Describe each of these methods for recording investment, and indicate their advantages and disadvantages.
Answer to Problem 1Q
The methods for recording investment are as follows:
- Equity method
- Initial value method
- Partial equity method
Explanation of Solution
Equity method:
The equity method is used when the investor is having the significant influence and the investment balance is reduced by the amount of dividend paid. The method is however best method for accounting of consolidated investments but it is the difficult method to use.
Initial value method:
The dividends are recorded as income under the initial value method. The initial value method differs from the equity method as the dividend is not reduced from the value of the investment.
Partial equity method:
The partial equity method is not that appropriate as the equity method and the fair value method amortizations are accounted under this method.
The partial equity method is however easier than the equity method.
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Chapter 3 Solutions
Fundamentals of Advanced Accounting
