Question

Prior to 2008, CBS Corp. owned approximately 18% of Westwood One, Inc. which managed the CBS Radio Network. CBS, in turn, managed Westwood under a management agreement. Further, one employee of CBS was a member of Westwood’s board of directors. CBS did not control the board of directors, however. In this situation, how should CBS account for its investment in Westwood One?

Answer 1

Answer -

The equity method is a type of accounting used for intercorporate investments. This method is used when one company, the investor, has a significant influence over another company, the investee.

If the ownership percentage is less than 20% , there is a presumption that the investor does not have significant influence over the investee, unless it can otherwise demonstrate such ability. If the ownership percentage is between 20% to 50%, it is considered to have significant influence.

In the given case, CBS Corp. has no significant influence over Westwood One, Inc. since it owns only 18% of the outstanding shares.

Therefore, CBS Corp. should use Cost method to account for its investment in Westwood One, and reports the cost of the investment as an Asset. When dividend income is received, it is immediately recognized on the income statement.