KEMBAR78
Equity Method of Accounting For Investment in Associate | PDF | Investing | Equity (Finance)
Scribd
Upload
251 views7 pages

Equity Method of Accounting For Investment in Associate

The document discusses the equity method of accounting for investments in associates. An associate is an entity where the investor holds 20-50% voting power. For investments between 20-50%, the equity method is used. Under this method: (1) The investment is initially recorded at cost; (2) The carrying amount is later adjusted to reflect the investor's share of the associate's profit or loss; (3) Dividends received reduce the carrying amount. An example shows an investor recording the initial investment, a reduction for dividends, and an increase for its share of the associate's net income.

Uploaded by

dorpianabsa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
251 views7 pages

Equity Method of Accounting For Investment in Associate

The document discusses the equity method of accounting for investments in associates. An associate is an entity where the investor holds 20-50% voting power. For investments between 20-50%, the equity method is used. Under this method: (1) The investment is initially recorded at cost; (2) The carrying amount is later adjusted to reflect the investor's share of the associate's profit or loss; (3) Dividends received reduce the carrying amount. An example shows an investor recording the initial investment, a reduction for dividends, and an increase for its share of the associate's net income.

Uploaded by

dorpianabsa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 7

Equity method of accounting for

investment in associate
PAS 28 INVESTMENT IN ASSOCIATES AND JOINT
VENTURES
Pas 28 Prescribes the accounting for investments in associates and the
application of the equity to investments in associates and joint
ventures.
What is an associate?
An associate is an entity over which the investor has significant influence.
Significant influence presumes to exist if the investor holds, directly or indirectly, 20%-
50% voting power of the investee.

Investee = associate or affiliate.

Percentage of ownership interest Type of investment

Less than 20% Financial assets at fair value

20% to 50% Investment in associates

51-100% Investment in subsidiary

Contractually agreed sharing of control Investment in joint venture


Accounting for investment in
associates.
Investment in associates is accounted for using the equity method
Equity method – is a type of accounting methods used for investments when the
investor holds significant influence over the investee, but does not exercise full
control over it.

a. Investment is initially recognized at cost


b. Carrying amount is increase for investor’s share in profit/ decrease for the share in loss.
Investment income is journal entry for the investor’s share of the profit or loss of the
investee.
c. Distribution or dividends received from an equity investee reduce the carrying amount
of the investment.
d. Investment must be in ordinary shares
e. The investment in associate accounted for using the equity method shall be classified as
non-current asset.
Example:
On January 1, 2001, Entity a acquires 20% interest in Entity B for P500,000. At the end of the year,
Entity B reports a net income of P100,000 and declare dividends of P50,000.

When Entity A makes the purchase, it records its investment under “Investments in
Associates/Affiliates”, a long-term asset account. The transaction is recorded at cost.

Dr Cr
Investment in associates ₱500,00
Cash 500,00
Entity A receives dividends of P10,000, which is 20% of P50,000 and records a reduction in their
investment account. The reason for this is that they have received money from their investee. In
other words, there is an outflow of cash from the investee, as reflected in the reduced investment
account.

Dr Cr
Cash 10,000
Investment in associates 10,000

Finally, Entity A records the net income from Entity B as an increase to its investment account.

Dr Cr

Investment in associates 20,000 (20%x100,000)

Investment income 20,000


T account

Investment in associates
500,000
10,000
20000
510,000

Ending balance – 10,000 increases in Entity A investment cost.

Entity B
Entity B net income 100,000
Dividends paid (50,000)
Retained earnings 50,000
x20%
Entity A portion 10,000

You might also like