Asked by Shriyam Jairath on Jun 17, 2024
Verified
A.Discuss the criteria for applying the equity method of accounting for long-term investments.
B.Discuss the rationale for the equity method procedures of accounting for long-term investments.
Equity Method
An accounting technique used to record investments in associate companies, where the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the associate’s net assets.
Long-Term Investments
Assets that are intended to be held for more than one year, such as stocks, bonds, or real estate, for income or capital gains.
Accounting
A system that collects and processes (Analyzes, measures, and records) financial information about an organization and reports that information to decision makers.
- Employ the equity method for the financial accounting of long-term investments.
- Explain the rationale behind accounting procedures for long-term investments.
Verified Answer
B.The rationale for the equity method of accounting is rather like an "accrual" system.That is,the relationship of the affiliate and investor is typically expected to be a long-term association.As such,the investor recognizes income on an accrual rather than a cash basis.The proportionate share of income in the affiliate is recognized on the income statement and the investment (asset)account is increased.When actual dividends are received by the investor,they reduce the investment account since some of the previously recognized income is being distributed.
Learning Objectives
- Employ the equity method for the financial accounting of long-term investments.
- Explain the rationale behind accounting procedures for long-term investments.
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