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Important information about Equity method

Jones Company possesses a 25 percent interest in the outstanding voting shares of Sandridge Company.Under what circumstances might Jones decide that the equity method would not be appropriate to account for this investment?

Although the equity method is a generally accepted accounting principle (GAAP), recognition of equityincome has been criticized. What theoretical problems can be brought up by opponents of the equity method? What managerial incentives exist that could influence a firm's percentage ownership interest in another firm?

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Under the equity method, stock investments are valued at cost at the time of acquisition. Thereafter, equity shares in the investee's earnings are recognized as income to the owner and are added to the balance of the investment account. Dividends declared are treated as distributions of net assets (not as new income) and are deducted from the investment account balance. This method is used when the stock owner holds an influential ...

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The solution answers the question: What theoretical problems can be brought up by opponents of the equity method? What managerial incentives exist that could influence a firm's percentage ownership interest in another firm?

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