ACC 4100 Lecture Notes - Lecture 6: Special Purpose Entity, Equity Method, Financial Statement

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Equity method is appropriate because they own 32%, which is between the 20-50% range. Other factors when the equity method would be appropriate are when there is evidence of significant influence such as: Investor participation in the decision-making process of the investee. The equity method will show larger reported earnings if net income is greater than dividends paid. However, if there is a net loss, or earnings less than dividends distributed, it would be less favorable to use equity method on the financials and we would use the cost basis to report larger contributions to reported earnings. The equity method becomes more appropriate as the percentage of ownership increases because the equity method provides more accurate information concerning the company acquired. Also, the company parent can monitor how and on what the income is spent by the subsidiary. If the parent company considers that the income is improperly distributed then will have the right to influence the further decisions.

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