Under the equity method, how is the investment recorded when ownership is between 20% and 50%?

Under the equity method, how is the investment recorded when ownership is between 20% and 50%?

• A. You consolidate the subsidiary's financial statements
• B. You reflect percentage ownership as an asset called Investments in Equity Interests and recognize the share of net income in your income statement, with adjustments over time
• C. You record the investment as a liability
• D. You treat it as a trading security

Answer: (B)

When ownership is between 20% and 50%, you have significant influence, so you apply the equity method. The investment is recorded as an asset called Investments in Equity Interests. It starts at cost, and then each period you increase the investment for your share of the investee’s net income, and decrease it for any dividends you receive. The investor’s income statement shows the share of the investee’s net income, but the effect is to push up (or down) the carrying amount of the investment over time rather than reporting the income as stand-alone revenue. Over time you also adjust for other changes, such as amortization of any fair value differences between the purchase price and the investee’s net assets, which affects the amount recognized in both the investment account and the income statement.

When ownership is between 20% and 50%, you have significant influence, so you apply the equity method. The investment is recorded as an asset called Investments in Equity Interests. It starts at cost, and then each period you increase the investment for your share of the investee’s net income, and decrease it for any dividends you receive. The investor’s income statement shows the share of the investee’s net income, but the effect is to push up (or down) the carrying amount of the investment over time rather than reporting the income as stand-alone revenue. Over time you also adjust for other changes, such as amortization of any fair value differences between the purchase price and the investee’s net assets, which affects the amount recognized in both the investment account and the income statement.