The Equity method is implemented by companies to account for their portion of interest in another company. This method is used when companies have a 20-50% percent equity interest in another financial entity; however the key characteristic is the ability to exercise significant influence. Sometimes a business may have less than 20% ownership, yet control a majority of the entity and exercise significant influence. This is an exception to the rule and therefore the entity can implement the equity method. The equity method is often referred to as the "single line" consolidation entry account.
The account "equity investee income" account is used to depict the balance in the investee account as shown in the picture below. The "equity in investee" account is increased when the investor records its share of its earnings of its investee. The account has a normal credit balance. It is decreased to account for any undervaluation of its investee's assets and also to account for any depreciation of its investee's assets.
Example: On January 1st, Adequate Disclosure, Inc. invests $30,000 worth into Inadequate Disclosure, Inc. What is the corresponding journal entry?
- The Investment in Investee account is decreased when dividends are disbursed.