How is equity income recorded for investments in associates?

How is equity income recorded for investments in associates?

• A. Based solely on the net income from the previous year
• B. Using fair value adjustments only
• C. Associates net income multiplied by ownership percentage
• D. Only based on dividends received from the associate

Answer: (C)

Equity income from investments in associates is recorded based on the associate's net income multiplied by the investor's ownership percentage. This method reflects the investor's share of the profits or losses of the associate, aligning with the equity method of accounting. Under this approach, when an investor holds significant influence over the associate—typically indicated by ownership of 20% to 50% of the voting shares—the investor reports its share of the associate's net income in its own financial statements. This is recognized as an increase in earnings and consequently increases the carrying amount of the investment on the balance sheet. This approach provides a more accurate representation of the investor's performance since it incorporates proportional income derived from the associate's operations, rather than relying solely on other measures such as dividends or prior year earnings. Therefore, this method emphasizes the ongoing business relationship and the impact of the associate's performance on the investor's financial results.

Equity income from investments in associates is recorded based on the associate's net income multiplied by the investor's ownership percentage. This method reflects the investor's share of the profits or losses of the associate, aligning with the equity method of accounting.

Under this approach, when an investor holds significant influence over the associate—typically indicated by ownership of 20% to 50% of the voting shares—the investor reports its share of the associate's net income in its own financial statements. This is recognized as an increase in earnings and consequently increases the carrying amount of the investment on the balance sheet.

This approach provides a more accurate representation of the investor's performance since it incorporates proportional income derived from the associate's operations, rather than relying solely on other measures such as dividends or prior year earnings. Therefore, this method emphasizes the ongoing business relationship and the impact of the associate's performance on the investor's financial results.