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Equity Method

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The more influence a stockholder has on another company, the more it can influence the decision to distribute dividends.

This would introduce the potential for misleading financial statements, if we used the fair value method. The stockholder could pressure the firm to release dividends, even if the company were losing money. This would make the investment look profitable.

For this reason, when the stockholder has significant influence (typically 20%-50% ownership), it should use the equity method.

investor may make a one-time change to elect to use irrevocably the fair value method.

Question Ginny LLC, the power-hungry airplane importer, has 540 shares outstanding. Your firm has purchased 254 of those shares for $596,000.00. The company reported a net income of $19,000.00 and issued $11,210.00 in dividends to its shareholders. You see that the current price of your shares is $464,880.00.
Under the equity method, what should you list as the company's carrying value?
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