impairment AND her unamortised excess attributable to that asset.

Investor decision to sell their equity-method stake:

If Lucia sells her 20% interest in William, the entire investment carrying value (which includes unamortised excess and embedded goodwill) is compared to the sale price:

So no separate accounting for the unamortised excess on a sale of the investment itself — it's all folded into the carrying value.

Exam pitfall:

If the question says "the investee sold one of its assets," look for the attribution of excess to that asset and recognise the write-off. If the question says "the investor sold its interest," use the standard sale-vs-carrying-value gain/loss formula.