1. What types of investments in common stock are accounted for using (a) the equ
ID: 2472765 • Letter: 1
Question
1. What types of investments in common stock are accounted for using (a) the equity method and (b) the cost method? How is the receipt of a dividend treated under the equity method? under the cost method?
2. Review the financial statements of a well-known public company and comment on their investments as reported in their Form 10-K. You should list the different type of investments, percentage ownership, and method of accounting for the investments
Annual reports of public companies can be found on the SEC website.
Explanation / Answer
Investments in common stock are accounted for using the equity method, when the Investment is made in at least 20% of the investee’s shares.
On the other hand Investments in common stock is accounted for using the Cost method, when the Investment is made in less than 20% of the investee’s shares.
In case of Equity method, receipt of a dividend is treated as a return of investment and it is posted to a contra-asset account linked to the investment account. And hence dividend receipts are not treated as income in income statement.
In case of cost method, dividend receipts are treated as income in income statement.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.