Adjusting the Balance Sheet for Equity Method Investments
Abbott Laboratories reports its 50% joint venrure investment in TAP Pharmaceutical Products Inc. using the equity method of accounting in its 2007 10-K. The Abbott balance sheet reports an investment balance of $ 159 million. TAP has total assets of $ 1,354.2 million, liabilities of $1,036.7 million, and equity of $3 17.5 million. Abbott's investment balance is, thus, equal to its 50% interest in TAP's equity ($3 17.5 million X 50% = $ 158.75 million, rounded to $ 159 million). What adjustment(s) might we consider to Abbott's balance sheet before we forecast its financial statements? (Hint: Consider the distinction between operating and nonoperating assets and liabilities.) What risks might Abbott Laboratories face that are not revealed on the face of its balance sheet?
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