What is the rationale for used the Equity Method for accounting for Investments in the Common...
What is the rationale for used the Equity Method for accounting for Investments in the Common Stock of another Corporation?
Describe the accounting for Investments in Common Stock under the Equity Method.
Homework Answers
Under Equity Method, for accounting the investments in the
common stock of another corporation, the investor records the
investment initially at cost, and then such value is adjusted with
any change due to the changes in the investor's share in the
company's income or losses. The share of the investee's profits
that the investor recognizes is calculated based on the investor's
ownership percentage of the investee's common stock. When
calculating its share of the investee's profits, the investor must
also eliminate intra-entity profits and losses.
For example,
A Ltd. has a capital of 100,000 shares of $10 each, and B Ltd. buys
40% share in A Ltd. at $11 per share.
Cost of investment of B Ltd. = $440,000
The journal entry passed will be -
Investment in the share of A Ltd. Dr. $440,000
Bank A/c $440,000
Suppose, the company earns a profit of $200,000 for the year. B
Ltd.'s share will be 40% of $200,000, i.e. $80,000
The value of investment for B Ltd. will increase by its share, and
the journal entry required will be -
Investment in the share of A Ltd. Dr. $80,000
Revenue from Investment $80,000
Thus, the value of investment will become $520,000 at the
year-end.
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What is the rationale for used the Equity Method for accounting
for Investments in the Common...
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Under what circumstances is the equity method used to account for an investment in stock?
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7.
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7.
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