Question

‏In a classroom discussion of the relative merits of the equity method and the cost method of accounting for operations of subsidiaries , most students of Professor Ahmad's advanced accounting class expressed a preference for the equity method , influenced in large part by their textbook's support for that method . Student Fatima , however , suggested that , for a parent company with several subsidiaries , the cost method of accounting might be more cost - effective because it entails fewer journal entries than does the equity method . In Fatima ' s view , it would be more efficient in such circumstances to make the multitudinous entries for subsidiaries ' operations in the working paper for consolidated financial statements than in several ledger accounts in computerized accounting records . Do you agree with student Fatima ' s view ? Explain

-Please help me, it is very important

There is no other information. The question is only this way, and the answer is yes or no, with the reason when answering yes or no.

Answer 1

No, i do not agree with fatima because generally uses cost method when ownership stake is less than 20%

There are primarily three ways to report ownership interest between companies. The first way is to create consolidated subsidiary financial statements. The cost and equity methods are two additional ways companies may account for ownership interests in their financial reporting. Overall, ownership is usually based on the total amount of equity owned. If a company owns less than 20% of another company's stock, it will usually use the cost method of financial reporting. If a company owns more than 20% but less than 50%, a company will usually use the equity method.

Let us take anexample of Berkshire Hathaway Inc. (BRK.A, BRK.B) and Coca-Cola (KO) Berkshire Hathaway is a holding company with ownership interests in many different companies. Berkshire Hathaway uses a hybrid consolidated financial statements approach which can be seen from its financials. In its consolidated financial statements it breaks out its businesses by Insurance and Other, and then Railroad, Utilities, and Energy. Its ownership stake in publicly traded company Kraft Heinz (KHC) is accounted for through the equity method.