Question

Which of the following is an acceptable accounting approach for distributions under the equity method?

Multiple Choice

• net accumulated benefits approach

• nature of income approach

• net unrealized appreciation approach

• cumulative earnings approach

Answer 1

The equity method of accounting is used to account for an organization’s investment in another entity (the investee). This method is only used when the investor has significant influence over the investee. Under this method, the investor recognizes its share of the profits and losses of the investee in the periods when these profits and losses are also reflected in the accounts of the investee. Any profit or loss recognized by the investing entity appears in its income statement. Also, any recognized profit increases the investment recorded by the investing entity, while a recognized loss decreases the investment.

Going by the above, the answer is d) Cumulative earnings approach