The Equity Method Records Dividends

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3. The equity method records dividends received from an investee as a reduction in the investment account, not as dividend income to avoid reporting the income from the investee twice. The equity method is used when an investor has the ability to significantly influence over the operating and financing decisions of an investee. Because dividends represent financing decisions, the investor may have the ability to influence dividend timing. If dividend were record as revenue managers could affect reported income in a way that does not reflect actual performance. 6. The equity method has been criticized because it emphasizing the 20–50 percent of voting stock in determining significant influence versus control, allowing off-balance sheet…show more content…
13. Downstream sales are made to investee while upstream sales are made by investee. The direction of intra-entry sales has no affect on reported equity method balances for investments when significant influence exists, it has definite consequences when financial control requires the consolidation of financial statements, as discussed in Chapter 5. 23a. Since the equity method has been used since date of sale the equity accrual must be recorded based on recognizing 40% of Brooks reported income. Any dividends reported by Brooks must be record by Einstein as a reduction in the book value of the investment account. Lastly, amortization entries of specific allocations within the purchase price must be record up to August 1. The amortization entries establish an appropriate book value as of the date of sale. The amount of the book value equal to the portion of shares sold is removed in order to compute the resulting gain or loss. b. How Einstein accounts for this investment after August 1 depends on if significant influence is retained. If so he should continue to use the equity method if not fair-value method should be used. c. Einstein must first record an equity balance that includes both the accrual and amortization prior to August 1. Next he should record a

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