Question

When significant influence does exist, the equity method of accounting must be used. Explain how the fair market method and the equity method of accounting for equity securities differ.

Answer 1

Solution:

Equity Method of bookkeeping interest in other organization is utilized when the contributing organization has huge impact over the Investee Company. An organization holding 20% or half is taken as critical impact though as an organization holding 9% of offers of other organization won't be brought as having impact over other organization. The estimation of venture should be higher.

In the event that a Company does not have critical impact at that point Fair Value strategy for valuating Investment is utilized.

Under Equity Method the Percentage possessed by contributing organization is figured, for example, 30%. The estimation of the venture is expanded by the bit of pay earned by Investor Company in Investee Company.

Under fair value method the investor organization records any pay on the off chance that reasonable estimation of venture is expanded (note- - reasonable esteem is taken as market cost of offer).

Under Equity method any profits got from Investee Company is deducted from the Value of Investment since bit of benefit earned on Invested shares is now considered. Then again under Fair value Method profit got is considered as a pay and not balanced with book estimation of Investment.

The Investor Company records their part of Investee's Income in his Books of Accounts where as under fair value method wage is reserved as hidden additions or Other Comprehensive wage when Market cost of offers is expanded.