1> Equity method vs. cost method of accounting for LT investment. 2> 3 classifications of reporting...

1> Equity method vs. cost method of accounting for LT investment.

2> 3 classifications of reporting investment.

Expert Solution

1. Equity and cost methods are methods used by companies for accounting their investment in other company.

a) Equity Method: A company uses the equity method when it has a significant investment(20 to 50%) and influence over another company. Earnings of the investee will be recorded in investor's book on the basis of percentage owned by the investor.

b) Cost Method: A company has an investment less than or equal to 20% in another company, it is not considered a significant investment and the cost method can be used for accounting investment. Earnings of the investee will not be recorded as per cost method.

2. All our Investments can be classified into 3 broad categories.

a) Stocks:- Investing in another company with an expectation to get the dividend. Eg: Investment in equity shares and preference shares.

b) Bond:- Lending money to a company with an expectation to get fixed interest for a predefined period of time.

c) Cash equivalent:- Investment with high flexibility and very less return. Eg: Investment in savings accounts, Certificate of deposits etc.

ekkarill92 answered 1 year ago

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