Equity and Fair Value Method for Investments

Question 1

How to record dividend receive(cash or stock) under equity method?

Answer 1

under equity method, dividend received is reported as a reduction in carrying value of the investment account on the BS

Question 2

How to record dividend (cash only) receive under fair value method?

Answer 2

under fair value method, dividend (not liquidating) received is reported as income and does not affect investment account. If dividend is liquidating, report as a reduction on investment account.

Question 3

what is considered investment income under equity method?

Answer 3

proportion of investor’s ownership on investee’s income. This also increases the investment account

Question 4

what method to use for preferred stock?

Answer 4

always fair value method, which is reporting income when receiving dividends.

Question 5

When is equity method used?

Answer 5

Equity method is used when an investor has significant influence over a company (investee) business. Significant influence is when an investor owns 20% or more of voting stock of an investee.