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Equity Method

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The more influence a stockholder has on another company, the more it can influence the decision to distribute dividends.

This would introduce the potential for misleading financial statements, if we used the fair value method. The stockholder could pressure the firm to release dividends, even if the company were losing money. This would make the investment look profitable.

For this reason, when the stockholder has significant influence (typically 20%-50% ownership), it should use the equity method.

investor may make a one-time change to elect to use irrevocably the fair value method.

Question You spent $777,000.00 to buy 106 of Adam inc., the famed airplane exporter,. The price of those shares is now $971,250.00. The firm has 240 shares outstanding. It paid $46,060.00 in dividends after earning $94,000.00 in net income.
Under the equity method, what should you list as the company's carrying value?
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