Question

Discuss the merits of accounting for subsidiaries using the: 1) Simple equity method 2) Sophisticated equity method 3) Cost method. When completed submit your assignment to the appropriate area.

Answer 1

An equity method is a form of accounting for intercorporate investments. When the investor has substantial control over the investee and not sole control over it, like in a parent firm and subsidiary relationship, it is utilized.

a). Simple equity method—The investment account shows an end-of-year balance, whereas the subsidiary's equity accounts show beginning-of-year balances. The investment account is closed to the subsidiary income and the parent's portion of the subsidiary's declared dividends throughout the consolidation process to restore the investment account to its balance at the beginning of the year.

b). Sophisticated equity method—The investment account shows an end-of-year balance whereas the subsidiary's acquisition price show beginning-of-year balances. The investment account is close to the subsidiary revenue and the parent's portion of the subsidiary's reported dividends during the consolidation to return it to its balance at the start of the year.

c). Cost method—The investment account shows the balance on the date of acquisition, while the equity accounts for the subsidiary show beginning-of-year balances. To synchronize dates, the investment account is therefore changed to its basic equity balance at the start of the period.