3.2 Equity Method

Question 1

Under the equity method, dividends from the investee are treated as

Answer 1

a return of an investment.

they decrease the investment balance but have not effect on the investor’s income.

Question 2

Chatham Co. owned 25% of the voting stock of Boyrum Co. Chatham applied the equity method to account for this investment. Boyrum reported income of $100,000 and paid $30,000 in cash dividends during the period. What amount should Chatham report as investment income?

Answer 2

$25,000

Under the equity method, the investor recognizes in income its share of the investee’s earnings or losses in the periods for which they are reported by the investee. Thus, Chatham’s equity income (investment income) for the period is $25,000. Under the equity method, dividends from the investee are treated as a return of an investment. They decrease the investment balance but have no effect on the investor’s income.

Question 3

Significant influence is presumed to exist when the investor holds

Answer 3

between 20% and 50% of the investee’s voting interests (shares of common stock)