Question

please explain in depth:

Explain what method is used to account for investments in equity securities with 20% to 50% ownership. Briefly describe how dividends received and share of net income are accounted for under this method

Answer 1

An investment in equity securities with 20-50% of ownership is typically categorized as a non-controlling investment - however, this can still influence the investee's business and its operations. This type of investment is generally called as Investment in Associates and equity method of accounting treatment is used to record for such investments.

Using the equity method, the initial investment at cost is reported on the balance sheet as a non-current asset. Also, whenever, the dividend is received by the investor it is treated as a return of capital i.e. it reduces the investment account in the balance sheet and unlike, normal investments, dividend received is not recorded in the investor's income statement.

The investor would also recognize its proportionate share of the net income of the investee and record the same in its income statement and also increase the investment account balance by the same amount in the balance sheet reflecting the proportionate share.

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